Skip to main content

Sound Advice: June 24, 2020

Sugar High and Then What?
I cannot remember a time when I’ve seen such widespread disparity between what is happening in the economy and what is happening in the stock market.  
We have record layoffs.  In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.  
The number of first-time claims for unemployment insurance has topped 45 million.  Nearly one in four working Americans has lost a job.  Given the devastation among weaker companies, it has been estimated that 10-15 million jobs will be lost permanently.
If there is any good news, it is that the number of first-time filings has been declining, and the number of individuals who file on a regular basis in order to receive jobless benefits is about half the number of first-time filings. 
In spite of this, the broader-based S&P 500 Index has already eclipsed 3,100, rebounding over 39% and the tech-heavy NASDAQ Composite has added more than 46%, rising to an all-time high above 10,000.
Economic activity has fallen with depression-like speed, but the major averages have staged an impressive rally.  The adage “stocks climb a wall of worry” has never been more appropriate than now amid economic devastation and an outlook that remains incredibly murky.
Major stock market index levels represent the collective wisdom of tens of millions of stock market investors.  They are not simply an opinion, but an opinion with money behind it.
When stocks were in a free fall in March, investors were anticipating a devastating blow to the economy.  Tragically, reality did not disappoint.
More recent data indicating that workers are returning to their jobs appears encouraging, but needs to be viewed in perspective.  It is reasonable to expect that a majority of laid-off workers will return to their jobs.  The problem, however, is the likelihood that an estimated 10% of the workforce will be permanently unemployed.  That’s nearly triple the unemployment level prevailing at the beginning of this year.
Although the market’s short-term reaction to news of people returning to work was enthusiastic, it seems inevitable that the reality of mass unemployment will temper that early response.
The sheer number of unemployed people will have a substantial impact on consumer spending, but it is likely that this shortfall will be more than offset by the return of spending for travel, restaurants, professional sports, and musical events.  Funds that are being held back today will be spent as life returns to a new normal. 
Even in the best of times, economic forecasting is difficult. Today, the outlook is clouded with an even greater degree of uncertainty.
Don’t expect a return to the pre-COVID jobless rate anytime soon.  But investors are betting that an economic bottom is in sight.  The more pressing concern is how long it will take for U.S. business to recover fully and move to new high ground.  
Although there will certainly be companies that prosper and grow without missing a beat, they will be the exception, not the rule.
N. Russell Wayne, CFP®

Comments

Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo

Sound Advice: May 13, 2020

Reality Check On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history.  Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better.  They are not. For one thing, we are now in the midst of earnings reason, when companies report their quarterly results.  Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement.  Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison. With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news.  Who knows how many of these

Sound Advice: July 22, 2020

Fixed Income: In a Fix Typically, the construction of an investment portfolio has begun with an approximate balance of 60% in equities and 40% in fixed income instruments.   Fixed income generally means bonds, but that includes bond funds and exchange-traded funds holding bonds.   The equity portion is intended to be the driver of capital appreciation over extended periods of time and the fixed income portion is supposed to provide stable, albeit more moderate ongoing rates of return. The theory behind this approach is that as the time periods measured have lengthened, the relative risk of holding equities has diminished while the returns they have generated have been higher than those of other asset classes.   What equities do in the short term, even a year or two, is often anybody’s guess.    To the extent that fundamental analysis can help toward determining future equity values, investors need to look ahead three, four, five years or more before reasonably expecting t