4/29/2020
| Who Do You LUV? This has to be the craziest title I’ve ever created for a client focused article based on stocks, bonds and the economy, but it is appropriate. This weekend I spent close to six hours reading research reports and opinions on what COVID-19 has done or still might do to our economy, our stock and bond markets and our overall way of life. Could any of us ever conceived what is happening to our fellow Americans? I know I couldn’t! As of April 24th the U.S. has recorded 895,766 documented cases of COVID-19 with 50,439 recorded deaths. There are over 26.5 million Americans out of work and who have applied or are applying for unemployment benefits. The U.S. Conference Boards Leading Economic Index which covers ten economic indicators shrank in March by 6.7 percent, its largest decline in 60 years. April’s results won’t be announced until after the end of the month. All of this damage is due to the coronavirus COVID-19. Who would have “thunk” it?A bear market is defined as a -20% drop from any prior high. This year’s high point for the S&P 500 occurred on February 19 when it was up +5.08%. It took only 20 days to March 11 for the 500 to drop a total of -20%. It was the fastest drop to a bear market in stock market history. From there it fell another -15.51% to March 23 for a total peak to trough loss of -35.51%. As of April 23rd the S&P is still down -13% from the first of the year, down -18.08% from the February 19th high. So the question is where does the market go from here? The answer is, “I wish I knew”!This is when I explain my crazy article title, “Who Do You LUV?”. Please notice that I have underscored four letters in the title. Each of these letters W,L,U,V suggest different types of economic outcomes that hopefully result with an economic recovery! Remember an “economic recovery” also suggests a recovery for both the stock and bond markets as well.You have I’m sure heard Wall Street Journal pundits state that the best case for the stock market is to have a “V” shaped economic recovery. This interpretation suggests that the market has already suffered its worst and is now poised to go back towards where it was on February 19 when the S&P was positive +5.08%. Minimally we might expect to see a return to at least where we were on January 1, 2020. While a “V” recovery is the preferred result and one that would please us the most, we are not confident that it will be the ultimate outcome for 2020. Why? Because we don’t believe we truly understand the amount of collateral damage novel COVID-19 has brought to so many areas of our economy, and for that matter the world. Airlines, hotels, cruise ships, restaurants, manufacturing, sporting events, bars, even Disney World has shut down and the list goes on and on. Of the 26.5 million Americans who are out of work the question is what percentage of these folks will get their old jobs back? Many of our unemployed may be forced to do something different if their previous position has been eliminated? These are the questions that require answers in order for us to become more confident about the type of recovery we may actually experience? It is for these and other important reasons that a “V” shaped recovery may not be our immediate outcome. A “U” shaped economic recovery suggests that the S&P 500 will float around (+/-) the average of the worst levels of the stock market this year and linger there for an undetermined amount of time until it finally moves back up again to previous market highs. The length of the time spent at the bottom of the “U”, for the most part just moving sideways, is the unknown and the ultimate indeterminate. To varying degrees and for so many reasons this could be the outcome that we actually realize. The “U” shape recovery requires more time to pass than that of the “V” in order to repair the damage caused by the bear market born out of this recession. To be clear here, we are not yet officially in a recession. A recession is defined as two consecutive quarters of negative economic growth in the business cycle. We’ve only finished one quarter! Recessions generally occur when there is a widespread drop in spending. You can now understand why one of the purposes of the first three U.S. government stimulus programs coupled with our latest “phase four” package of $484 billion brings the total amount of stimulus to almost $3 trillion. One of the purposes of these stimulus plans is to get money into the hands of both government programs, citizens and businesses alike? Recall that 70% of our annual GDP is based on domestic consumption. Do you see a lot of people out and about spending money? Of course not, we are all “shuttered in” as a result of the coronavirus. Almost all recessions are triggered by various events, but most time it’s because of a financial crisis. Please refer back to my article titled Black Swan: The Reality Of Unexpected Volatility! So even though we have not met the exact definition of a recession at this very moment, it most certainly appears or is at least seems likely that we are moving post haste to that conclusion.Another possible outcome could be a “W” shaped recession. In a “W” recession, as the letter suggests the stock market falls, recovers a bit, but then falls back again (generally to retest prior market lows), but then finally rises once again and recovers back to previous market highs. This can happen in almost any time frame, a quarter, six months, a year? This outcome is presently “not” out of the realm of possibilities. While the previously three discussed outcomes are different, they all three promote the result of an eventual recovery which our country’s history validates has always happened. It is the path of the recovery that we are exploring. There is one other “letter” of a recession possibility and that is the dreaded “L”. This outcome isn’t friendly to individuals, businesses or countries alike. Quite frankly we hope to get the “L” out of here! Please note our attempted humor! The “L” shape result doesn’t recover, it just stagnates and lingers around its low point for a longer period of time than one can imagine. This outcome is an extreme outlier really doesn’t deserve any of our attention.So which of the four basic outcomes has the best chance of becoming a reality? If pressed to make a best guess it is our belief and our expectation that we will most likely recover via a “U”, with a “W” recovery as our “distant” second choice. When analyzed from a very basic level it appears to be very obvious that if stock market earnings are going to be pressured lower as a result of a lack of economic growth, and profits decline as a result, it’s probably a safe assumption that company stock prices will fall. When stock prices fall, especially across multiple industries and sectors, it’s pretty safe to assume that the stock market itself will fall as well. Simple right? Don’t you believe it! I previously mentioned that President Trump just signed into law our fourth stimulus package. This $484 billion stimulus package is principally focused on getting money to hospitals, small businesses and testing for novel COVID-19. Almost all of us view these fiscal and monetary stimulus plans as necessary. We should do whatever we need to do! But remember these plans, as well intended as they are, will someday have to be repaid. There will be a future price for that as well. America has lived through so much in the last 115 years since the New York Stock Exchange was first organized. Through wars, recessions, a depression, political changes, economic bumps and slumps and human triumphs and tragedies investors have always been rewarded with time in the stock market. Asset allocation is clearly the most meaningful way to mitigate risk without cashing out when markets are stressed! Tactical asset allocation strategies that constructively re-adjust for risk in both good times and bad have always helped investors to psychologically deal with the occasional disruptions that investors face when markets become challenging. Please remember that opportunity is born out of uncertainty and it will be no different this time either!We stand confidently vigilant by your side as we work through difficult chapter of U.S. history! |