Recovery Continues
The below update is a generally positive report on an improving economic situation but we would be remiss in not saying how saying how saddened we are at the tragedies in our nation and our hearts go out to everyone suffering, but especially to those personally affected by the +100,000 Covid-19 related deaths as well the recent horrific actions of injustice that we have been witness to. We continue to pray for you and for healing in our nation.
Well I’m not going to call a no hitter in the 7th inning, but the situation has certainly improved in the economy and financial markets. That’s not necessarily saying a lot given just a few weeks ago we were writing trillion dollar checks and seeing record breaking unemployment figures as many businesses were either closed or working on skeleton crews, but I’ll take the ‘better’ none the less.
As was mentioned previously, the fiscal and monetary stimulus that has been slowly gaining traction and as Social Distancing policies are relaxed, businesses have begun to reopen and rehire (albeit as they continue to adapt to the new rules). Citizens are starting to incrementally (and as safely as possible) emerge from shelter in place status and getting back out into more of something that resembles normalcy. We are in no way out of the woods regarding the virus as risk of contagion will be a part of life for the foreseeable future, and the risk of a reversal or retracement of Social Distance rules remains.
As things have started to resume though, the markets have tremendously recovered from the panic levels we were at just a couple of months ago. Obviously going through something like this, we don’t have much history to work from as a guide, but as related to Covid-19, I think it’s quite likely that the bottom is behind us and while volatility will remain as related to case rates, recovery rates, and potential vaccine announcements, I think we are improved 12-24 months from now in the markets/ economy.
We still have an election to get through later this year and tensions with China seem to be a never ending issue so there is more risk on the horizon in the near-term, but as you’ve heard me say countless times, we don’t invest for the next 3-6 months, we invest for the next 3-6 years, and so that’s where our gaze remains.
Below are more details on facts and figures as well as where things landed in the Month of May and Year to Date.
Please know that we are thinking of you and your family and wishing you all good health. As always, feel free to reach out with any questions you may have – about the markets, your financial plan or anything else that we may be able to help with. Thank you for your trust in us.
Here is a look at some key factors we are watching, both here and abroad:
Bottom line
Savvy investors can consider using market pullbacks to add exposure to favored sectors (e.g., info tech, communication services, health care).
Be sure to set aside emotion before thoughtfully adding to your portfolio. While opportunities exist, they come at various levels of risk for both stocks and bonds. Be patient and steadfast.
Economy
Recent economic data continues to reflect the record decline we’ve seen so far in 2020, including unprecedented job losses and declines in consumer spending. Aggressive action from the Federal Reserve (the Fed) has helped to ease strains in credit markets, and fiscal support from Congress has provided some cushion against the downturn.
The expansion of the Fed’s balance sheet and the increase in government borrowing are not necessarily inflationary. In fact, Chief Economist Scott Brown expects some downward pressure on prices given high unemployment and the excess in global productive capacity.
After the pandemic, the U.S. will need to get the federal budget on a more sustainable path, but the current elevated level of borrowing need not have an adverse impact on longer-term growth. The greater risk for the economy is ending support too soon, Brown notes.
As social distancing guidelines relax, Brown anticipates a sharp rebound in economic growth into the second half of the year, fueled partly by the buildup of savings during the lockdown. However, without a vaccine or effective treatment for COVID-19, many individuals may be reluctant to eat in restaurants, get on airplanes, or attend concerts or sporting events. A full recovery could take several quarters.
Equities
The rally in U.S. growth equities relative to the rest of the world is primarily driven by a handful of companies that have benefited from heavy exposure to technology and the work-from-home environment, with large cap and growth names leading the way. Missing is the broad-based rally in more cyclical names as well as the smaller companies, says Nick Lacy, chief portfolio strategist for Raymond James Asset Management Services.
Companies may face challenges returning to pre-pandemic profitability with double digit unemployment. The employment situation is likely to stay negative for a few years as some jobs are not coming back any time soon, notes Lacy.
The massive underperformance of value stocks relates mostly to those particular companies’ quality and profitability, both in the U.S. and abroad.
International
During May, equity markets outside the U.S. continued to build on the gains of late March and April, although the strengths of these gains typically were lower than those seen in the mainstream American markets, reflecting lower technology sector weightings, according to European Strategist Chris Bailey.
Across Europe, both COVID-19 new cases and death rates moderated, allowing for tentative loosening of lockdown rules.
Economic data – including corporate earnings results – remained exceptionally weak; however, both consumer and business survey data started to improve.
Regional government stimulus efforts included an extension of the U.K.’s wage support scheme until the end of October and a Franco-German plan to bolster the eurozone’s recovery.
Interestingly, the European Union plans to put significant funding behind its “green recovery,” making it more than just a buzzword. The EU proposed its largest-ever budget, including investments for the European Green Deal, the largest decarbonization initiative in world history, notes Pavel Molchanov, energy research analyst. The EU plan to sustain its post-crisis recovery focuses strongly on green initiatives, such as low-carbon electricity generation, including support for countries such as Poland and the Czech Republic, which have been heavily dependent on coal.
China and some other parts of East Asia continued their more advanced economic recovery, avoiding any notable COVID-19 second wave so far.
Fixed income
Overall, May was a very positive month for credit, for balance sheets and for issuance, with one notable exception – the drop within municipal spreads. The big drop reflects very low Treasury rates coupled with investor appetite for high-quality yield, explains Doug Drabik, managing director for fixed income research.
However, we also saw significant spread compression as well as a growing new issue calendar for corporate and municipal bonds, notes Chief Fixed Income Strategist Kevin Giddis.
These conditions have allowed state and local governments to tap the capital markets at much lower yields. Furthermore, there’s an expectation that a second round of COVID-19 relief could provide additional money to aid state and local governments with revenue shortfalls and budget deficits. If that happens, we could see municipal yields fall even further.
The Treasury offered its first 20-year bond since 1986, and it was a hit. The Treasury has said that it will need to raise $3 trillion in the second quarter of 2020, and the reopening of the 20-year bond helps to let the Treasury finance well out on the yield curve at just over a 1% rate.
Best Regards,
Brad Hudson
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