THE WEEK ON WALL STREET: Last week, the Standard & Poor’s 500 dropped 4.8%. The MSCI ACWI Index, a broad measure of equity-market performance throughout the world, also dipped 4.13%. Meanwhile, the AGG rose 0.6%.
THE SPIKE IN COVID-19 CASES: New coronavirus infections are rising in at least 20 states, even as restrictions on daily life continue to ease across the country. The latest data also reflects the difficulty of quashing the coronavirus. While some early hotspots such as New York state have seen a sustained drop in new cases, COVID-19 hospitalizations have swelled recently in places like Texas, Arizona, Arkansas and California.
Ashish Jha, director of the Harvard Global Health Institute, says that nationwide, “we’re identifying between 20,000 and 25,000 new cases a day, and about 800 to 1,000 people a day are dying of this virus.” The national numbers remain stubbornly high. Often, when one state gains a measure of control over COVID-19, another seems to report a new spike.
This concern along with that of the FED’s comments (detailed below) are what pushed us into last week’s market tailspin on Thursday—the largest one-day dip since mid-March and a huge reminder that this market is indeed fragile at these price levels.
OFFICIALLY IN RECESSION, IN CASE THERE WAS EVER A DOUBT: The National Bureau of Economic Research Business (NBER) Cycle Dating Committeehas now made the recession official, determining that activity peaked in February 2020, marking the end of the expansion that began in June 2009. The committee also determined that the peak in quarterly economic activity occurred in 2019-Q4, so that the 2009-2019 expansion lasted 128 months, the “longest in the history of US business cycles dating back to 1854.”
In a testament to the unique nature of the Global Coronavirus Recession, the NBER called this recession just over three months after its onset, making this the fastest call since the 1980 recession, much shorter than the usual nine months to a year. While the NBER noted that, “the usual definition of a recession involves a decline in economic activity that lasts more than a few months,” it judged that the magnitude of the contraction in employment and production along with its breadth justified the “recession” label, “even if it turns out to be briefer than earlier contractions.”
COMMENTS FROM THE FED MEETING: The Federal Reserve met this week and pledged to maintain asset purchases at “at least” the present pace. “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning,” the Federal Open Market Committee said in a statement Wednesday following a two-day policy meeting.
A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.
RATES ON HOLD: The Fed also projected that interest rates will remain near zero through 2022, as policy makers attempt to support the economy’s recovery from the coronavirus recession. Their quarterly projections—depicted through the widely followed “Dot Plot”—showed all policy makers expect the federal funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.
INFLATION CONTINUES TO DROP: The May consumer price data continue to underscore that the fallout from the coronavirus has had a substantial disinflationary effect on prices due to the large demand shock, plunge in oil prices, and still strong US dollar. The headline consumer price index (CPI) fell 0.1% following a 0.8% decline in April, which was the most since December 2008. The year-over-year pace is a now barely positive 0.1%.
Core CPI, which excludes volatile energy and food prices, fell 0.1%, following a record 0.4% decline in April. For the first time ever, core CPI has declined for three consecutive months.
These benign inflation numbers, along with the great disruption to business activity caused by the coronavirus, are key reasons why the Fed is taking such a “dovish” stance (policies favoring lowered rates) in overseeing the economy.
TO REFI OR NOT TO REFI? LET YOUR PLAN LEAD THE WAY: With all this talk about homeowners, interest rates, and mortgage applications, what are some good rules of thumb to keep in mind if you’re considering a refinance?
Every situation is unique, of course, but conventional wisdom suggests current interest rates should be at least 1% lower than your existing rate. Also, if you decide to go through the hassle and costs involved with a refinance, make sure you’re planning to stay in your home for at least several more years, say at least 3-5 years (but ideally more), to realize the impact.
The magic behind a refinance is to either lower monthly mortgage expenses (usually if you refinance back into the same term length), or to pay much less in interest expenses over the course of the loan (typically changing from a 30 year mortgage to a 15 year mortgage). The key determinant is to ask yourself: what will you do with the savings? If it allows you to boost retirement savings or save more to your taxable assets, a refinance makes great sense. If the refinance is to allow for more discretionary spending, it’s probably not a good idea. Lastly, if the refinance is to pay for home improvements, the answer becomes the dreaded “it depends”. We help clients think through the merits of a refinance all the time and let the financial plan along with the comparison of outcomes from the status quo or a refinance be our guide.
HEADS OR TAILS: A recent primary race in Ada County, Idaho, had each candidate deadlocked at 36 votes. A law on the books since 1970 requires that in such cases, the primary be decided by a coin toss within two days of votes being canvassed.
Though resolving elections this way isn’t common, it has happened several times in the past few years, said Chelsea Carattini, spokesperson for the Ada County elections office. “We did one in 2016 and in 2012.” This time, Carattini said, she intends to use a Susan B. Anthony dollar in commemoration of the 19th Amendment, which granted women the right to vote. This is its 100th year. County clerks receive no special training in how to flip coins, but Carattini said both of her predecessors were “very good at it.”  Perhaps we should try this practical approach to elections in November?
FINAL THOUGHTS: U.S. equities reminded us recently of just how volatile they can be after a sustained run-up since the March lows. The optimism shown regarding the potential re-opening of the economy will most certainly hit rough patches along the way, as we are seeing already with reports of rises in new COVID-19 cases stoking fears of a second wave. As we’ve previously noted in this commentary, the Fed also signaled that it remains “dovish” or accommodating to keep interest rates lower. The stock market often reads this with concern that the economy needs to be propped up more than originally thought. While lately not always proven right, we still think it prudent to be more cautious and patient with portfolios when it comes to risk. The long and strange story of the COVID-19 pandemic has more chapters to be written, though we remain optimistic of the long-term resiliency of the markets and more importantly, the country.
In addition to this optimism, we remain vigilant on your behalf every day—the highlight of which is often when we get to connect with you. Never hesitate to reach out with your curiosity about the road ahead and what that may mean for you and yours.
- NPR, June 10, 2020.
- Bloomberg, June 10, 2020.
- Oxford Economics, June 10, 2020.
- Idaho Statesman, June 9, 2020.