THE WEEK ON WALL STREET: Last week, the the Standard & Poor’s 500 rose 1.88%. The MSCI ACWI Index, a broad measure of equity-market performance throughout the world advanced 2.01%. Meanwhile, the Barclays Global Bond Index was near break even for the week at -0.03%.
COVID RECOVERY TRACKER: Oxford Economics recently created a weekly Recovery Tracker which studies the state of the economy across six dimensions: health, demand, employment, production, mobility, and financial markets. It illustrates the recession’s suddenness and points to a relatively firm initial rebound in activity through the first week of June. This was evident in the much-stronger-than-expected 18% bounce in retail sales in May.
While this has bolstered arguments in favor of a V-shaped recovery, they caution that the US economy is only in the initial recovery phase—one in which strong growth figures from depressed levels of activity give the false impression of an immediate return to pre-COVID economic dynamism.
Case in point, while the financial index has recovered strongly from its mid-March trough and is currently at 90% of its pre-COVID levels, the other indices remain 25% or more below their original levels.
The health and mobility indices lag, still down 30%-35%, highlighting the importance of a medical solution to the pandemic that limits deaths, reassures the population, and helps “normal” activities resume.
MARKET AND ECONOMIC DISLOCATION CONTINUES: We’ve covered, at length, the growing disconnect between market conditions and economic conditions. Howard Marks, co-founder of Oaktree Capital Management, made recent comments that address this chasm.
“The powerful rally we’ve seen has been built on optimism; has incorporated positive expectations and overlooked potential negatives; and has been driven largely by the Fed’s injections of liquidity and the Treasury’s stimulus payments, which investors assume will bridge to a fundamental recovery and be free from highly negative second-order consequences.”
It’s important to remember that no one can predict the future. Portfolio managers in the recent Bank of America Fund Managers survey are still leaning in a more defensive posture. Will they be right?
Richard Bernstein recently addressed those with extreme optimism or pessimism when he said:
“The extraordinary multi-black swan environment makes it difficult to be an ardent bull or ardent bear. Extreme positions seem based largely on guessing an outcome or market momentum rather than a thoughtful analysis of the fundamentals. Fundamentals are improving from miserable levels and remain horribly depressed, but they are indeed improving. However, the reality of the US’ inept response to COVID-19 should temper investors’ enthusiasm at least to some degree.”
A CLOSER LOOK AT JOBLESS BENEFITS: New applications for benefits edged lower by 58,000 to a seasonally adjusted 1.5 million in the week ended June 13, the Labor Department said Thursday. While it is the fewest weekly applications since mid-March, it also shows the pace of layoffs is no longer declining rapidly.
The number of Americans receiving benefits payments fell by 62,000 to 20.5 million in the week ended June 6. Those continuing claims are reported with a one-week lag. A stable level of people on benefit rolls suggested that new layoffs are being offset by employers hiring or recalling workers as states have allowed more businesses to reopen in recent weeks. To consider:
- How many of the 20.5 million people still on unemployment are waiting for the business they used to work for to reopen?
- How many of those waiting will be rehired as each state’s economy reopens, and how many will not?
- How many of these businesses will never reopen?
- Will there be enough new businesses springing up to replace them?
- What will be the effect on consumer spending/confidence when the extra $600 unemployment benefit rolls off at the end of July? Will enough people be back to work to offset the decline in income?
FUEL DEMAND BOUNCES OFF OF LOWS: We continue to track demand as an indicator of the continued strength or possible weakness in the US recovery. When will you be back on a plane? When will travel get back to historic norms?
ASSESSING YOUR KEY PLANNING LEVERS: As spring ends and summer begins, perhaps now is a good time to ponder some key tenants of your financial plan. At its core, a financial plan is simply calibrating five key areas: spending; savings; portfolio risk; timing of events; and your legacy goals (gifting and philanthropy). We’ve heard from many clients these past few months of lockdown about how this time has given people a chance to revisit and adjust these levers. It may be particularly helpful to analyze your spending and see if any new, good habits you’ve developed can continue—even after life returns to something approximating normal. In many cases, more than any other planning input, spending can have the greatest effect (positive or negative) on the probability of your retirement success.
REFINANCE NOW: This week saw another drop in mortgage rates, with 30-year fixed mortgages hovering around 3.13%. These historic low rates are driving significant refinancing activity. Lowering your rate or converting variable rate debt (auto, education, credit card…) to a fixed rate can be a significant aid to your long-term cash flow and improve the strength of your financial plan. We at Compass Ion Advisors can analyze if this makes sense for you and then introduce you to a trustworthy mortgage professional if warranted.
FINAL THOUGHTS: As our firm acknowledges the benefit of meeting together in person, we have been making plans for returning to our office, even if in small measures. However, with the recent spike in cases in some areas, and because of our investment in culture and technology, we continue effectively work remotely. So we hit pause on those plans. We’d love to hear feedback from our clients about how we can best interact with you, be that with continued virtual meetings, or if you are comfortable resuming in-person meetings with added safety measures. We are always open to hearing what you’re thinking about how we can be a firm that meets you where you are.
1. Visual Capitalist, June 18, 2020.
2. GMO, June 18, 2020.
CHART CITATIONS: See graphics.