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A Look at Investment Markets Midway 2020

Steve GibsonJuly 10, 2020

Markets

Stephen Gibson joined Hoover Financial in June 2020 as Chief Investment Officer.  Stephen is a 30-year veteran of investment management and has managed more than $160 billion in assets in more than 140 different investment products. He has consulted with more than a dozen RIA/Planning firms and recently served for seven years as the investment leader for a successful Delaware based RIA. He has also served as a regulatory advisor to FINRA and the SEC. This is his first blog for HFA.

For some reason as I prepared to write about the investment markets and economy of the first half of 2020, my mind drifted to one of my favorite historical events. It was 82 years ago that the inspirational horse race between Man o’ War and Sea Biscuit caused the entire nation to forget about the coming World War, the sluggish persistence of the great depression and the cultural differences between the establishment east coast and the upstart western states. I wish we could find such an exciting distraction in the face of our own concerns about Covid-19 resurging, 12% unemployment and deep partisan issues over race and the culture wars. The track only held 15,000 at Pimlico so they scheduled it on a Tuesday so people would not be able to attend because of work.   More than 40,000 packed the track, and an entire nation, including FDR, was glued to radio. The immediate situation that day in 1938 was overwhelming, and people were fatigued from depression woes as the Nazi threat was becoming clearer. Little did the country know that day that America was about to begin an unbelievable climb out of a bear market to become the world’s economic and military leader. It was impossible to see the incredible 82 years ahead. The outlook today, looking at the rest of 2020, is equally split. There are concerns about the virus resurging, election uncertainty and multiple economic challenges. Equally powerful, so far, is the positive reality of new highs in the stock market, continuing technology breakthroughs, the greatest infusion of stimulus liquidity in history and a notable drop in unemployment. It is essential that long term investors look beyond 2020 and worry less about the value of the stock market next month and more about how investors will fare over the next decade.

The first half of 2020 saw one the worst quarters in U.S. stock market history followed by one of the best. If anyone doubted that timing markets was nearly impossible, we can rest our case. Weekly double-digit swings became a bit of the norm. But in the end, we are nearly back at the point we started and the decision to let asset diversification work has proven on target. The first quarter saw a 6.8% decline in GDP, and consensus looks like a 30-40% drop in the 2nd quarter. That certainly meets the definition of a recession. The decline is led by a 50% drop in consumer spending and a sharp drop in business spending as well. Exports are down 35% and profits for 2020 could end up slightly negative for the year even with an expected beginning of recovery. It requires a lot of stimulus to offset that level of economic slowdown. Fortunately, that is just what we got. Not only the initial $2 trillion from Congress but a Federal Reserve saying that they will provide, “whatever is needed.” Another round of stimulus is highly likely. It is time to recall a powerful reminder, “Don’t fight the Fed.” In fact, the dollars pumped into the economy, between the government and the Fed, are pure liquidity equal to the loss of activity. Banks are also in strong capital positions. The threat of a depression-like event is off the table. However, a significant dip, driven by the virus resurgence, would not be a huge surprise.

We entered the end of February in strong shape with record low unemployment and solid profits. There is nothing in the current crisis that derails America’s technological transformation in both semiconductor chips and artificial intelligence. Indeed, a hidden bonus is the “stay at home” training of reliance on cloud computing and network applications. Media, home shopping, home cooking and telemedicine are pushed ahead by years and the explosive stock prices reflect a recognition that things will never be quite the same in some good ways. The market has also decided that electric self-driving cars are coming faster, and biotech has re-emerged as a strong growth sector. The stock market generally discounts four to six months into the future, but given the near zero interest rates and the current expectation of Fed backing, that window is comfortable into next year even if we are forced to take a step back because of the resurging virus. Yes, we still have trade disputes, partisan bickering and an election that promises to be unsettling. These too will cause roller coaster moves but not a secular damage to the economy. By the time we get to the election, the expected result will be reflected in stock prices. It will be too late to try to time any impact. More importantly, the powerful forces of near zero interest rates and a secular growth in key American sectors should potentially more than offset any temporary concerns over tax rates or progressive policies. Government spending and especially infrastructure programs are likely regardless of the election. Evidence from the rest of the world indicates that once we get flattening of the virus, people do return to a full range of activities including travel. China, particularly, is showing some important positive recoveries in key parts of that economy. Other Asian nations, too, were fortunate to recover solidly. Europe is already back to 8% unemployment. The U.S. might lag time wise but our underlying growth sectors are more powerful.

Retired investors are facing some very positive forces. Worldwide aging populations are holding inflation to historically low levels. Home prices are rising and boosting wealth and new advances make everything from healthcare to home shopping more accessible. Therefore, the returns from investing (even if bonds offer lower than historic returns) are putting real purchasing power into financial plans. The level of spending by the Fed is not likely to cause a surge in inflation or a decline in the dollar for three reasons. First, our spending is relative to other central banks and governments. They too have had peak spending levels. Secondly, the worldwide demand for yield is extremely strong, and $17 trillion in global savings have negative rates. Our bonds look attractive. Finally, when things look a little shaky around the world, the U.S. is still the world’s comfort haven. Bond investors are not likely to decide that Chinese bonds are a better bet. Since 2009, the stock market is up 241%. That is well below the cumulative gains of previous financial crisis recoveries. Until earnings recover, measures of the value of stocks will be distorted and appear high. That is, again, because the market is very bullish on 2021 and beyond. Like those listening to the big horse race in 1938, we perhaps cannot imagine that we will look back at this strange time in our society as the beginning of another strong advance in market returns, the quality of life and American leadership. So far in 2020, that is what markets are telling us.

Sources:

  • Seabiscuit vs War Admiral: the Hollywood version. Photograph: Universal/Everett/Rex Features
  • A Perspective on Secular Bull and Bear Markets by Jill Mislinski, 7/1/20 Advisor Perspectives.com
  • Blackstone Quarterly Economic Update Report
  • P. Morgan- A Look at 2020-J.P. Morgan Asset Management Insight
  • The Conference Board Economic Forecast June 2020
  • The FRED Federal Reserve Economics Database- St. Louis

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