Summer 2020 Market Commentary
By Seth Meisler, CFA, CPA/PFS, CFP®, BFA™ and Marc Usem
Could this have been the shortest bear market in the last 100 years?
We’ve heard it said that the COVID-19 pandemic has led to an acceleration of technology, science, work, and social behaviors. Could this be the case with the market as well? Over the last six months we’ve seen the fastest drop in stock market history, as well as the fastest recovery. Over this time period we received official confirmation that we are in a recession, which has been accompanied by reduced economic activity and increased unemployment. While it appeared that we were flattening the curve, the global pandemic is resurging in the United States. Add to that mix the social unrest sparked by the tragic death of George Floyd in late May and the first half of 2020 has certainly been the stuff of future history textbooks.
If the stock market action during the last six months have left you bewildered, you are not alone. Some of the greatest investors have been surprised at how the market has behaved this year. We believe the primary drivers of the market’s resurgence have been the quick and significant actions by the Federal Reserve and Federal Government, which have backstopped the proper functioning of capital markets and injected cash into the economy. While the Federal Reserve does not invest directly in the stock market, it does lend money, and (for the first time) purchased corporate bond ETFs and municipal bonds on the open market. What has become clear is that when the Federal Reserve expands its balance sheet, the stock market goes up. In addition, the U.S. government has expanded unemployment insurance, distributed PPP loans, provided for some renters not to be evicted, allowed student loan borrowers to suspend interest payments, and allowed Required Minimum Distributions to be skipped in 2020. According to T. Rowe Price, Federal Reserve liquidity measures accounted for 29% of GDP and fiscal stimulus accounted for 15.4% of GDP from January 1 to May 31, 2020. That is a lot of money looking for a place to go, and in a world of very low interest rates, stocks seem like a reasonable option.
All of the above has led to the certainty of uncertainty. The future is cloudy.
The current economic uncertainty is compounded by the pandemic, as well as trade, technological, and geopolitical tensions with China, increased bankruptcies of national companies, as well as the shuttering of local stores and restaurants, and a marked increase in internal strife within this country.
Despite the gloom and doom, we do believe that there will be another side. We are aware of at least one potential vaccine that is in Phase 3 trials and another two potential vaccines that are in Phase 2 trials. In addition, both Congress and the Federal Reserve have been very forceful in stating that they will do whatever it takes to keep this economy afloat.
For these reasons, we currently see more positives than negatives. Nevertheless, we think it is entirely possible that we could see more stock market volatility ahead as we face new COVID-19 surges and approach the November elections. For that reason, we suggest focusing on the potential long-term opportunities that may be presenting themselves. As we have stated on our Market Volatility Conference Calls, when stores put merchandise on sale, people buy to get a good deal, but when the stock market is on sale, investors tend to run the other direction. The reason is that we, as humans, are not hardwired to invest in the market. We are hardwired to run from perceived danger. Since the speed of events has increased dramatically, we continue to suggest you focus on the things you can control, which includes focusing on the long-term, tax and estate planning, and ensuring you have enough cash and bonds to match your risk tolerance or withstand potential market drawdowns. These actions will help your long-term financial plan and allow for a greater return on life.
Thank you for your continued confidence in our work.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.
There are no assurance that the content made reference to directly or indirectly in this Market Commentary will be profitable, or suitable for your individual situation, or prove successful. Due to various factors, including changing conditions, the content is only reflective of current opinions or positions and is subject to change at any time and without notice. Moreover, you should not assume that this Market Commentary serves as the receipt of, or as a substitute for, personalized investment advice from Affiance Financial. Please remember to contact Affiance Financial, if there are any changes in your personal/financial situation or investment objectives.