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Darren's Market Commentary

June 2020 Market Commentary

Economic Outlook

The month of June has been interesting. Earlier in the month, there were signs that the reopening of certain state economies were moving forward without any interruption. However, we are now seeing signs that healthcare systems, in states like Texas, are coming under stress due to increased infection rates from economic activity and less social distancing. Therefore, while there are new rising cases reported, I do think that the very restrictive quarantine policies enacted early on when COVID first appeared in the U.S. are not going to reappear in Texas and other states. Those quarantine measures were put in place when we had less information about the spread of COVID. In addition, since those social distancing measures kill small businesses and I think in general, people are not as worried about COVID as we were in early March, I just don’t see the restrictive measures coming back. I do see measures that can allow for the reopening of the economy to continue such as new facemask requirements for businesses or social gatherings, but I think the “Don’t leave your home” quarantines are not returning anytime soon. I write about this change in how we are reacting to COVID because I think it is essential if the economy is going to continue to reopen, which I think it will. I am still very encouraged by the early numbers on the reopening of the economy and it seems like that bad case of cabin fever I have been writing about for months now is showing up in the economic data as people get out of the house and get social again. I am already seeing signs of a V-shaped recovery when I see airline bookings up, job numbers improving, and heavier traffic on the roads. I am very interested to see if the business traveler comes back to fly in large numbers in the coming months or even years since we may see video conferencing become the new normal and a great way for companies to cut expenses. I am also interested to see if corporate America gets more comfortable with remote working from home for employees and therefore may be able to reduce office footprints in the future. We could see some very cheap commercial rental rates over the next few years.

 

The bottom line for me is that I did not expect the economic recovery from COVID to ramp up until now, but the recovery already began in late May and the early signs are encouraging, but this recovery will not be without some bumps in the road. Stay patient and diversified.

 

Stock/Bond Report

Stocks have held onto much of the gains posted since the lows in early March despite news of higher infections in states that are reopening. I have said it before, stock markets typically look 6-9 months ahead, and I think that the economy is going to be in much better shape 6-9 months from now, and I think the stock markets might be expecting a better economy as well. As a result, you have the NASDAQ hitting record highs with the S&P 500 and DOW 30 holding on to much of the gains recovered from mid-March. When I look at stock valuations, I see a market that may tread water around these levels for a while longer as the tug-of-war between opening and infection rates compete for the market’s attention, and we could even see some weakness in stocks if the infection rates don’t subside. If the infection rates start to get out of control in Texas and elsewhere, then we could very well see another market sell-off which could go back and retest the March lows, but I think this is the outlier scenario. In my opinion, we are more likely to see the market drift lower over the next few weeks on the new infection rate data without a severe drop like the one we saw in March. From a technical trading point of view, it would be good to retest the March lows. However, I don’t hear the deep fear regarding COVID today when I talk with family, friends, and clients like those that I heard during the terrible month of March. Therefore, I think a retest of the March lows seems improbable in the near term, but not entirely impossible, especially if Texas is walloped by COVID like New York was in March and April. 

 

The “Vaccine Premium” in the stock market rose over the last 2 weeks as the recovery in equities appears to be on pause in late June. The “Vaccine Premium” changes every day and it represents 80% of the difference between the current stock valuations and the stock market highs from February. The Vaccine Premium is the amount that I think the stock market could recover shortly after the news of an approved vaccine. As of late June, the Vaccine Premium is close to 3,000 points on the Dow 30, which is up since my last writing due to the recent stock market weakness.

 

The bond market appears to be in a trading range and I expect it to remain in a trading range over the next few months, if not longer. I also expect interest rates to remain low through the end of the year as the Fed navigates its way out of the massive spending spree by the Federal government to prop up the economy. Low rates will help stimulate the economy with lower borrowing costs for individuals and businesses alike and we are already seeing record low mortgage rates help homeowners. Unfortunately, low interest rates will cause banks to lower or eliminate interest payments on money markets and CD’s, which will once again negatively affect savers, who are typically seniors. The recent economic rebound has also led me to believe that we will not see negative interest rates here in the U.S. anytime soon, and that is a good thing. 

 

Now is the time to remain diversified, patient, and focused on your goals and know that having a diversified portfolio does not eliminate downside risk, but it can help reduce the impact of major movements of one asset class.

 

Just a Thought

“Courage doesn’t always roar. Sometimes courage is the quiet voice at the end of the day saying, “I will try again tomorrow.”

-Mary Anne Radmacher, writer


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May 2020 (2) Market Commentary


Notice

Due to the speed and severity of this crisis, I will be writing these updates more frequently in an effort to keep you informed on the changing economic and financial conditions.

Economic Outlook

World governments have begun the process of restarting their economies and I expect that process to accelerate over the next 2 months. Here in the U.S., we are seeing some states like Texas begin the process quickly while other states like hard-hit New York will take some time. And it is not just the U.S. that is opening up as I see that Japan may pay you to be a tourist there and even Italy appears to be gearing up for business with the popular summer tourist season starting now. The more I talk to friends and family now, I hear a common theme from those conversations, and it is all about planning time on vacation or just getting out to eat a dinner that is not home-cooked. Either way, I see a strong pent-up demand to get out of the house and enjoy ourselves socially again, which reinforces my belief that we could experience a sharp economic rebound in the coming months.

So what do I mean when I talk about a sharp, V-shaped recovery coming out of a recession? It means that I expect the economy to recover about as quickly as it declined. However, a recession is defined as negative growth for 2 quarters in a row, and the first quarter GDP numbers were negative and I think we can all agree that the second quarter GDP numbers will be negative as well. So for my V-shaped recovery to occur, the GDP numbers would have to show double digit growth in the third quarter, which I think can happen. I have to remind myself that it is still only May and we are still in the worst economic downturn any of us have seen, but we are starting to reopen our economy and the third quarter seems like an eternity away from here. My point is that while the current economic data is about as bad as it can get, I feel that we could start to see the economy bottom out in the near future and possibly start to show signs of recovery towards the end of June, which would be a good sign for the V-shaped recovery. As long as I continue to see signs of the economy reopening, I remain optimistic on a sharp recovery, and as of this writing, the floor of the New York stock opened to trading since being shut down in March. I also hear about the ways businesses are going to open as the “new normal”, which makes me laugh a bit. I do not believe there are going to be lasting social distancing measures, these are temporary, so I refer to this phased-in reopening as the “new temporary”. I do believe life will generally return to pre-Covid 19 normal not if, but when we get a vaccine.

As you can tell, I am positive about our economic future and I haven’t even mentioned the trillions of dollars that our government is pumping into the economy to keep paychecks going and businesses afloat. When all is said and done, I expect around $8-10 trillion dollars will be spent to keep our economy from going into a depression, and that is an extraordinary amount of money. Even if we did not have states and world governments opening up their economies now, I would still be optimistic on an economic rebound based on the trillions being spent alone, but when you combine that with world economies reopening, I think it is a recipe for a sharp rebound.


Stock/Bond Report

Stocks continue to respond positively to optimism on a possible vaccine and the continued reopening of economies. I have always said that every bear market is different and this one is no exception for its quickness and speed to the bear market lows we saw in mid-March. I have been writing that from a technical point of view, I would have liked to see the markets retest the March lows as a way to confirm the bottom in stocks, which may still happen, but I think the sharp recovery from the March lows without the retest could be the signature of this truly unique downturn in equities. The further we get away from March, the more I think that we may not see a double bottom and that stock values could continue to move higher as more economies open up. Much like when the bombing of London marked a low-point for the U.K. in WWII, I think the middle of March could be the low-point for us as fear, uncertainty, and stock market volatility were running high in mid-March.

The “Vaccine Premium” in the stock market has declined lately as stocks have trended higher since my last writing. It changes every day and it represents 80% of the difference between the current stock valuations and the stock market highs from February. The Vaccine Premium is the amount that I think the stock market could recover shortly after the news of an approved vaccine. As of late May, the Vaccine Premium is close to 3,600 points on the Dow 30, which is down 1200 points since my last writing due to the recent stock market strength.

The bond market is very interesting at this point as talk of a stimulus package for municipalities continue while interest rates have become less volatile. What I do find interesting is the fact that the Fed has to downplay talk of negative interest rates. If it looks like the Fed is moving towards negative interest rates, I think that will have more long-term consequences on our economy than COVID-19, so I am watching the Fed closely on this matter. How do negative rates work? If you have a bond with a negative interest rate of 1% and you invest $100,000, you will get back $99,000 when that bond matures. Negative rates are not good for an economy long-term because you are paying someone just to give you a portion of your principal back. In this environment, investors look for a return OF their principal rather than a return ON their principal. I hope we can avoid the tough economic position that negative rates can bring, but it is something that every investor should be paying close attention to over the next few months.

Now is the time to remain diversified, patient, and focused on your goals and know that having a diversified portfolio does not eliminate downside risk, but it can help reduce the impact of major movements of one asset class, such as a declining stock market.


Just a Thought

“The joy of life comes from our encounters with new experiences, and hence there is no greater joy than to have an endlessly changing horizon, for each day to have a new and different sun.”


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May 2020 (1) Market Commentary


Notice

Due to the speed and severity of this crisis, I will be writing these updates more frequently in an effort to keep you informed on the changing economic and financial conditions.

Economic Outlook

World economies have been in sudden stop mode for the last 3 months, but I think the tide is starting to turn. The severity of the economic shutdown experienced by many world economies is on full display with the negative data reports that are now coming in. Some of the economic reports and the rapid rise in job losses are something that I have never seen before in my 25 years in this business, and I don’t want to see ever again. However, I start the month of May with a much more positive outlook than I did March and April for one simple reason: economies are starting to open back up again. While I expect the May economic reports to show little to get excited about, we could start to see some reports that the job losses and slowing GDP could be leveling out in June as America opens for business. I am even more encouraged to see some of the big states, like California, considering easing restrictions sooner than later, while many states in the south, like Texas, have already begun that process, and I like what I see and hear about so far. As the list of states that reopen grows, I think the June economic data could show our economy regaining its footing and begin the process of recovery, which I think has already begun. It will be interesting to see how quickly some states re-open and that should determine how quickly we could get back to normal. I still think we could see a dramatic recovery in our economy in the second half of the year and could see a normalized economy by year’s end, assuming we don’t see another outbreak of the virus in the fall months, which is a legitimate concern going forward. I am still assuming the virus becomes less effective in spreading or becomes dormant in the warm summer months, which hopefully allow us to get a foothold on it and prepare for any further outbreaks to come. We also have had some recent medical breakthroughs of drugs that can help alleviate the symptoms of the virus and other promising drugs in early stage trials, which could allow for less strict social distancing if we get second outbreak in the late fall/early winter.

 

The federal government is still throwing money at the economy to soften the short-term economic damage, and this added debt will have long-term consequences that I will discuss later. In the meantime, I firmly believe that once our economy begins to recover, it could be just as historic to the upside as it was when it stopped, and I think that our economy is well-positioned to recover quicker than many European and Asian economies.

 

I think we have seen the worst of the virus’s economic impact, and this month could prove to be the month when Americans start to show our best and begin the recovery process. Right now, I am not betting against the Fed, Donald Trump, or most importantly, the American people.

 

Stock/Bond Report

The stock markets appear to have become less volatile as the days of 1,000 point-plus swings on the Dow 30 have become less common recently. We may not see a retest of the March lows that I wrote about in my last note to you, but the markets are still digesting the dismal corporate earnings season and the long list of bad economic reports that continue to come out. As a result, I still think that a technical retest to confirm the March stock market bottom may still happen in the next few weeks, if it is going to happen at all. After that, I think the market will begin to look ahead to better days and could begin another leg up.  

 

The “Vaccine Premium” in the stock market has risen lately as stocks have trended lower. It changes every day and it represents 80% of the difference between the current stock valuations and the stock market highs from February. The Vaccine Premium is the amount that I think the stock market could recover shortly after the news of an approved vaccine. As of early May, the Vaccine Premium is close to 4,800 points on the Dow 30, which is up 800 points since my last writing.

 

The bond market is beginning to show signs of stabilization as well. Interest rates have become less volatile, and it appears that municipalities will also receive some sort of federal bailout to offset declining tax revenues. The corporate bond market could still come under pressure in the near-term as companies race to raise cash, especially in the hard-hit travel sector. These two sectors, municipal and corporate bonds, along with the bank loan sector, appear to be offering attractive valuations right now.

 

Now is the time to remain diversified, patient, and focused on your goals and know that having a diversified portfolio does not eliminate downside risk, but it can help reduce the impact of major movements of one asset class, such as a declining stock market.

 

Just a Thought

“Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.”

-Marie Curie, physicist and chemist


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April 2020 (2) Market Commentary

Notice

Due to the speed and severity of this crisis, I will be writing these updates more frequently in an effort to keep you informed on the changing economic and financial conditions.


Economic Outlook

The economic damage as a result of the COVID-19 social distancing measures around the world are starting to come into view and it is quite devastating. Some GDP numbers may decline as much as 40% in the second quarter, which is a stunning slowdown. In less than 6 weeks, we have effectively wiped out the job gains over the last 10 years. During this historic recession or sudden stop, I feel it is important to remember that the damage to the economy was expected, so while the news is as bad as we thought, it is time to look beyond what we knew would happen. When I look out just one month or even 3 months (which seems like an eternity now), there are reasons to be optimistic when you start to think of the eventual economic recovery. For starters, you have the recent $2 trillion stimulus, which could be one of many trillion-dollar packages, including an expected infrastructure package in the coming months. For the consumer, oil and gas  prices have tanked (this acts as a tax cut to consumers), interest rates are near record lows (borrowing and refinancing activity is accelerating), and the weather is getting warmer in a nation suffering from a major case of cabin fever.

 

It may be too early to think about what type of recovery we have, whether it is a sharp V-shaped one, or a sharp recovery that took a bit longer to get to in a U-shaped recovery. If we have another outbreak later this year, we could experience a W-shaped recovery punctuated with another sudden stop in the economy. I continue to believe that the V-shaped recovery is possible but the odds of it happening may be lowering due to how quickly the economy opens up, which at this time appears to be state specific. If there are enough states that can open up early and Texas along with many other states appear to be on that trajectory, I think the economic recovery can happen quicker than most expect, and I am staying with that assumption. I am encouraged that it is the middle of April and we are already talking about how to open up the economy, and that was not the case when I wrote my last email to you a very long 2 weeks ago.

 

Like my father, I am a firm believer in the American spirit. When we are presented with a challenge, we rise to meet it head on, and I think that spirit will shine through when parts of the economy begin the recovery process. I remain very optimistic in our near-term future and I would be wary of anyone who is betting against the American people.


Stock/Bond Report

What a difference 2 weeks makes. The fears of an all-out stock market collapse appear to be fading away after the dramatic first-half April rally. It seems just as quickly as stocks declined based on short-term fears in March, stocks have snapped back quickly, and investors are already starting to wonder if they missed the bottom.  It is typical that stocks begin to rebound before a crisis lifts, and often we find that stocks hit a bottom during the crisis itself. This time appears no different as the economic fear gauge was peaking in March when stocks were in free-fall. Now, just two long weeks later, I think the stock markets are trying to look past the current damage reports and look forward to what opening up the economy may look like. While we may have hit a stock market bottom in March, it would actually be healthy if the market went back down to retest those March lows, but I am sure nobody wants to go there again, but it is a possibility. The economic reports over the next 2 months are going to be historic, not in a good way, so a retest of the March lows would not be surprising, and it would be good from a technical standpoint. However, if the reopening of the economy goes better than expected, or happens quicker, or both, we may not retest the March lows and continue to grind higher from here. Either way, I think stock values will be close to record highs again by the end of the year, which is consistent with my overall economic recovery outlook.

 

I also think there is what I am calling the “Vaccine Premium” in the stock market. It changes every day and it represents 80% of the difference between the current stock valuations and the stock market highs from February. The Vaccine Premium is the amount that I think the stock market could recover shortly after the news of an approved vaccine. As of mid-April, the Vaccine Premium is close to 4,000 points on the Dow 30.

 

The bond market had certain sectors underperform recently, but they are not down for the count. First, municipal bonds declined based on fears of lower tax revenues from a sudden stop economy. However, there is even talk of a federal bailout for municipalities, and many states are beginning to open up their economies, which may alleviate fears of lower tax revenue. The high yield corporate bond market also declined based on slower corporate earnings and the ability to make debt payments, but a reviving economy could lower debt default concerns. These two sectors, along with the bank loan sector, appear to be offering attractive valuations right now.

 

In the meantime, your quarter-end statements, which have already arrived or are arriving now, will show how the downturn has effected your portfolio. It is important to remember to that these statements are showing values as of March 31, but the stock market has risen dramatically since then, so most portfolios values are higher today when compared to your statement dates at the end of March. Now is the time to remain diversified, patient, and focused on your goals and know that having a diversified portfolio does not eliminate downside risk, but it can help reduce the impact of major movements of one asset class, such as a declining stock market. I have also found it interesting that when I look at client portfolios and the decline that has taken place, most client portfolio values today are near where they were about a year ago.


Just a Thought

“There is nothing wrong with fear; the only mistake is to let it stop you in your tracks.”-Twyla Tharp, choreographer

 


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April 2020 (1) Market Commentary

Notice

Due to the speed and severity of this crisis, I will be writing these updates more frequently in an effort to keep you informed on the changing economic and financial conditions.


Economic Outlook

The COVID-19 social distancing measures around the world have effectively pulled the emergency brake on the global economy. While most recessions are caused by monetary policies or financial imbalances built up during economic expansion, this time is very different. This is such a unique situation, there is no playbook on how to deal with it, and as a result, world governments and central banks are providing an unprecedented response in the form of monetary and fiscal policies in the trillions of dollars. While there will be a comparison to the Great Depression of the 1930’s, I think we will avoid a depression (mass bankruptcies and mass long-term unemployment), but we could experience one of the worst recessions in history, which could also be one of the shortest in history for many reasons. First, the recent stimulus package from the U.S. (CARES Act) totaled around $2 trillion, which is a staggering amount of money to inject into an economy. This will go a long way in providing many Americans with living expenses to get through the next few months, which is extremely critical at this point in time not just from an economic standpoint, but also to give people some peace of mind. Second, the dramatic drop in oil prices can act like a tax cut for the world economy and reduce operating costs for industries, like the airlines, and individuals alike. Third, the Fed cut interest rates to near zero, which can help stabilize the economy through continued lending and borrowing, but can also serve as a major catalyst to jump-start the economy when quarantine measures are lifted. Fourth, and I mentioned this in last month’s email, this is not a natural disaster or terrorist event where we would need to rebuild infrastructure to get the economy going again; everything is in place and ready to go when people start being social again. Fifth, I don’t think we are done with government stimulus packages. I believe we could see a major infrastructure-spending bill that will not only employ many Americans, but also rebuild our roads and bridges that are in need of repair; it’s a win/win. Lastly, I do believe that Americans are ready to get back out and be productive, so I think there will be a tremendous amount of demand on the other side of the quarantines. When you combine all of the above, you have a recipe for one of the greatest economic rebounds of all time, which would be appropriate considering we are experiencing one of the quickest and most severe economic declines in history. One other hopeful issue to consider would be any medical advance against the virus or the symptoms of the virus. Should any medicine or vaccine prove helpful, that would be a critical catalyst for kick starting the economy since the need for quarantines would subside.

So where do I think we are headed? I believe we are still in the early stages of this economic downturn (soon to be recession), and I expect more negative economic data to come out over the next couple of months. However, most projections put the peak of the COVID-19 outbreak in the U.S. around mid-April, which means that we could see quarantines begin to lift in May, which would begin the healing process of the economy. I think that once the recovery begins, the economic rebound could be very swift due to the reasons above when combined with the hot and humid summer months, which are typically an unfavorable environment for viruses, but a time for higher economic activity when more people are more social. As a result, I do expect the data to show a deep recession for the first and second quarters, with a v-shaped economic rebound possibly setting up for the second half of the year that could actually begin in June. I am sure you are already hearing your friends and family talk of what they want to do when they get out again, and many, dare I say, are even looking forward to going back to work. I think that the worst case of cabin fever this country has ever endured can go a long way to returning our economy to normal. The American consumer will want to get out, and when they finally do, they will most likely have low gas prices, low interest rates, one more stimulus package to create new jobs to rebuild America, and a favorable monetary policy to back them up. The ingredients are there for an economic boom, we just have to be patient over the next couple of months.


Stock/Bond Report

The stock and bond markets experienced a March like no other. The swiftness and magnitude of the decline in stock values in March was historic, but stocks have bounced off the March lows, which could be a good sign, or the calm before the storm. Since we are still in the middle of this crisis with no sign of quarantines to lift this month, I think stocks will be slow to show any signs of recovery. In fact, it would actually be healthy for stocks to retest the March lows as a technical indicator that we reached some sort of bottom. However, as more news of rising death rates and new quarantines are likely in the coming weeks, stocks could soon push to new lows, so the month of April will test most investor’s patience. With all of the expected bad news coming in, I see little reason for stocks to push substantially higher in April, barring some unforeseen medical breakthrough against the virus. When stocks are searching for direction during a crisis, the path is usually towards lower values. As many of you know, I am an unapologetic optimist, so I do believe that stocks could begin to recover next month, especially if the virus peaks in the U.S. in mid-April. I know that May seems like an eternity from where we are today, but it’s not unreasonable to think that if the quarantines start to go away, that could serve as a lifting mechanism for stock values or at least provide some stabilization by reducing volatility.    

The bond market experienced volatility as well during the month of March, especially in the corporate and bank loan sectors. However, the Federal Reserve deployed substantial measures to relieve some of the strains that were developing in those sectors of the bond market. These measures added liquidity to those areas and there is talk of more stimulus to help municipalities and almost all levels of government to help offset the reduction in tax revenue due to the economic slowdown.

The month of April should be one of uncertainty and volatility as we move into the most critical time of the crisis, both in terms of human suffering and economic damage. Across the board, I expect most data in April to be very depressing as a human and an investor. However, I think that the stock and bond markets can begin to show signs of life as early as next month for the reasons I listed in my economic discussion above. I also think that many people are accepting the shock of this crisis and are coming to terms with it and making the best out of a bad situation, which is an incredible human trait. I mention this because that is usually the first sign of recovery in stocks, when the markets have dealt with the shock (sudden bear market) and switch to looking to the future when we all hope the economy is on its way to recovery, which should support higher stock values.

In the meantime, your quarter-end statements, which should arrive shortly, will show how the downturn has affected your portfolio. The numbers may be disconcerting, but it’s important to remember to remain diversified, patient, and focused on your goals. Also, know that having a diversified portfolio does not eliminate downside risk, but it can help reduce the impact of major movements of one asset class, such as a declining stock market. I have also found it interesting that when I look at client portfolios and the decline that has taken place, most client portfolio values today are near where they were about a year ago.


Just a Thought  

While you’re quarantined, consider trying something new. Grow a beard, color your hair or let your natural color grow out; learn a new skill such as a new language, or how to play a musical instrument. My wife has been teaching me how to cook, and it is some of the most quality time we have ever spent together.

Take care of yourselves both physically and mentally.

 


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March 2020 Market Commentary

Economic Outlook

The Coronavirus is having an unprecedented impact on the economy, and therefore this economic slowdown, or even possible recession, should be different from any other we have seen. At the time of this writing, sports leagues are cancelling or suspending their seasons, businesses are cutting back or eliminating non-essential travel and group meetings, and Americans seem to be preparing for the worst. All of these issues have caused a ripple throughout the economy where I am seeing the signs of an economic slowdown due to people trying to reduce contact with others. But I would like to point out that this is not 2008-2009 again when stocks declined as a result of major dislocations in the credit and financial markets. If it is confirmed in the summer that we dipped into a recession, which I think is likely now, we should be in the beginning stages of a recession right now, but I think it could be short-lived. I think that once the hype and fear of the virus fade away, hopefully in the coming months, we should see Americans get out and spend again. Consumer spending could jump-start the economy out of a slump or recession later this year in a sharp, V-shaped economic recovery. I liken this to a massive case of “cabin-fever” that the whole world could experience in the coming months with an economic rebound when we finally get out and become more social again. As I stated last month, I still think that a year from now, we will look back on this as one of many temporary, but major, disruptions to the world’s economies and stock markets. I also think it is important to remember that this is a virus, and I think it is most likely not going to be a health issue by the end of next year, or even possibly by this summer when viruses usually go dormant or are less potent.


Stock/Bond Report

It may not seem like it with the major swings in the stock markets and Treasury yields, but the stock and bond markets are functioning normally. Usually when stocks are declining, bonds are rising as investors flee to an asset class perceived to be less risky, and that is exactly what is happening now in both stocks and bonds, which is normal. I know many of you would say that stocks being down over 20% in such a short time is not normal at all, but when markets function properly during times of crisis as they are now, it is a good thing. We don’t have to look far back in history to see a time when the markets were not functioning normally during the Great Recession. Back then, the world was very close to a financial collapse and anything that had risk got jettisoned out of portfolios. The result was that stocks and bonds were both declining at the same time so a diversified portfolio of stocks and bonds were declining more back then than most are today. The simple fact is that asset allocation plays a much more important role in growing your portfolio than timing the market. Many of you may be surprised to see that the diversified portfolios I have built are not capturing 100% of the downside of the stock market since your entire portfolio is not allocated to stocks. It is times like these when I feel my diversified allocation for client portfolios really shine since they are able to navigate the choppy waters a little more smoothly. Therefore, while these diversified portfolios have declined as a whole, they generally have not declined as much as the stock market and that is the main reason to diversify and remain diversified.

Where do we go from here?

I have said before that every bear market is caused by a different reason and bull markets just don’t die of old age. As of this writing, stocks have moved into bear market territory so the bull market that began March 9, 2009 has ended, caused by the Coronavirus fears, not because it was overdue for a decline. This bear market could be different in that we got to this point quickly and we could get out of it just as quick for many reasons. First, any meaningful central bank actions could help the economy while things slow down. Second, President Trump could offer significant, but temporary, tax cuts to boost consumer spending. Third, there could be and should be a vaccine for the virus in the next 12-18 months that would all but silence most fears. If any of the above were to occur, I think that would go a long way in restarting the economy and starting another bull market. This economic downturn is also different in that it is not due to a natural disaster or terror event where you are destroying infrastructure, or like the Great Recession where you had financial infrastructure seize up, so that could go a long way in helping the economy and markets recover quickly. One other thing to remember is that the bull market that started on March 9, 2009 began when we were still in the middle of the Great Recession, not when we actually got the data that the economy was beginning to recover, which came much later. I expect that the next bull market will begin before all of the fears of Coronavirus have gone away and we will then only be able to look back and realize we are in a new bull market. My main point is that I do not recommend clients make dramatic changes to their allocation due to what I believe are severe, but temporary, reactions in the stock and bond markets. My best advice for clients is to stay the course since every other bear market and crisis before Coronavirus has passed, I believe this too shall pass.


Just a Thought

“Hope is like a bird that senses the dawn and carefully starts to sing while it is still dark.”

 


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February 2020 Market Commentary

Economic Outlook

The Coronavirus is all we are hearing about as fears of the flu-like virus spread throughout the world, and as of this writing, it is beginning to have a significant impact on stock values. While I believe that the Coronavirus fears are overblown, like what we saw with recession fears last year or the avian-flu outbreak, investors are becoming concerned that the outbreak could affect the world economy through a major disruption in Asian supply chains if quarantine protocols spread worldwide. However, I think this fear will pass in time too, and 6 months from now, we should be focused on the Presidential election, which in my opinion is more important than the Coronavirus. In the meantime, stock markets could be under short-term pressure if it appears that the virus spread is accelerating or if we are just overreacting to new cases outside of China. As long as the Coronavirus does not get out of control and become a true pandemic, I think our economy will continue to grow at the pace we have seen over the last few quarters, which should help the stock and bond markets stabilize.

In addition, since this is a Presidential election year, now is the time to talk about how the race is shaping up. At this point, it appears that Bernie Sanders, an outright socialist, is leading the Democratic Party’s nomination race. If you are a Trump supporter like me, you have to be very happy about Bernie leading the way since I think it is very unlikely that a socialist wins a Presidential election in America today…maybe in 20 years, but not today. It is even more comforting to know that Trump can tout the many accomplishments during his first 3 years in office, which include a very low unemployment rate, a strong economy, lower tax rates, an obliteration of ISIS, finally taking on the Chinese in a long-overdue trade war, and a general rollback of the Obama-era regulations that were choking off economic growth. While I cannot imagine a scenario where Bernie would be elected, I am shocked that young voters do not view socialism as a bad word, so I cannot say a Trump win against Sanders is a slam-dunk.

 

Stock/Bond Report

Stock values were near record highs when the Coronavirus fears starting affecting stock values, which were sent tumbling. I do think that the current pullback in stock values is a buying opportunity or a time to stick with current allocations and risk tolerances, but I do not think it is the beginning of a major market decline. On a positive note, while virus fears have escalated, the recession fears that were a common theme for 2019 have faded dramatically to the point that it is hard to find an economic article talking about it let alone predicting one this year.

Bonds have benefitted from lowering yields, but we may be approaching a near-term bottom in yields where we could see them begin to flatten out. As a result, we could see bond values stabilize as well. However, I do think that yields should begin to rise as we get closer to this year’s elections, especially if the polls show Trump leading. I continue to favor the high-yield and municipal sectors of the bond market, and I expect the Fed to keep interest rates unchanged until after the elections.

 

Just a Thought

“If no one ever took risks, Michelangelo would have painted the Sistine floor.”

-Neil Simon, playwright


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