Dear Friends,I hope you may benefit from this edition of Notes Along the Path.
I cannot remember a time when I've seen such a wide disparity between what is happening in the economy and what is happening in the stock market. As I explained last month, much of what is happening is the achievement (fault?) of the Federal Reserve and its Chairman Jerome Powell. His commitment to do whatever it takes to keep the economy afloat is unprecedented.
Let's take a moment to briefly outline the situation using hard data.
The unemployment rate soared to a post-depression high of 14.7% in April, while the survey of businesses by the US Bureau of Labor Statistics revealed a loss of 20.5 million jobs in April, the worst monthly reading since records began in 1939.
In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.
April's 11.2% drop in industrial production, a metric the Federal Reserve has tracked since 1919 – is the largest monthly decline on record. Furthermore, in April, consumer spending fell 13.6%, the biggest drop ever recorded (US BEA, data back to 1959).
Record layoffs continue, with the number of first-time claims for unemployment insurance topping 40 million over the 10-weeks ending May 23 (Dept. of Labor/St. Louis Federal Reserve). Put another way, nearly one in four working Americans have experienced a job loss.
If there is any good news, the number of first-time filings has been declining, and the number of individuals who regularly file to receive jobless benefits is about half the number of first-time filings.
This would suggest that paycheck protection loans are kicking in, and re-openings are encouraging businesses to recall furloughed workers. Still, May's employment report will likely show another rise in the jobless rate.
Let's back up for a moment.
In March, over just three weeks, the number of first-time claims for jobless benefits totaled an astounding 17 million. For perspective, during the 18-month-long 2007-2009 recession, first-time claims totaled 9.6 million. Yet, the Dow Jones Industrial Average added 2,107 points over the same three Thursdays the massive number of new claims were released (St. Louis Fed).
Since April 9, the Dow has added 1,664 points, or 7.0% (St. Louis Federal Reserve). It is up 36.5% since its near-term March 23 bottom.
The broader-based S&P 500 Index eclipsed 3,000 by the end of May and has rebounded 36.1% (St. Louis Federal Reserve) from its March 23 low.
Meanwhile, the tech-heavy NASDAQ Composite has added 38.3%, is back above 9,000, and is nearing its all-time high (Yahoo Finance).
Economic activity is falling with depression-like speed, but the major averages are in the midst of an impressive rally.
Here's one more piece of performance data.
During the financial crisis, the S&P 500 Index lost nearly 57% from its October 2007 peak to the bottom in March 2009 (St. Louis Federal Reserve). This year, in about one month, the S&P 500 Index shed 34% before hitting a near-term bottom on March 23.
The adage "stocks climb a wall of worry" has never been more appropriate amid economic devastation and an outlook that remains incredibly murky.
A closer look at the Wall Street/Main Street disconnect
A combination of factors has fueled the rally since late March.
The response by the Federal Reserve has far outpaced its 2008 intervention. They have lent a tremendous amount of support to stocks. Simultaneously, the legislative fiscal stimulus also supports higher stock prices.
Investors are also keeping close tabs on state re-openings, which will re-employ furloughed workers, help stabilize the economy, and set the stage for a possible economic rebound later in the summer. Talk of vaccines has also helped.
Investors don't merely look at today's data, which in many cases is backward-looking. Instead, they are forward-looking as they attempt to price in economic activity, the level of interest rates, corporate profits, and more, over the next 6-12 months.
An approaching dawn
If we look at what is called "high-frequency economic data" (daily or weekly reports), we are beginning to see signs of stability.
Daily gasoline usage has rebounded (Energy Information Administration), daily travel through TSA checkpoints is up (TSA), hotel occupancy is off the bottom, and the same is true of weekly box office receipts (Box Office Mojo).
In addition, the weekly US MBA's Purchase Index (home loan applications) registered its fifth-best reading over the last year (as of May 22, US Mortgage Bankers' Association/Investing.com), suggesting that low interest rates and some confidence that the US economy is set to recover are lending support to housing.
Of course, these are highly unconventional measures of economic activity and are industry-specific. Outside the Purchase Index, each remains well below previous highs, but the turnaround suggests we may be seeing some light at the end of a very dark tunnel.
Any given level of a broad stock market index represents the collective wisdom of tens of millions of stock market investors. It is not merely an opinion, but an opinion with money behind it.
When stocks were in free fall in March, investors were anticipating a devastating blow to the economy. Tragically, the data did not disappoint.
Has the rally been too much, too quickly? In my opinion, yes.
Several factors are artificially inflating stock values.
Interest rates, and thus returns on bonds, are so low that there is no place else to go for institutional money managers.
Individual investors are too frightened to sell if they have not already done so.
The federal reserve is actively buying debt (bonds) of large companies (such as Berkshire Hathaway, which is already sitting on $101 Billion) at nearly 0% interest rates. In effect, loaning them money for practically nothing - whether they need help or not. This buying improves the companies' balance sheets and makes their stock more attractive to investors. The long term cost may be enormous, but that's a debate for another time.
Don't expect a return to a pre-COVID jobless rate anytime soon. But investors are, in effect, betting that an economic bottom is in sight.
Key Index Returns MTD% YTD%Dow Jones Industrial Average 4.3 -11.1NASDAQ Composite 6.8 5.8S&P 500 Index 4.5 -5.8Russell 2000 Index 6.4 -16.4MSCI World ex-USA* 4.0 -15.5MSCI Emerging Markets* 0.6 -16.5Bloomberg Barclays U.S.Aggregate Bond TR 0.5 5.5Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatchMTD: returns: Apr 30, 2020-May 29, 2020YTD returns: Dec 31, 2019-May 29, 2020*in US dollars
I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis, not to mention recent civil unrest. It’s a combination none of us have ever faced.
7 steps to successfully steer your finances in a COVID-19 world
Since the economic crisis began, I have shifted my focus towards financial planning pieces that incorporate the COVID-19 crisis and its impact on your finances.
I have highlighted the many scams that have sprung out of the pandemic. Be careful. New ones pop up all the time. I have written about new rules that make it easier to tap into your IRA if you’ve been affected by the coronavirus. I have also counseled on ways you might financially right yourself if you have been laid off and are nearing retirement.
This month, we want to look at various ways you might shore up your finances in today’s uncertain world.
If you are single, take control of your situation. If you are a couple, sit down with your partner and craft a plan. It’s essential that both of you are on the same page. These are guidelines, and we are here to assist if you have any questions.
1. Now is the time to build up an emergency reserve of at least three to six months. You don’t know what the future may bring, and savings will help you weather a job loss if it were to occur.
If you have been laid off, the federal government is providing an additional $600/week in unemployment benefits.
Some are earning more unemployed than when they were working! If you are in this situation, use the extra cash to build up your savings.
2. Start saving. If you met the income criteria, you received a stimulus check of up to $1,200 from the federal government ($2,400 if you are a couple). Now it’s time to eliminate unnecessary expenditures. Lockdowns have made the task easier. Yes, I understand that forced closures have had a devastating economic impact. However, outlays on gasoline, Uber, car repairs, entertainment, eating out, and much more have been curtailed. Build up your rainy day fund.
3. Do you have a mortgage? If so, record low rates could save you hundreds of dollars every month. Review the numbers and determine if refinancing makes sense.
4. Are you making monthly payments on federally backed student loans? Payments for student loans owned by the federal government are suspended through September 30, 2020, and the interest rate is zero.
No action is required by you. If someone contacts you and can stop payments, provided you pay a fee, hang up the phone or ignore the email. This is a scam.
Your deferred payments will allow you the opportunity to build up your savings. If your finances are stable, any monthly payments will go entirely towards the principal, enabling you to pay off your loans sooner than anticipated.
5. Consider college refunds and your 529 plan. With lockdowns, dorm closures, canceled meal plans, and online learning, you may be due a refund from your college. If you used 529 funds, your refund becomes a taxable distribution and will be tagged with a 10% penalty.
Usually, you have 60 days from the date of the refund to redeposit the funds and avoid the penalty. Today, the period has been extended.
If the 60-day period ends on or after April 1, 2020, and before July 15, 2020, the redeposit can be made any time before July 15, 2020, or 60 days after the refund date, whichever is longer.
6. Do you need financial assistance? Contrary to popular opinion, banks don’t want to get tough with borrowers. A bank’s business model is based on repayment of loans, not foreclosures. Many banks are willing to work with you in today’s environment, but you must reach out to them. The same holds for utilities and other monthly services.
7. Mortgage forbearance programs may be available for those who have lost jobs due to the pandemic. Be sure the terms being offered are reasonable. Again, reach out for assistance. Simply stopping payments will quickly get you into trouble.
Please recognize that you are not in this alone. We are here to assist you as you formulate a plan.
The steps above offer a broad overview. Taking action is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a much better position than you realized, which will relieve an enormous amount of stress.
If you like it this newsletter I encourage you to pass it on to any contacts you have that might benefit.
I remain honored and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.
All the Best!