Welcome! I hope you may benefit from this month's edition of Notes Along the Path.
Today we will be discussing:
- In the News
- Market commentary: Recession and Rally - Together Like Never Before
- A Personal Reflection: Advice for College Freshmen
In the News
- I mentioned last month I would be in a story in Investor's Business Daily. It's a nice piece on my CSRIC certification. Here's the link to IBD
- A week later I had more mentions, this one on CNBC. The article is about the unexpected phenomenon of student credit scores improving due to the virus.
A couple of weeks ago I wrote about how to do a kind of back-of-the-envelope approximation on if you are saving enough for retirement. See my Blog here, and please pass this one on to anyone who may need to know this. If they have any trouble with my explanation of the calculation I would be happy to walk them through it over the phone with no obligation.
Recession and Rally - Together Like Never Before
Imagine yourself at the beginning of the year. You know that within weeks a novel virus will emerge that will shut down much of the global economy. Businesses will close, sporting events will be canceled, your daily routine will be altered, travel plans will be derailed, and tens of millions of Americans will be thrown out of work.
There is no preventative vaccine, no cure, and the virus can be contracted like the common cold or the flu via airborne contact.
A health and economic crisis will emerge that no one alive has ever experienced.
It sounds like a script created in a Hollywood studio. Yet, it’s the reality of 2020.
With the foreknowledge that a global pandemic and economic collapse is on the horizon, how might you position your investment portfolio?
Many would have correctly anticipated a swift sell-off in stocks as the virus swept across the globe, and the U.S economy went into hibernation. The safety of cash or long-term Treasury bonds would have been alluring.
But consistently picking the peaks and valleys in stocks, or even something close is a fruitless endeavor. We know that intuitively.
When might the investors who had fled to safety decide to repurchase equities, returning to the proper asset allocation designed to achieve their financial goals?
Would the unending drumbeat of bearish sentiment have kept them out of the market and in the safety of cash or government bonds? For most of us, it’s challenging to buy stocks when the news is bleak, and there’s no light at the end of a dark tunnel.
The swift sell-off in stocks is in the record books. It was violent but short-lived.
As the economy was on the precipice of its worst quarterly decline on record*, the major market indexes touched bottom in late March. Then they began a remarkable rally that few thought possible.
*St. Louis Federal Reserve GDP data, April – June quarter (quarterly records began 1947)
According to a mid-August article by Barron’s, the Dow Jones Industrial Average registered its best 100-day advance since 1933 (Mar 23 bottom – 100 trading days).
While the Dow has yet to eclipse its prior high, the S&P 500 Index set a new record on Aug 18 and proceeded to set six new closing highs by the end of August (St. Louis Federal Reserve S&P 500 data).
Strength in a few large technology stocks has helped fuel the rise in the S&P 500, while strong technology performance has fueled a spectacular advance this year in the Nasdaq.
Some say the pandemic has changed the rules, that there’s no playbook to model outcomes, that the Fed, economists, and analysts are all playing by new rules. I disagree. I would say rather that this set of inputs has never been seen before. The rules were silent on what would happen in this situation.
Aided by fiscal and monetary stimulus, price action in the market since late March accurately predicted the rebound in economic activity that began in May and has continued into August.
However, the recovery did slow in July (based on the broad-based Chicago National Activity Index, which is comprised of 85 monthly economic reports).
And while the economy is in recovery mode, it has been very uneven.
We see a strong stock market, which has been supported by three things:
unprecedented liquidity supplied by the Fed,
rock bottom interest rates also due to Fed action (bond-buying),
and improvement (from apocalyptic to merely great-depression-level horrible) in the overall economy.
Buoyed by low mortgage rates and pent-up demand, housing activity, a traditional leading economic indicator, has surged (U.S. Census data, National Assoc of Realtors, NAHB).
Retail sales, as measured by the U.S. Census, have surpassed pre-Covid levels. Thank pent-up demand, jobless benefits, and stimulus checks.
The Atlanta Fed’s GDPNow model, which inputs economic growth into a complex GDP model as new economic reports are released, is tracking an annualized growth rate of 28.5% in Q3 (as of Sep 1). While that is a significant number, we would still be down 16% due to the 34.3% 2Q decline.
Blemishes remain on the economic landscape
While some companies have been recalling furloughed workers, total employment remains well below the pre-Covid peak. For example, the U.S economy has yet to reclaim even half of the 22.1 million jobs lost in just March and April (U.S. BLS through July).
July’s unemployment rate (August will be updated Sep 4) of 10.2% is down from the April peak of 14.7% but remains above the 10.0% peak that occurred in the Great Recession (St. Louis Fed).
First-time claims for unemployment benefits have been hovering near one million each week, well above the 665,000 peak registered in the Great Recession (St. Louis Fed).
Don’t let the August number that just came out fool you. The methodology was changed to lower the number. "The new method of adjustment, based on an additive instead of a multiplicative approach, is complicated to explain. Suffice to say, it should result in a much narrower gap between the actual and seasonally adjusted number of new jobless claims." (Source)
See (LINK)(LINK 2) for further color commentary.
Meanwhile, the economy may need another shot of fiscal stimulus, but lawmakers are at an impasse.
I remain bullish on the long-term prospects for the U.S. economy, but I am monitoring short-term risks. If you have money you will need in the next 2-9 years and would like to discuss a risk reduction investment strategy, please give me a call. I hope I don't have to tell you that money you need to live on in the next year does not belong in the stock market.
Outsized gains in a few technology shares leave the market vulnerable to a pullback, as we saw yesterday (9/3/20). When we see stocks priced at lofty levels, any surprises can create outsized volatility.
The path of the virus remains top of mind. Fortunately, the mid-summer spike in cases has subsided somewhat. Yet, could we see the second wave in the fall or winter? Might we see a resurgence in the virus amid the reopening of schools? What if the massive effort to develop a vaccine comes up short? I'm sorry pose questions without answers, but these are the uncertainties we are all grappling with.
The election is barely two months away, which will create headline risk. And tension between the U.S. and China may generate waves in the market.
While markets don’t always get it right, they attempt to price in the future. Markets are made up of millions of investors that have a financial stake in their decisions. Current price action suggests the economy will continue to improve, though the pace of improvement is uncertain.
As I said last month, the economy may not be the same when the pandemic is behind us, but people are resilient, we will persevere, and we will adapt.
If you have any thoughts, questions, or concerns, feel free to reach out. That’s what I’m here for.
Advising a college freshman
You may recall we sent our eldest off to college almost 2 weeks ago. For most incoming students, the freshman year begins in late August or early September. If you parents are in this boat you are about to embark on a new journey.
Some of you will be in a classroom setting, while others will be online as the pandemic injects uncertainty into your college experience. Flexibility is paramount.
You will be away from home for an extended period, some of you for the first time. You’ll have to adjust to a new schedule, make new friends, maybe share a dorm room with a roommate, and juggle your extracurriculars and newfound freedom with your academic responsibilities.
Some will thrive in the new environment, and others will struggle. It’s an adjustment every new college student must deal with. I highly encourage you to take advantage of the resources on campus that support new students. When you make mistakes (and you will; I sure did), learn from them.
With that in mind, let’s look at six ideas that will get you started on the right path. Even if you are not going away to college, these principles can be adapted to those starting out in adult life.
1. You’ll need a budget. What is your income? How much money do you have in savings? What might your expenditures be? Outflows shouldn’t exceed inflows. You can guestimate your expenses, but you won’t know how much you spend until you begin tracking your monthly outlays.
Don’t spend all your income. It’s never too soon to start saving money. Over time, you’ll develop good habits, and you’ll graduate with cash in the bank.
2. Speaking of cash in the bank, open a savings and checking account. With the guidance of others, one way to learn life’s lessons is by doing. At regular intervals, log into your account and make sure the transactions are yours. In today’s digital world, identity theft is a risk.
Finally, never give anyone your online passwords. EVER. I was dumbfounded to hear that some young folks share passwords as a sign of friendship or affection. It’s better to buy someone an inexpensive gift or get them a friendly card rather than giving them the keys to your financial kingdom.
3. Get a job. The pickings may be slimmer this year due to the virus, but try and get some part-time work if you can. Having a job that allows you to study is ideal, such as something in your dorm or the library. You’ll not only earn extra cash, but the job will force you to take responsibility, and you’ll learn to manage your time better.
Counterintuitively, the more tasks I had when I was in school, the better my grades and overall outcomes. Too much time can create procrastination, the enemy of the college student. There are plenty of options for students, but flexibility is the key, as you’ll need to work around your class schedule.
The exception to this is if you are a serious athlete at the intercollegiate level. Having a job and a year-round sport is likely too much. Remember, you are in college to get educated.
4. Be leery of that free t-shirt that comes with a credit card. While the Credit CARD Act of 2009, made it more difficult for someone under 21 to obtain a credit card, it’s not impossible.
Having a credit card comes with responsibility. Use it sparingly, pay it off every month, and pay it off on time. The moment you carry a balance, steep interest charges will kick in.
Know what you are signing up for, know the terms, and avoid cash advances. Quick cash is expensive.
By responsibly using a credit card, you’ll build up a good credit rating, but let me emphasize one more time that credit cards require responsibility on your part.
5. Build a professional online profile. You are already familiar with Instagram, Facebook, and many other social media platforms, but I recommend getting on LinkedIn.
When you graduate, you should have hundreds of connections within your field of study, including students and professors. If you intern, "link into" your co-workers and your supervisor. When you meet young professionals at company-sponsored recruiting events, grab business cards, link into them, and include a short note with your invitation.
Highlight any experience and skills that potential companies will want to see.
Be sure to join professional groups within your areas of interest. You’ll not only benefit from the connections in your network; you’ll find it immensely satisfying to assist others who may need support.
Recruiters that review your LinkedIn profile will be impressed with the initiative you took while still in college.
6. Carefully choose your electives and include a class on personal finance. Unless your Mom or Dad is a Financial Planner, there’s much to learn about budgeting, insurance, debt management, taxes, savings, and housing.
You’ll not only discover many practical tips but what you learn will stay with you long after you leave college.
I hope you've found this review to be helpful and educational.
I understand the uncertainty facing all of us. We are still grappling with an economic and a health care crisis. It's something none of us have ever faced. We have addressed various issues with you, but there are always questions. If you want to talk any time, let's have that conversation. That's what I'm here for.
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!