What Did We See?
- U.S. Large Cap stocks, or the S&P 500 index, were up more than 5% in July.
- The developed markets of Japan, Europe and the U.K. were all down from about 1% to 4%.
- Emerging Markets and Asia (Ex-Japan) were up more than 8%.
- Global fixed income returns were all positive in a continuation of their prior trend.
Where Do We Stand?
- The market rally has surpassed an expectation of a perfect recovery of the U.S. economy.
- Valuations have become extremely stretched while volatile events loom on the horizon.
- I remain in a position of avoiding overweights to higher risk areas while maintaining an allocation to large, quality equities.
- I continue to rebalance your accounts accordingly and have been selectively waiting to put more cash to work in portfolios.
While the equity markets enjoyed a significant rally in July, Coronavirus infection rates surged in the US. This prompted state and local governments to rollback or curb economic re-opening initiatives. Global central banks did their part to provide liquidity to the financial markets, extending lending facilities and leaving policy rates unchanged. Meanwhile, fiscal policies have fallen short of the task as negotiations on a new trillion-dollar stimulus bill have stalled. Economic data has been mixed, and a bit of a head scratcher. Retail sales and home prices remain robust while Manufacturing and Services indices floated back into expansionary territory. However, second quarter GDP was reported falling almost 33% and unemployment remains extremely elevated. The rollback of reopening initiatives has also taken it’s toll on consumer confidence and sentiment. This will likely show up in the retail sales numbers in August.
Short Term Thinking
Humans, and especially Americans, are optimistic creatures. And we are prone to short-term-ism. Meaning, we tend to extrapolate our most recent history and expect the trend of that history to continue forever. In this case, we saw real hope in the early parts of July that many believed would continue. Good results from the major players in the vaccine hunt were being reported. Good retail sales spoke of Americans not ready to lay down their credit cards in this fight. Governments ready and willing to help at all costs. Infection rates declining around the world. It seemed like we would in fact get “back to normal” and quickly.
The Folly of America
This is the folly of America. Ever the optimists. Always the fighters. Forever the free. However, in our blinded optimism we forgot that this was a virus. And a dangerous one at that. As the infection numbers shrank through June and early July one could visibly see the reins on our perceived freedoms being thrown off. Masks became a “maybe” instead of a “must”. Increasing numbers of groups cavorting could be seen on the beaches of America. And several weeks later the result is obvious. The US now has the highest number of cases in the world and the highest number of deaths. This has caused re-opening plans to have been reversed. For example, companies like Live Entertainment, a concert promoter, came into the pandemic thinking live concerts would be happening this summer. They are now projecting next summer to host concerts again.
Regressing into Issues
This economic reopening regression is happening at the same time several other factors that drive markets are coming to bear.
- The election season is nearly upon us in the US. With elections come volatility.
- As I write this, the US Congress is still debating a new package of stimulus for the country. A big driver of the aforementioned retail sales robustness has been driven by the additional $600 a week in unemployment benefits. I wrote about that here.
- The talk right now is to drive that number down to $200. This would undoubtedly force some on the Unemployment Payroll to start looking for work.
- Right at the time we are seeing heightened bankruptcies in the industries most of these people came from (restaurants, bars, travel, etc…). It is not a pretty picture for many of those effected.
- Lastly, don’t forget that schools are less and less likely to reopen in a timely manner this year. That will further dampen the employment atmosphere as parents struggle to be all things to everyone.
So what is to like?
The biotechnology companies are making headway on a vaccine. Trials are commencing and once a good candidate is found the supply of vaccines has already begun to be stockpiled under the US’s accelerated vaccine program.
Volatility has continued to ease in the markets. The monetary and fiscal actions taken around the globe have succeeded in calming the markets. They have not addressed the underlying problems but they have kept markets from melting down. That is important because it gives the markets time to digest the news as it is printed. We are not out of the woods but we have a better mechanism to navigate now.
What’s Coming?
So what does all this mean? As we have said before, there is a reckoning in the economy that markets seemingly are refusing to address. For sure, the amount of liquidity and government support for economies around the world has been enough to drive equity prices higher. But will the economies of the world recover before that support runs out? That is a major question right now.
We are also seeing a natural shift in our own political discourse today. The original response to the pandemic was to “shoot money first, ask questions later”. As evidenced in the recent talks on another stage of stimulus packages, the powers in Congress seem less willing to just throw money around.
Fiscal Restraint?
This most recent round of stimulus talks has more of a restrained atmosphere. Maybe they know that the train that is coming is too fast and big to slow down? Possibly they think enough has been done already? Maybe they are hoping the vaccine arrives to save the day? Whatever the hope, one would be remiss to not be prepared in some way for bumpier times ahead. For example, if the $600 a week additional unemployment benefits go away, retail sales will suffer.
I remain positioned to take advantage of those bumpier times when they do come. Accounts at Shorepine Wealth Management have ample cash on hand to buy when the opportunities present themselves. We may have to wait a bit for those opportunities but they will come.
If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.
We appreciate you being a part of the Shorepine Wealth Management family!
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