A Recession and a Rally Like No Others |
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Imagine yourself at the beginning of the year. You have knowledge 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.
This will turn into a health and economic crisis 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 many, it’s difficult to pull the trigger 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 (St. Louis Federal Reserve GDP data, April – June quarter, quarterly records began 1947), the major market indexes touched bottom in late March and began a remarkable rally that few thought possible.
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According to a mid-August article by Barron’s, the Dow Jones Industrial Average registered its best 100-day advance since 1933 (March 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 August 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 have helped fuel the rise in the S&P 500, while strong technology performance has fueled a spectacular advance this year in the Nasdaq.
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The pandemic changed the rules. There’s no playbook to model outcomes. The Fed, economists, and analysts are all playing by new rules.
Aided by fiscal and monetary stimulus, price action in the market since late March accurately called the bounce in economic activity that began in May and has continued into August.
However, let’s acknowledge that 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’re seeing a strong stock market, which has been supported by unprecedented liquidity supplied by the Fed, rock bottom interest rates, and an improvement 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, generous jobless benefits, and stimulus checks.
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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 September 1).
While we could see moderation in activity prior to the quarter’s end, anything north of 16.7% annualized GDP growth, which occurred in the first quarter of 1950 (St. Louis Fed), would set a new record.
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Blemishes Remain On The Economic Landscape |
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It has been an uneven recovery. While 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).
Meanwhile, the economy may need another shot of fiscal stimulus, but lawmakers are at an impasse.
A liquidity crisis was avoided when the Fed flooded the financial system with cash, but economic output remains subpar, and potential solvency issues among homeowners and businesses may create new hurdles down the road.
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Accredited Asset Management Specialist®
Certified Divorce Financial Analyst™
Chartered Federal Employee Benefit Consultant℠
Professional Plan Consultant®
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Investment decisions must be made on your own individual needs and risk tolerance. |
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This information herein is general in nature and should not be considered legal or tax advise. It is your responsibility to consult with your legal and tax counsel regarding your specific situation. |
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Humphrey G. Thomas is registered with and offers securities through Kovack Securities, Inc., member FINRA, SIPC. 6451 N. Federal Highway, Ste 1201, Fort Lauderdale, FL 33308 (954) 782-4771 Advisory services offered through Kovack Advisors, Inc. HG THOMAS WEALTH MANAGEMENT, LLC and Empower Your Wealth unaffiliated with Kovack Securities, Inc. and Kovack Advisors, Inc. Humphrey G. Thomas is registered in GA and TX. This information herein is general in nature and should not be considered legal or tax advise. It is your responsibility to consult with your legal and tax counsel regarding your specific situation.
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