To attempt to make any comment in the middle of a pandemic, and I do think we are in the middle not the end, is to invite a list of unwelcome platitudes. These Comments always strive to capture an economic observation or two and relate those observations to our vision of the trend(s) which should most effect our financial planning and investment management decisions over the next few months. So, with a nod to the wisdom of past plagues – This too shall pass – let me make a leading observation – This too shall pass, but we may not entirely recognize the markers along the passage.
The stock markets and the bond markets are indicating two very different paths to our evolving economic futures.
Let’s start with the stock market. The S&P 500 Index is down from the high of February, but off only -5.6% from a low of almost -30% (Bloomberg 5-28-20); the tech heavy Nasdaq is up +5.2% YTD and up +6.2%% in the last thirty days. The stock market, as a leading indicator of economic activity, is suggesting corporate activity, earnings, and profitability are close at hand.
The bond market is telling a different tale. Interest rates have declined dramatically, both in the US and globally. Declining interest rates are an indication of lowered expectations for economic activity and earnings. As investors fear lack of economic growth, they pour money into “safe havens” such as US Treasury Notes and Bonds, thereby pushing rates to lower lows. The message here is “Lower for Even Longer,” or “don’t expect economic activity to push back to even a 2% GDP growth” until well into 2021.
So, which is it? Happy days will be here again in just a few, or, don’t expect this to get better anytime soon. To fall back on the latest platitude – The virus is in control. As with most outcomes, I believe we will navigate a passage somewhere between the two. From a point of total shutdown, the global economy is slowly re-opening. Anything other than total collapse is a “positive,” and should get better from here – unless we get a second wave of the virus. What happens then? Perhaps the bond market is anticipating just that scenario: a now fragile economy forced back into lock down.
Here at Erickson Advisors we had moved a small percentage of portfolios back into equity or risk at the beginning of the quarter. We may, in the next quarterly rebalance and for those who want less risk in this continuing uncertainty, adjust those balanced portfolios back to take less equity risk, and place more allocation to high quality corporate bonds.
Knowing we have a consumer based economy, we must watch consumer behavior to get a sense of what is coming. With close to forty million people unemployed in the US today, and adding in the possibility that the post-pandemic workforce will be dramatically changed from the pre-pandemic, we will be watching for opportunity in our wealth management process which aligns with the new environment in several areas: work from home and its impact on real estate, both residential and commercial; the advanced use of technology in most sectors of the economy; the increased importance of public health and health care to the general economy.
We believe that sticking to a management process, honed over thirty years, of staying with an agreed upon asset allocation, adjusting for changing economic conditions done at regular intervals (we choose quarterly), and taking advantage of opportunity when presented by either the stock or the bond market, will give us some markers along this passage into whatever may be our new, or renewed, post-pandemic world.
Everyone at Erickson Advisors wishes you a safe and enjoyable summer. Please – wear a mask when out and about, wash your hands with soap and water, and stay a safe distance from your neighbors. As always, we welcome your questions or comments as we continue to work from home through the end of this quarter.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.