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Investment advisory services are offered through Agemy Wealth Advisors, LLC, a Registered Investment Advisor and fiduciary to its clients. Agemy Financial Strategies, Inc. is a franchisee of Retirement Income Source®, LLC. Agemy Financial Strategies, Inc. and Agemy Wealth Advisors, LLC are associated entities. Agemy Financial Strategies, Inc. and Agemy Wealth Advisors, LLC entities are not associated with Retirement Income Source®, LLC.
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Keep Building Up Or Healthy Dose Of Caution?
NewsMarket May Keep Building Up, Blowing Off ‘Froth’ for Some Time
July could be a pivotal month in the coronavirus crisis for many reasons. With the infection rate spiking in several states as June ended, we’ll find out whether these outbreaks can be contained without a major setback to reopening efforts nationwide. By mid-August, we should also see the release of corporate earnings reports, second-quarter GDP numbers, and other data that will give us a clearer picture of the true economic impact of the crisis so far. How the financial markets respond to these developments will be telling—although I believe the shaky holding pattern the stock market has been in, may continue for some time.
As you know, Wall Street has done a good job so far of staying laser-focused on good news while shrugging off bad news. As a result, the stock market was able to rebound from its initial drop of nearly 40% and has remained down by only about 10% for most of the pandemic. However, its hold on that relatively slight drop has been tenuous at times. That’s typical when a market is overvalued and experiencing a blow-off top rally, which is what I believe is happening. This is a period of irrational growth that occurs without the economic fundamentals to support it, and I believe in this case it also is occurring despite a lot of socio-economic uncertainty.
In truth, I believe this market was already in a blow-off top period before the coronavirus hit. The pandemic has simply made the market’s top “frothier” and more vulnerable to getting blown-off, as was clearly demonstrated last month. When the labor department reported in early June that the unemployment rate decreased slightly in May rather than increased as most analysts predicted, the Dow Jones Industrial Average quickly shot up 800 points.* Never mind that the real unemployment rate for the country still stands at close to 19%; just because the job news for May was slightly less bad than expected, Wall Street went crazy!
It went crazy again when the commerce department reported that retail sales rose by a record 18% in May.** Never mind that sales had shrunk by a record 16.5% in April, or that second-quarter GDP shrinkage is now expected to exceed 50%.*** Wall Street focused only on the good news, and the Dow added another 600 points.
Healthy Dose of Caution
Just as quickly as froth can build up during a blow-off top rally, it can be blown off. This happened only a week after the jobs report spike when Federal Reserve Chairman Jerome Powell said some things that were already obvious to most economists, namely that this recovery is likely to be slow, and that unemployment may still stand at between 8 and 10% by the end of the year. With that, the Dow dropped 1,800 points, its biggest drop since March.****
This rapid change also illustrates why a blow-off top period can be so volatile. Big money investors don’t really care whether a market spike is supported by economic fundamentals. Most are short-term traders and they just want in on the spike so they can make money. However—as I’ve noted many times—they also keep one finger on the trigger, ready to pull out whenever the next big selloff starts. That’s exactly what we saw in mid-June, and it’s probably what we will continue to see as reopening efforts proceed and more data emerges about the pandemic’s impact on every sector of the economy.
Ultimately, I believe that dramatic 1,800-point blow-off in June was a good thing because it brought a dose of healthy skepticism and caution back to the markets. There was little of that throughout April and May, and the lack of it may have put some everyday investors at risk of falling prey to the psychological trap of “FOMO”—or “fear of missing out”—and buying back into the market at a dangerous time. FOMO is always a danger during a blow-off top period, which is why it’s so important to keep things in perspective. Yes, the stock market has shown remarkable resilience during the coronavirus crisis so far, and there are some analysts who continue to believe the worst is already over for Wall Street. But considering all the potential setbacks to reopening, and the fact that we still don’t have a coronavirus vaccine, I’m not that optimistic—nor are most economists.
A Narrow Range
What’s more, even if a vaccine is discovered soon and virus spikes are quickly contained, the systemic damage already done to the economy may be more extensive than we realize. That’s why the next six weeks could be so pivotal since second-quarter earnings and GDP figures will help make that picture clearer. Either way, I believe we will continue to see more weeks like we saw in mid-June, with froth building up and blowing off in an ongoing cycle. As a result, I believe the market should continue to trade in a fairly narrow range. Where it goes when it breaks out of that range will depend on how the pandemic plays out in the coming months. If a lot of things go right (the outbreaks subside, we get a vaccine, etc.) it could go up. If just one thing goes wrong, however, it could go down significantly again.
As I pointed out in last month’s newsletter, the next downturn may not be as precipitous as the first, but I believe it will return the market to bear territory and possibly test its low point from March. The important thing for everyday investors to do during this period is to keep things in the right perspective, stay focused on asset protection, and be aware of the potential dangers of “FOMO” whenever the market’s blow-off top is building up froth again.
Honoring your trust and confidence,
Andrew, Daniel and your AFSi Team!
*“May Sees Biggest Jobs Increase Ever of 2.5 Million,” CNBC, June 5, 2020
**“US Retail Sales Rose Record 18% in May,” Wall Street Journal, June 16, 2020
***“GDP is Now Projected to Fall Nearly 53% in the Second Quarter,” CNBC, June 3, 2020
****“US Stocks End Sharply Lower as Coronavirus Worries Return,” Wall Street Journal, June 11, 2020
Does a V-Shaped Economic Recovery Make Sense to You?
NewsDoes a V-Shaped Economic Recovery Make Sense to You?
You don’t need me to tell you May was a chaotic month for America. It began with the highest one-day coronavirus death count since the start of the pandemic* and ended with violent street protests and renewed trade tensions with China.** In between we saw states cautiously reopen, even as the economic damage caused by the pandemic continued to mount. In fact, the only things that seemed relatively calm in May were the financial markets. The Dow ended the month nearly 2,000 points higher than it started, having recovered by nearly three-quarters from its low point in March. The bond market was also calm, with the yield on the 10-Year Treasury rate up slightly by month’s end, although still below 1%. What does it all mean?
Well, some Wall Street cheerleaders argue that it means a V-shaped recovery from the coronavirus recession is possible. Even with unemployment and economic shrinkage at historic highs, they claim the economy has already bottomed out and will only keep trending upward now that businesses are reopening and quarantines are being lifted.*** They say the stock market supports their argument because if big investors are confident in the midst of all this chaos and bad news, then everyday Americans should be, too. They argue further that the unprecedented aid provided by Congress and the Fed in response to this crisis (which includes open-ended quantitative easing) will also help ensure a V-shaped recovery. Never mind history and the fact that the stock market dropped by nearly 60% during the Great Recession, and by 90% during the Great Depression. These analysts say, “This time will be different”!
On the Other Hand
Of course, certain analysts will always make this argument during any economic crisis or pending crisis, and maybe this time they’ll be right. Anything is possible. On the other hand, many more have been arguing that a V-shaped recovery is highly unlikely for many reasons.**** Personally and professionally, I believe a W-shaped recovery—where the markets see at least one more major downturn—is more probable. The fact that the stock market is currently down only about 10% from its peak highs only reinforces that belief. Here’s why:
For one thing, it illustrates the dangerous disconnect between the stock market and economic fundamentals. I’ve been talking about this disconnect for years, but the coronavirus crisis has made it (like so many other things) more obvious—and potentially more dangerous. ***** The argument for a V-shaped recovery conveniently ignores the possibility of another major virus outbreak, and how it might set back the economic recovery.
However, even without another outbreak, consider some of the following facts. Though states are reopening, the unemployment rate is still historically high, and rather than decrease steadily, I believe those numbers are likely to ebb and flow for the rest of the year. With restrictions and partial shutdowns still in place, some businesses will have to try to get by on 50% of their normal revenue, and many simply won’t be able to do it. To me it seems likely that unemployment will still be at around 10% (at least) by the end of the year, which is slightly higher than it was at the peak of the Great Recession.
What about growth? Let’s say we do see growth get back on track in the third quarter, as advocates of a V-shaped recovery are predicting. That would be great, of course, but remember, the GDP was only at about 2.5% before the crisis, not 5 or 6%. Then, in the first quarter it shrank by nearly 5%, and even the Congressional Budget Office has forecast it will shrink by as much as 30 to 40% in the second quarter.****** So, how will all of that balance out by the end of the year? Mathematically speaking, a GDP of -10% for 2020 would probably be a best-case scenario!
Common Sense
So, the question is: does any of that sound like it should justify steadily rising stock prices? Does it sound like the makings of a V-shaped recovery? Not to me, and not to most global fund managers either, of whom only 1 in 10 believe a V-shaped recovery is possible.******* I concur, and continue to believe that the stock market will experience at least one more major pullback before it truly starts to recover. It may not be as precipitous as the first drop, but it will return the market to bear territory and possibly test its low point from March. I also believe the drop may be more gradual (two days up, three days down, two more up, etc.) and more segmented. In March, there was a flight to cash, and everything dropped: stocks, bonds, and bond-like instruments. This time, investors and advisors will have had time to analyze what should and shouldn’t be sold, meaning riskier holdings may drop more than conservative ones.
In the mist of all this disconnection and uncertainty, income-based investors can continue to take comfort in the knowledge that their portfolios are, generally, better protected from loss and shrinkage than those of growth-based investors.
If, on the other hand, you still have significant investments elsewhere in common stock or stock mutual funds (or you have friends or family who do), you might want to re-read this newsletter and ask yourself: “What do I think? Do I hold with the analysts who claim ‘This time will be different?’ Do I believe the stock market makes sense right now considering all the economic data, and that we’re on our way to a V-shaped recovery? Or do I believe another pullback sounds more likely?” Those are crucial questions because, as I always stress, smart investing isn’t just about numbers and textbook formulas. It’s also about plain old-fashioned common sense!
Honoring your trust and confidence,
Andrew, Daniel and your AFSi Team!
*“Stocks Slightly Higher Amid Unrest, US-China Tensions,” Yahoo Finance, June 1, 2020
**“The US Just Reported it’s Dealiest Day for Coronavirus Patients, CNBC, May 2, 2020
***“US Economy to See V-Shaped Recovery: Morgan Stanley,” Fox Business, May 11, 2020
****“A V-Shaped Recovery is ‘Off the Table,’ Fed’s Kashkari Says,” MarketWatch, May 14, 2020
*****“A Dangerous Gap: The Market vs. The Real Economy,” The Economist, May 7, 2020
******“What is a V-Shaped Economic Recovery & How Likely is It,” MercuryNews.com, May 27, 2020
*******“Just One in Ten Fund Managers Expect a V-Shaped Recovery,” Financial Times, May 2020
Is Your Retirement Susceptible To The Virus?
NewsOn going Crisis Illustrates Exactly Why Protection
Should Be Priority Number One
In late March the U.S. surpassed every country in the world in reported cases of the coronavirus.* If you think about it, that’s not surprising. The social distancing measures health experts recommend for slowing the spread of the virus have been more challenging to enforce here. We’re “the land of the free and the home of the brave,” and we’re not accustomed to having our government tell us what we can and can’t do. It’s a classic example of how a great strength can also be a weakness under certain circumstances.
Unfortunately, we’ll probably be dealing with social distancing for some time. On March 30th the White House announced it was extending its coronavirus guidelines, meaning people are now urged to avoid crowds and stay home as much as possible through the end of April.** Naturally, that means the economic shutdown resulting from these guidelines will also continue for at least that much longer.
The toll taken by the shutdown has already been massive. In the final week of March, a record 3 million-plus American workers filed unemployment claims.*** Meanwhile, Goldman Sachs forecast growth could fall by as much as 24% in the second quarter.**** With so much uncertainty, it’s little wonder the stock market has seen record high volatility since the crisis started. Investors have been bouncing rapidly back and forth between extreme fear and cautious optimism because they just don’t know what to expect. No one does.
That’s true despite historic response measures taken by the government, which include a $2 trillion congressional relief package—the CARES Act—and emergency actions by the Federal Reserve.***** The Fed slashed its benchmark interest rate to zero and launched open-ended quantitative easing, among other steps. Will it help? A bit, probably. Ultimately, though, I believe all these efforts have their limits, and that the long-overdue major correction I’ve been forecasting for years can no longer be artificially held off by the government. Even if Wall Street manages to gain back much of the 20 to30% it’s already lost, I believe several more down-waves are likely in the months ahead, culminating in the 50% or greater correction that market history tells us is overdue.
‘Utterly Ridiculous’
While certain measures of the government’s relief plan will genuinely help offset the mounting impacts of the economic shutdown, others are impractical, ill-conceived, or clearly designed just to try and keep stock investors hopeful. Take the Fed’s plan for example. Lowering short-term rates to zero was smart and necessary to maintain liquidity in the banking system. As for unchecked quantitative easing, however, that move is utterly ridiculous.
I believe the overuse of Q.E. ever since the Financial Crisis is responsible for much of the economic instability in the world today; using more now isn’t going to fix anything—certainly not in this situation. Easing is all about flooding the market with cheap money for consumers and businesses to spend because that’s how you jump start the economy, according to all the textbooks. However, the textbooks fail to address one important question: what if nobody spends the money? What if they save it or pay down debt because they’re too scared to spend? That’s the fatal flaw in quantitative easing. We saw it demonstrated through three rounds of Q.E. during the long, slow recovery from the Great Recession, and I believe we’ll see it again in this instance.
This same flaw exists in the main component of the CARES Act: mailing one-time $1,200 checks to millions of workers below a certain income level. For workers who have already lost their jobs, that money will probably be used to pay essential bills. But even for those fortunate enough to still be working, how likely are they to spend their check on something that really helps the struggling economy? How much more likely are they to save it or pay down debt because they’re afraid things are going to get worse? Again, it’s the same flaw at the heart of quantitative easing, and it won’t really help the economy. Nor will it fool Wall Street enough to stave off a major correction—not this time!
Why Protection is Priority Number One
With all this said, it’s important to keep in mind that this crisis offers a perfect illustration of why I believe it’s so important for investors in or nearing retirement to reduce their stock market risk by switching their strategic focus from growth to income. If you are investing for income, odds are your portfolio has seen less negative impact so far than if you were still invested in stock-based strategies. Yes, the bond market has been rocked by this crisis too, with yields at historic lows, but remember three things. First, any insured items in your portfolio (such as C.D.s, annuities and government bonds) have not been adversely affected by market volatility. Second, non-insured items such as corporate bonds and bond-like instruments may be down in value on your statement, but the dollar amount of your income hasn’t changed. Finally, the loss is only a paper loss because these instruments have a par value that guarantees your investment will be paid back in full whenever the bond gets called or paid off, provided there is no default.
While the current economic crisis may increase the risk of default for some companies, I don’t see it as a significant risk in our portfolios. What’s more, actively managed income strategies like ours make it possible for account managers to continually minimize that risk while also taking advantage of new opportunities—and such opportunities are, in fact, emerging as a direct result of the coronavirus crisis, even amid all the challenges.
Keep all this in mind each time you get your statement in the months ahead. Even if values on your bond and bond-like instruments drop further in April than they did in March, your interest and dividend payment (your income) and your par value on most holdings haven’t changed. At the same time, if you do have questions or concerns about anything in your portfolio, reach out to my office so we can schedule a meeting—by phone, of course. Most importantly, do all you can to stay safe and healthy as we all work through this crisis together!
Honoring your trust and confidence,
Andrew, Daniel and your AFSi Team!
*“U.S. Now Leads the World in Confirmed Coronavirus Cases,” MSN.com, March 27, 2020
**“White House Extends Social Distancing Guidelines to the End of April,” Wall Street Journal, March 30, 2020
***“Millions More Jobless Claims to Show Reeling U.S. Economy,” Bloomberg, March 30, 2020
****“Goldman Sees Unprecedented Stop in Economic Activity,” CNBC, March 20, 2020
*****“Fed Announces Vast New Emergency Effort to Boost the Economy, Politico, March 23, 2020
5 Star Wealth Managers You Need to Know
NewsI was honored to be chosen for the Five Star Wealth Manager Award recognized for service to clients!
Look for “Wealth Managers You Need to Know” in:
Your May subscriber issues of ”Forbes, Fortune, Money and Entrepreneur” Magazines
We are happy to announce that Andrew was selected as a Five Star Wealth Manager for 2015. Our clients were an important factor in the research criteria with areas including retention and client satisfaction. Your loyalty and trust are very important to Andrew, so it meant a lot to qualify for this award.
Only a very limited group of all the Wealth Managers in Connecticut qualified and were chosen based on their commitment and service to clients.
We are honored for Andrew to have been selected for this award and grateful for your business.
If you would like to receive copies of Andrew’s appearance as one of these recipients that appeared in subscriber copies of Forbes, Fortune, Money and Entrepreneur Magazines, please contact our office.
We will continue to work at meeting the goals of our clients and thank each and every one of you for your continued trust and confidence.
Click the image below to view Andrew’s full biography with Five Star Professional!
Radio Webcast – “Money For Lunch”
NewsThis past Wednesday, March 16, Andrew had the honor of being a featured guest of the internet radio webcast, “Money For Lunch,” hosted by Bert Martinez. Listen to the webcast by clicking here and for more information on Bert Martinez and the “Money For Lunch” radio show.
Please make sure to check back on the website, our facebook page or Linkedin for upcoming radio appearances!
Radio Webcast – “The Money Answers Show”
NewsThis past Monday, February 22nd, Andrew had the honor of being the featured guest of the nationally syndicated internet radio show, “The Money Answers Show” hosted by Jordan Goodman. Listen and visit the website for Voice America here for more information on Jordan Goodman, Voice America and “The Money Answers Show”.
Please make sure to check back on the website, our facebook page or Linkedin for upcoming radio appearances!