August 24, 2020
For this week’s blog, I will be providing our Monthly Market and Economic Commentary instead of our typical Top 3. Check out this week’s video to get more info on what we saw last week.
Konvergent Monthly Market & Economic Commentary:
The S&P 500 hit a new all-time high as investors continue to have faith that Congress and the Fed will pump additional stimulus into the economy[i]. Despite initial reports Republicans and Democrats would come together on a second round of stimulus in early August, talks quickly broke down. In response, President Trump issued several executive orders to unilaterally extend stimulus – however, the effectiveness and legality of the executive orders are in serious question. It is not expected for meaningful negotiations to begin again until late August or early September when both the Senate and House are back in session. The pause adds another layer of risk to equity markets that have reached these levels solely on the belief that more stimulus is coming. If a stimulus package doesn’t happen in a timely manner, it could lead to substantial and deep market losses.
Helped by historic federal relief efforts, including direct payments to individuals via the CARES Act, the second quarter saw personal incomes rise at an annualized rate of 7.4% compared to a year prior. This increase in income is in stark contrast to the economy, which declined at an annualized rate of nearly 33% during the same period[ii]. The disconnect between a damaged economy and an increase in overall income points to a severe risk of market contraction as household income returns to normal, or worse, in the recovering economic environment.
Although many equity indices have hit all-time highs during the recession, 5 of the 11 S&P 500 sectors were negative year-to-date as the S&P 500 reached all-time highs[iii]. This means the rally is largely concentrated in areas of the economy that have benefitted from a stay-at-home culture shift, such as technology and home improvement sectors.
Fixed income markets have seen a slight rise in interest rates, creating some level of consternation for investors that moved to bonds for fear of equity market volatility. We continue to expect interest rates to rise even though the Fed has communicated it will keep rates near zero until inflation targets of roughly 2% are met. Overall, we believe fixed income can serve as a “safe haven” from potential equity volatility in the short-term, but that longer-term bond strategies will need to account for a flat to rising interest rate environment.
Gold and silver prices also set an all-time high as investors fear rapid inflation may take hold due to the large amount of stimulus pushed into the economy, and the low yields paid by bonds.[iv] Gold and other precious metals have demonstrated a low level of correlation to equities over the past five years, but at all-time highs, we expect a pullback in values if inflation doesn’t rise rapidly in the near term. Nonetheless, we think it’s a good thing that gold may have a spot in portfolio construction going forward if it can maintain low correlations and act as a diversifier.
Articles of Interest
· Rising jobless claims may put more pressure on congress to reach an extended stimulus deal. – With Congress on vacation the hope of an extended stimulus package has dimished recently. However, the jump in new unemployment claims this week may put more pressure on Congress to return to the table.
· Deflation in the Stock Market – Here is an interesting take on how the effect increased Fed action is leading stocks to deflation.
Non-Financial Story of the Week
I took a few days off in the middle of the week last week to head to the mountains with my family. We had planned to do a lot more hiking this summer but then COVID hit. We finally got the chance to get out and found the perfect remote, partially overgrown hike up to Thorpe Mountain.
I had never seen Mount Rainier from this vantage point before. We stayed at the perfect cabin on the river to disconnect as a family for a few days!
Bottom line: We continue to see the entire US equity market is propped up by expectations of another stimulus package. In the very short-term, we expect equity markets to respond positively as that deal gets done, but if it appears the next stimulus package is “watered down” or delayed to the point where economic data begins to move backward, we could see substantial volatility in equity markets. Given the large number of unknowns and the potential magnitude of an equity sell-off, we maintain a defensive stance in portfolios.
If you have any questions about any of the information in this week’s blog or what you should be doing right now with your personal and business planning, do not hesitate to reach out to us by sending an email to firstname.lastname@example.org or calling us at 253-236-7000.
[i] Hajric, Vildana, et al. “S&P 500 (SPX) Rallies to Record High.” Bloomberg.com, Bloomberg, 12 Aug. 2020, www.bloomberg.com/news/articles/2020-08-12/to-the-brink-and-back-in-175-days-the-s-p-500-rallies-to-record. [ii] “News Release.” Gross Domestic Product, 2nd Quarter 2020 (Advance Estimate) and Annual Update | U.S. Bureau of Economic Analysis (BEA), Bureau of Economic Analysis, 2020, www.bea.gov/news/2020/gross-domestic-product-2nd-quarter-2020-advance-estimate-and-annual-update. [iii] “Sectors & Industries – Performance.” Fidelity, 2020, eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_performance.jhtml?tab=siperformance. [iv] Gurdus, Lizzy. “There’s More Pain in Store for Gold and Silver Short Term, Trader Warns.” CNBC, CNBC, 13 Aug. 2020, www.cnbc.com/2020/08/13/gold-silver-more-pain-in-store-short-term-trader-warns.html.