“Break up to make up, that’s all we do / First you love me then you hate me / That’s a game for fools” The Stylistics, “Break Up To Make Up”
The advent of nice weather and the phased ending of some quarantine restrictions have chased the market’s coronavirus blues away. Massive monetary stimulus on the part of the world’s central banks helped, too. Despite unprecedented layoffs and a sharp recession in the quarter, periodic tidbits of good news and vaccine hopes helped fuel strong recoveries in global equity markets. Returns on the rebound were almost as impressive as the previous quarter’s declines.
As we noted last quarter, markets still appear to be ignoring a host of other issues. We also think that Fed chair Powell’s and the U.S. central bank’s responses to the crisis are highly praiseworthy; indeed, many major central banks stepped up quickly and made their ‘deep pockets’ available. Swift action helped control and reverse the sell-off in bonds of all types, and corporations are accessing capital markets at record levels to boost cash reserves. Chair Powell has been clear in a pledge of further market support as well as a need for additional fiscal (Congressional) and medical (i.e. a vaccine) support. It’s also clear that the coronavirus and our response will be the main topic for some time.
“Come on, baby, let’s start anew / ‘Cause breaking up is hard to do” Neil Sedaka, “Breaking Up Is Hard To Do”
We are currently besieged with enormous amounts of market, economic and medical data. This is due to the pandemic, of course, but also because of the availability of technology to deliver data. Here are some relevant charts on COVID-19 and our recovery. First, a coronavirus chart through July 10, 2020:
Clearly, some regions are doing better than others in controlling the virus spread and resulting fatalities. Deaths appear to be lagging increases in infections by 2-3 weeks. So, what’s causing the increased infection rates? In the U.S., apparently, it’s mobility:
We might also ascribe the lack of a unified national response to the virus’s persistence as well. There seem to be 50 different U.S. viewpoints on simple things such as wearing a mask and avoiding crowds in public. In the case of Brazil, denying COVID’s severity and not taking nation-wide precautions contributed to the spread in a country that does not have the resources to battle the infection. A global, unified approach to combatting COVID might have prevented the rising infections and deaths.
“How can a loser ever win? / Please help me mend my broken heart and let me live again” Bee Gees, “How Can You Mend A Broken Heart?”
We’ve also been closely following the stunning rebound of the U.S. equity markets, particularly the S&P 500. Coincident with Congressional and Fed bailouts, the market pivoted in its decline for a sharp reversal that recouped some losses. We’ve also seen what one pundit referred to as the ‘disassociation’ of the market to the economy: stories of day-traders on the Robinhood platform bidding up stocks contrast with offsetting inflows to money-market funds in a recession. One thing we do see is the dominance of technology names in the rebound. This table highlights the market’s focus:
We can see that the top FIVE index names (~16% of the index) contributed strong and positive returns in a tumultuous environment. Investors holding these stocks at the beginning of the year are likely pleased but face the dilemma of what to do next. We can also see that the rest of the index did not do as well, and the equal-weight index (mostly large-cap and some mid-cap issues) did not fare as well either. This has given rise to comparisons to the ‘Tech Bubble’ market of the late 1990s. While we see some relevant comparisons—a focus on a handful of mega-cap tech names—we also think today’s popular names are much stronger companies. The technology bubble was primarily focused on the newness of internet access and unrealized assumptions about profitability. Today’s technology is quite different with respect to adoption (e.g. profitable online retailing, social media) and ‘plumbing,’ the hardware and software that enable the connectivity. The lack of strength in the rest of the index is concerning, as a broad economic rebound would ideally be reflected in stock returns across a number of industries and the market-cap spectrum (i.e. include small-cap names as well). We appreciate that owning some of these names might provide gratifying returns, but heavy concentration in any one stock fosters concerns over long-term returns, volatility, potential taxes and the viability of a long-term plan.
“Why, somebody, why people break-up / Oh, turn around and make-up / I just can’t see / You’d never do that to me” Al Green, “Let’s Stay Together”
The market rebound has clearly given investors a respite while climbing the wall of worry, yet many issues still require some hard thinking and decisions. Here’s our brief summary:
- The coronavirus—it’s still spreading regionally, and a vaccine likely won’t be broadly available until 2021. Diagnostic understanding and palliative treatments have improved, but there is no cure or inoculation. A proliferating first wave is occurring, and a second wave is possible. One pundit noted that, as in a horror movie, “The monster is always scariest before you see it,” meaning reactions to a second wave may promote a less-severe market decline.
- The global economy—is not projected to fully recover until Q3-2021 at the earliest. Some projections are for summer 2022. High unemployment and business bankruptcies still need to be worked through, especially in the U.S. Forecasts are for a slow and rolling global recovery either supported by regional finance strengths or hindered by shortfalls. There are also developing plans for ‘reshoring’ supply chains, another step away from the globalization that has dominated the past several decades. Finally, we should note that central banks cannot support the world forever…capitalism’s ‘creative destruction’ process will have to begin again at some point.
- Geopolitics—we’re still fighting all the brushfires that were alight before the pandemic, with tensions between the U.S. and China flaring hotter. The world’s largest economy is now tangling with the world’s second-largest economy in what’s described as a ‘decoupling.’ An economic cold war with China will have global ramifications in issues involving trade, human rights, technology developments and possibly military conflicts.
- Stocks—seem to be poised to do well, particularly U.S. large-cap names. With zero-bound interest rates for the foreseeable future, the ‘risk on’ trade appears especially attractive. The lack of breadth, in both regional markets and names beyond the ‘Fab 5,’ is a concern.
- Bonds and interest rates—have morphed into a policy tool and, in the case of U.S. Treasurys, a safe-haven asset. No longer sources of stable high-coupon income, bonds still have a place in portfolios, but probably not the one investors think of in a standard ‘60/40’ portfolio.
“Tomorrow looks unsure / Don’t leave your destiny to chance / What are you waiting for / The time has come to make your break / Breakout” Swing Out Sister, “Breakout”
First things first: we need to take care of ourselves and our nuclear families. That’s a given. We know that this crisis and the changes we discussed above are going to take some time to get us realigned on a growth path. For the near future, we’ve been given some direction on equity markets and interest rates, and we urge everyone reading this to consider what lies on the path ahead. It may be a time to take a risk in a new venture, to do some delayed financing, or to consider ‘re-risking’ an investment portfolio. We don’t think it’s time to add lots of individual equity risk in some of the hot names in the market, but now is an excellent opportunity to considering future exposures or actions that may not have been apparent just a few months ago.
Regardless of your path forward, please take the time to think about what’s ahead for you and engage with us to assess your financial plan(s) and consider any adjustments for the road further on.
As always, please feel free to contact us with your comments and questions.
—Your Wealth Management Team at JJ Burns & CompanyDownload Market Commentary
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