July Market Update: Looking Out Toward Economic Recovery

July 8, 2020

We hope that this letter finds you and yours well. With most stocks having posted negative returns for the year, risk management strategies have been important. Note the positive performance of the bond indices in the chart below. Precious metals and alternative investments, used where suitable, have also helped dampen volatility.

In serving you, our process emphasizes risk management ahead of seeking outsize returns. Of course, investment growth is important – it is often critical to meeting client goals. But, first, we must make sure that the base of your financial plan is intact. Then, we go to the markets to seek to pick up bargains, etc. Our focus is always on you, your goals, your plan, your present, and your future.

Looking out toward economic recovery

When things look bleak, it is often challenging to find the light. Right now, economically, our ship is tossing in the waves of Covid-19. One day we seesaw toward lower infections, the next, toward increases. This is compounded with worries in other directions: social change and unrest; and, for many people, political concerns.

Several clients have asked us how it could be that many stock indices have already recovered approximately two-thirds of their value from the Feb./March -37% drop. The answer is that the stock market looks ahead six to eight months. At this very moment, it has already “baked in” Covid-19 and many of its economic impacts. Shutdowns? Slowdowns? Unemployment? For the stock market, all of this is old news.

We believe the stock markets have also baked in a likely vaccine in the early part of 2021 and that we will not see another large-scale business shut down. Of course, if either of these two assumptions were tested, we think the stock market would likely pull back.

Some clients are asking us about the presidential election. Allow me to tread into sensitive territory with our analysis. With the Presidential election approximately four months away, we believe that the stock market has already evaluated what it believes is the likely impact of each key candidates’ economic policies. Since the stock market knew that President Trump would be the Republican candidate, the key question was the Democratic nominee. A Senator Sanders ticket may have created volatility. However, as former Vice President Biden emerged as the front runner, we did not see a strong stock market reaction in either direction. A bigger question may be the winners of congressional races both federally and at the state level. Right now, we believe that that the stock market is not baking in significant change. Therefore, a strong change in direction may move markets.

Looking forward on your behalf

In our work for you, we look out to the short-term, mid-term, and long-term. With either the advent of a vaccine or eventual herd immunity, we think that Covid-19 and its economic impacts will likely be largely in the rearview mirror in 1 ½ to 2 years, although full re-employment may move slower than that. One key question for us in protecting you and your financial plan is the growing U.S. government debt, now over 100% of our economy which is quite high. A country can “get away with” high debt for a long time, but there is no free lunch, and eventually, there is a reckoning in the form of inflation and unemployment. Inflation is the retiree’s enemy, and unemployment is the working person’s enemy. We also think about risks to the U.S. dollar as the U.S. debt grows, and we think about growing trade protectionism which tends to slow economies down. Solutions exist for these risks and we keep our eye out for the right time to incorporate them into your portfolio. Below, see specifics on strategies we are currently using on your behalf. Stay safe and let us know your questions!

Investment Specifics & Opportunities

A “K” Shaped Recovery

Stock market pundits have debated the timing and structure of economic recovery. At first, the main thought was a “U” or a “V” shaped recovery.  Either assumes a single-prong, sharp recovery. Instead, we now think that the recovery will look more like the letter “K,” with some industries thriving during the crisis; some experiencing a quick rebound as the crisis abates; some undergoing a delayed rebound; and, some, unfortunately, unable to survive (1). Our process tends to give more weight to companies with positive momentum. That focus works well with a “K” shaped recovery.


Federal Reserve’s Quick Actions

Many investors may expect the quality bond market to act inversely to the equity market (i.e. if stocks go down, bonds go up.) However, during the initial downturn earlier this year, many quality bonds dropped as well. Covid-19 was new and its economic impacts were unknown. Not knowing which companies might fail, some investors, in a search for safety, indiscriminately sold quality bonds. To help steady the bond market, the Federal Reserve Board (FED) stepped in to purchase corporate bonds (2). Despite this, a modest risk to quality bonds remains as “the devil is in the detail” on the FED’s buying program. For that reason, we are continuing to modestly overweight FDIC-insured money market positions in your portfolio to help reduce risk.

Beneath the Surface of the S&P 500

Defined as the largest 500 stocks in the U.S., this index has often been used as a broad measure of the U.S. stock market. However, over the past several years, it has become concentrated in technology, with much of that concentration in five companies: Microsoft, Apple, Amazon, Facebook, Alphabet.  Here is an important statistic:  year to date, those five companies rose 26% while the other 495 companies declined 12%, a large 38% difference (1). We have included these five companies in your portfolio, as suitable. We have also made sure that, as suitable, your portfolio is diversified because large positions can bring risk and move quickly (up or down). A special risk with these companies is anti-trust legislation.

Next stock buying plans. We have set our next buying targets at -25% and then -35% from the S&P 500’s record high in February. We may set additional pricing points if deep volatility occurs. Of course, we want to help you benefit whether or not bargains materialize. To implement the latter, we are letting equities ride 3% to 5% above your target. To quote Laura, “I love to let equities run during a recovery, even if there are dips along the way.”


  1. https://www.raymondjames.com/-/media/rj/dotcom/files/wealth-management/market-commentary-and-insights/investment-strategy/weekly-headings.pdf?la=en&hash=113AF8325A7BE39933CDD1849E63999A
  2. https://seekingalpha.com/article/4356273-u-s-federal-reserve-supports-corporate-bond-market-credit-facility-what-to-know
  3. https://www.slickcharts.com/sp500

Important information. The information on this and the previous page is not intended as a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended for a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for every investor. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. This may result in greater share price volatility. These risks are heightened in emerging markets. Diversification does not assure profit or protection against loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. Bond prices and interest rates have an inverse relationship. Dividends are not guaranteed and must be authorized by the company’s board of directors. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters.  Market performance results were obtained from Morningstar.com.


Dow Jones Industrial Average: The Dow Jones Industrial Average is a composite of 30 stocks spread among a wide variety of industries, such as financial services, industrials, consumer services, technology, health care, oil & gas, consumer goods, telecommunications, and basic materials. The index is price weighted (component weightings are affected by changes in the stocks’ prices).  S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2, 2014, the index consists of 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. Barclays Aggregate Bond: A representation of SEC-registered, taxable, and dollar denominated securities. The index covers the U.S. investment grade fixed rate bond market, with index components for asset-backed securities, government and corporate securities, and mortgage pass-through securities. Must be rated investment grade (Baa3/BBB- or higher) by at least two of the following rating agencies: Moody’s, S&P, Fitch; regardless of call features have at least one year to final maturity, and have an outstanding par value amount of at least $250 million. Russell 2000: The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Barclays 1 – 3-year Treasuries: The index measures the performance of the U.S. Treasury and U.S. Agency Indices with maturities of 1-3 years, including Treasuries and U.S. agency debentures. It is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index.

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