Wall Street Banks on Benefits

Please note: This update was prepared on Friday, August 7, 2020, before the market’s close.

The summer of inconsistent signals continues, as the latest market and economic data offered a mixed bag again this week. “Only” 1.2 million people filed new unemployment claims last week—that’s the lowest level since March, but still well above the pre-pandemic record set in 1982. As August began, the extra $600 a week in pandemic-related unemployment benefits ceased and Congress stood at an impasse over a new relief package, creating questions about how jobless Americans can continue to pay their bills.

Yet, stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. proved resilient. Buoyed by the performance of big tech companies that led the recovery off March 23 lows, the NASDAQ ended Thursday at a record high for the fourth consecutive day.

Through Thursday, the Dow Jones Industrial Average was down 2.7% for the year, while the broader S&P 500 index returned 4.8%. The MSCI EAFE index, a measure of developed international stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. markets, is down 7.1% for the year. The yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. on the Bloomberg Barclays U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index stood at 1.03% on Thursday, down from 1.07% last week and 2.31% at year-end. The U.S. bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market has generated a 7.9% total return so far this year.

‘V-Shaped’ Recovery Veers Off Course

Given the economy’s climb from the depths, some commentators have asserted that the recession is already over. In our view, a “V-shaped” economic recovery is off the table given the resurgence of the coronavirus in various regions nationwide. As we’ve said, the bounce will be strong, but it won’t necessarily continue its trajectory or maintain a constant speed. We think that’s what we’re seeing today.

The restaurant industry is a case in point. In March and April, people stopped eating out—some by choice, but most by local government mandate. They started going back to local eateries in May and into June as the spread of COVID-19 slowed, then progress stalled before a whiff of an uptick in restaurant-goers appeared in late July and early August.

We’ll take positive momentum wherever we can get it. But as the chart below shows, dining out flatlined in July, roughly 60% below where it was this time last summer. You can squint and see a recovery here, but it’s a long way back to “normal.”

Why focus on restaurants? In the last two decades, spending on travel, food and entertainment has boomed, and employment in leisure and hospitality—restaurants, hotels, amusement parks—has risen three times faster than the rest of the workforce. COVID-19 slammed the brakes on that.

The retreat from the good old days could be lengthy. If people continue working remotely going forward, even a 10% to 20% decline in business travel could permanently impair hiring in the restaurant, travel and hotel industries. Short-term, remote workers aren’t going out for lunch, gathering for happy hour or celebrating company milestones at their local bistro.

How consumer preferences and workplace conventions will change over time are open-ended questions. What we know right now is that the trajectory of the virus and the responses to it will dictate the path to economic recovery.

Washington Impasse Over Stimulus Package Creates Concern

Estimates suggest that economic growth could be curtailed by up to 1.3% if enhanced unemployment benefits from the CARES Act aren’t reinstated. That additional $600 a week allowed people to continue spending and supporting local businesses—not to mention buying food and paying rent—even as paychecks disappeared.

According to a study from the University of Chicago and the JPMorgan Chase Institute, Congress’ failure to act could cause aggregate spending to fall 4.3% in one month. While that scenario is highly unlikely, this cautionary estimate highlights the importance of protecting the economy from possible cascading effects of a sudden drop in consumer spending.

Labor Department figures show that as hiring rose in May and June following the shutdowns, most of the job gains came from temporarily displaced workers being rehired. This morning’s July jobs report showed that payrolls increased by another 1.8 million, with unemployment falling from 11.1% to 10.2%

All in, nine million jobs have come back from the 22 million lost in March and April. The progress is encouraging, but we’re far from where we were pre-pandemic. And as we alluded to, there is a real riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. that many of those jobs won’t be coming back.

The jockeying at the Congressional negotiating table hasn’t been pleasant to watch over the past few weeks, but given the hard political calculus involved in an election year, we think a relief package deal is more likely than not in the days or weeks ahead. Talks are stalled as we head to print, but the White House has vowed to step in with an executive order if a deal cannot be reached.

Podcast: The Portfolio Impact of Politics and Pandemic

Second-quarter earnings are down 35%. But when is a 35% slide not quite as devastating as it sounds? Maybe in the midst of a pandemic.

Join Adviser Investments Director of Research Jeff DeMaso, Portfolio Manager Steve Johnson and EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin, as they dig into the numbers and put these eye-popping earnings declines into perspective.

In this informative conversation, Jeff, Steve and Kate discuss:

• What’s been the biggest earnings surprise so far?
• How COVID-19 has accelerated trends we were already seeing
• Our biggest concerns and reasons for hope in the third and fourth quarters
• The impact of fiscal and monetary stimulus, and the sustainability of that safety net
• … and much more

Click here to listen now!

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Financial Planning Friday:

AnnuitiesA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). 101

Some concepts in the financial planning world are intuitive. Annuities, which often combine investment options with various forms of insurance, are not. As a retirement income tool, they’ve received increasing attention of late, especially after a provision in the SECURE Act—signed into law at the end of 2019—provided employers with incentives to include annuities in 401(k) plans.

But annuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). contracts are often confusing, hard to navigate and may not be the best solution for many retirees (similar to reverse mortgages, which we covered last week).

At its core, an annuity is an agreement you make with an insurance company. You purchase the contract with either a lump sum or as a series of payments. In return, the insurer commits to making a series of payments to you for as long as you live.

Two major factors distinguish one annuity from another: When you begin receiving payments and the form those payments take.

• Immediate annuity: Also known as an “income annuity,” payments on an immediate annuity must begin within one year of purchasing the contract. Immediate annuitiesA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). are always purchased with a single lump-sum payment.
• Deferred annuity: Payments begin on a future date you select. While you wait, your money in the annuity grows.
• Fixed annuities: Predictable and steady, fixed annuities offer a guaranteed interest rate and a fixed payment amount. The tradeoff is that you might not benefit from any market growth.
• Variable annuities: You select among investment options, often mutual funds, for preservation, growth or a combination of the two. Your payout is determined by how your investments perform.

One big disadvantage: Annuities can be costly and there are some liquidityThe ease with which an asset can be bought or sold. Assets for which there are many buyers and sellers at any given time are highly liquid (for example, a stock which trades on a public exchange). Assets which trade rarely are illiquid (for example, a Picasso painting or a high-end home). issues to contend with. Any withdrawals made from your annuity before you reach age 59½ incur a 10% penalty, and you’ll owe income tax on any earnings. Most contracts also include a “surrender charge” of anywhere from 7% to 20% on withdrawals made within the first five to seven years of purchase.

We advise investors to be selective and consult with a financial planner when it comes to annuities because of their complexity and high costs. An annuity may make sense if you’re concerned that you might outlive your assets. And we have found that they are a good fit for some people. But generally, we believe that with consistent savings and well-built investment and financial plans, you can grow an asset base that will sustain you in retirement without taking on annuities’ high costs.

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Adviser Investments’ Market Takeaways

Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begun providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us.

Kate Austin provided insight on Apple’s four-for-one stock split, and Steve Johnson discussed some of the rays of sunshine he’s seeing in the economy.

Looking Ahead

Medical data remains our primary focus, and a light slate of economic reports means volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. can ramp up—but the dog days of August may put a damper on any such momentum. We’ll be looking closely at June’s job openings figures in addition to July data on small-business confidence, inflation, retail sales and consumer sentiment.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.