Please note: This update was prepared on Friday, July 24, 2020, before the market’s close.
After a months-long stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market rebound based on hope, a harsher reality may finally be at hand. With coronavirus infections rising, so too are unemployment filings, as hard-hit states renew shutdown measures to curb its spread.
Investors and traders have also had to contend with heightened U.S.-China tensions and Washington’s tentative progress on new relief legislation. The net result was a fairly flat week in the markets.
For all of 2020’s tumult, stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. so far have proved remarkably resilient. Through Thursday, the S&P 500 is in the black, having returned 1.2% for the year while the narrower Dow Jones Industrial Average is off 5.4%. The MSCI EAFE index, a measure of developed international stock markets, has dropped 6.5%. As of Thursday, 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’s 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. stood at 1.13%, down from 2.31% at year-end. On a total return basis, 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 gained 7.4% for the year.
Recovery Delayed as Virus Cases Rise
A new pattern is starting to emerge in the data: The speed with which economic activity rebounded off the bottom has slowed dramatically, and, in some instances, has reversed course. With the increasing number of COVID-19 cases taking an intolerable human toll, our economic recovery is at 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. of stalling out.
As you may recall, two months ago we began describing the economic data as “bad, but getting better.” That trend is still evident in some areas. For example, take the housing market, where sales of previously owned homes jumped 21% in June—the highest monthly gain on record dating back to 1968. Sounds great, right? Yet those sales remain 22% below where they were a few months ago, before the dangers of the novel coronavirus became apparent and consumers reacted by sheltering in place rather than heading out house-hunting.
That rebound came in June, however. The economic reversal is showing up in more recent data. For example, layoffs are on the rise again in July. Every week since peaking in March, the number of people filing for unemployment for the first time has been trending lower and lower—until this past week, when 1.4 million people applied for aid, up from 1.3 million the week prior.
Restaurants Close as Diners Stay Home
Weekly jobless claims get a lot of attention in the press, and rightly so—layoffs directly impact communities and households nationwide.
We’ve also seen trends reversing in other “high-frequency” data collected on a daily or weekly basis; one we’ve been closely monitoring comes courtesy of OpenTable, a restaurant reservation app. The number of people booking a table and venturing out for a meal was on the rise in May and June, but that momentum ebbed in July.
In regions where virus infections are increasing, restaurants and bars that reopened are now shutting down again (sometimes for good). Whether it’s due to mandatory shutdowns or changing consumer behavior, this activity translates to more jobs lost and economic growth reversed.
Simply put, no matter how you read the data or what figures you’re looking at, we are still very much in a recession. Investors in large measure have pinned hopes for recovery on substantial and continuing government intervention.
Given that there’s an election looming, we fully expect Capitol Hill to come to an agreement on a new support bill, but we’re likely going to have to live through a few weeks of horse-trading and sleepless nights.
Consumers, parents, kids and essential workers need financial and moral support; the economy needs more help to get through these tumultuous times. We’re hopeful that the country will soon get back on a recovery course.
Financial Planning Focus:
Buying a Second Home
As summer stretches on and mortgage rates hit record lows, vacationers and would-be travelers staying put may find themselves daydreaming about what it would take to turn their favorite mountain, beach or lake home into a permanent family retreat.
Of course, buying a second property could have a major impact on your finances. Before taking the plunge, ask yourself the following questions:
Who will use it? Will a second home be solely for your use, or do you plan to rent it out? Renting can defray costs, but don’t underestimate the time, hassle and expense of being a landlord. The need to hire a local property manager or professional cleaning staff can put a serious dent in the profits from any rental income. Plus, tax laws are different for rentals than they are for properties used solely as second homes. How will you account for your new property on your tax returns?
How will I pay for it? We generally advise clients to pay off the mortgage on their primary home before buying a second property, even if they plan on renting it out. As the pandemic made clear, demand for vacation rentals can be unpredictable, so a second home purchase can be risky if you’re relying on rental income to make the numbers work.
Do I understand the total costs? A second property will add a slew of new fixed expenses to your budget—you’ll want to have solid estimates of property taxes, insurance payments, mortgage payments, maintenance costs and utilities when considering a purchase. It’s also wise to create a rainy-day fund for unexpected expenses that pop up.
Have I priced other options? How many weekends and vacation days will you realistically be able to spend in your new place? Compare ownership costs with prices for a similar rental in the area. Continuing to rent may prove a more affordable, flexible and less stressful alternative.
Can I still meet my financial goals? Don’t let a second home derail your progress toward other long-term goals, like paying for college or retirement.
Adviser Investments’ Market Takeaways
You can find two new Market Takeaways videos on our website, featuring 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, who explained why many companies are building cash reserves, and Vice President Steve Johnson on the value of bonds in a portfolio during periods of 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..
Second-quarter earnings reporting season ramps up next week, offering a sense of the difficulties companies faced during the height of the spring shutdown, as well as an idea of what corporate leaders are (or aren’t) able to see as they prepare for the months ahead.
And while we’ll remain focused on medical data, next week, we’ll also get June figures for durable goods orders, personal income, consumer spending, inflation and pending home sales, as well as July reads on manufacturing, consumer confidence and sentiment. The Federal Reserve also convenes for a two-day meeting, culminating in Chair Jay Powell’s press conference Wednesday afternoon.
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.
Please note: This update was prepared on Friday, July 24, 2020, before the market’s close.
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