Economic Recovery Is Soft…But the Bull Is Back - Adviser Investments

Economic Recovery Is Soft…But the Bull Is Back

August 24, 2020

Please note: This update was prepared on Friday, August 21, 2020, before the market’s close.

Believe it or not, we’re back in a bull market. Investor optimism drove the S&P 500 index to a record close on Tuesday (and another at week’s end), surpassing its February peak despite a political stalemate that has paralyzed efforts to provide more relief from the pandemic’s economic consequences.

A remarkable run-up in big tech shares is helping fuel the newly minted bull market, with Apple becoming the first U.S. company to hit a $2 trillion valuation. “Growth” stocks in general have been far outpacing their “value” cousins with energy, real estate and financial stocks lagging dramatically.

Interest rates and bond yields have been scraping bottom, leading many investors to seek out alternatives for their portfolios. With the “FAANG” stocks (Facebook, Apple, Amazon, Netflix and Alphabet/Google) hitting high after high, “fear of missing out” (or FOMO) has become pervasive on Main Street as well as Wall Street.

We’re never unhappy with rising stock prices, but we remain dubious that the economic reality justifies the big bounce—we are prepared to see increased volatility and market pullbacks in the months ahead.

Through Thursday, the 30-stock Dow Jones Industrial Average was down 1.3% for the year, while the broader S&P 500 has returned 6.1%. The MSCI EAFE index, a measure of developed international stock markets, is down 5.9%. As of Thursday, Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.13%, down from 2.31% at year-end. On a total return basis, the U.S. bond market has gained 7.1% for the year.

Retail Rebound Reality Check

Retail sales surpassed pre-pandemic levels in July, according to a Census Bureau report released last Friday. Does this mean the economy really is off and running? No, not if we dig deeper.

Consumers spent $87 billion (or 2.4%) less in the first seven months of this year compared to the same period in 2019. In other words, we’re not ready to interpret one record month of retail sales as a sign that consumer spending has bounced back.

Sources: Adviser Investments; U.S. Census Bureau.

With the extra $600 weekly in enhanced unemployment benefits gone from household balance sheets as of July 31, there’s a strong chance that retail sales will take another hit in the coming months and the V-shaped retail recovery could start to look a lot less bullish.

To make matters worse, new applications for unemployment benefits ticked up last week after a series of prior declines, showing that the labor market’s recovery remains soft.

If there is one area where recovery from the economic bottom has been very strong, it’s the housing market. Record-low mortgage rates and a bit of an increase in mobility has driven sales of existing homes to better-than-pre-pandemic levels. The knock-on impact on sales of consumer durable goods and the like could put a floor under at least a portion of the U.S. economy.

What’s Propping Up the Bond Market?

Stocks aren’t the only financial assets hitting records. The bond market has generated extremely robust returns this year, leading some to claim that it’s a false bull market driven by the actions of the Federal Reserve. Let’s see how that holds up under the magnifying glass.

The narrative begins with very strong demand for bonds. Corporations have borrowed a record $1.35 trillion this year—surpassing 2017’s calendar-year blow-out, even before the typical dog days of summer are past.

Plus the Fed’s balance sheet increased from $4.2 trillion to $7.0 trillion between February and June as it established a program that would allow it to purchase corporate bonds for the first time.

With that data in hand, it’s easy to conclude that the Fed is propping up the bond market. But that’s not what’s really happening. It’s true that the Fed is ready to act as a backstop if needed, but the bank has bought “only” about $12 billion in corporate bonds this year, or less than 1% of the $1.35 trillion in new issuance. Instead, it’s been private investors buying corporate debt—often at record-low yields.

We’ve come a long way from March when the bond market seized up. And yes, the Fed played a key role in jump-starting the markets. But now that the engine is running, the Fed is firmly in the passenger seat, with investors driving demand. Minutes from the Fed’s July meeting back this up—no new policy moves were announced, though the central bankers did pledge to use their “full range of tools” to keep interest rates near zero and support the economy for as long as it takes to recover from the pandemic.

We continue to believe that calls for a dramatic bond market decline spurred by inflation are wrong. While inflation expectations have risen over the past several weeks, the actual inflation rate has not. We think there’s time before inflation becomes a real, rather than expected, issue for bond market investors.

Podcast: Avoiding Financial Pitfalls—Five Essential Conversations to Raise With Your Adviser

Costly financial mistakes, often caused by seemingly simple decisions, can have ripple effects that resound for years and years. We’re here to help.

Join our wealth management and financial planning experts for this illuminating look at some basic steps that can have profound impacts on your family’s financial life for generations. In this edition of The Adviser You Can Talk To Podcast, Adviser Investments Account Manager and Financial Planner Diana Linn, Senior Financial Planner Andrew Busa and Vice President Josh Jones discuss key topics for your portfolio and your pocketbook, including:

  • Cash flow and savings
  • Identifying goals
  • Risk management and legacy planning
  • Managing debt and credit
  • Maximizing company benefits

Whether you’re just getting started in your financial planning or only need a little fine-tuning, there’s something in this engaging conversation for everyone. Click to listen now!

*****

Financial Planning Focus:

Health Care for Early Retirement

If you plan to work until age 65, continuing your health coverage can be a snap—simply switch from your employer-based plan over to Medicare. (For details, check out our podcast on Medicare planning.) But how do you handle health insurance if you want to retire earlier?

Here are five options to consider:

  1. COBRA. The Consolidated Omnibus Budget Reconciliation Act allows you and your dependents to maintain health coverage under your employer’s plan for up to 18 months after you retire. Beware: Employers generally pay a large portion of the premium while you’re working, whereas now the entire expense will fall on your shoulders. And prices can be steep, especially if you have underlying conditions. We recommend finding out in advance what your employer pays so you can begin to budget for the increased premium.
  2. Health Care Exchange. If the 18-month COBRA window doesn’t bridge the gap to Medicare, acquiring individual coverage through the insurance exchange at healthcare.gov is another option. When COBRA expires, you are granted a 60-day enrollment period where you cannot be denied coverage on the insurance exchange based on preexisting conditions. Some states, such as Massachusetts, offer their own exchange for health care plans. However, both paths are expensive. If you expect to use the health care exchange, check healthcare.gov preemptively to shop for a suitable plan.
  3. Spousal Plan. If you plan to retire sooner than your spouse, find out if you’re eligible to be included as part of a family plan through their employer. This can be a handy and cost-effective way to maintain health coverage before Medicare eligibility and without purchasing an individual plan on the insurance exchange.
  4. Part-Time Work. Many retirees decide to take up part-time work after leaving their full-time careers. If you think this is a possibility for you, check what health benefits may come through your part-time employer.
  5. Retirement Package. While this avenue is far less common today than in the past, it is possible you may be eligible for health benefits in retirement through a past employer or union. (Teachers, civil servants and veterans sometimes receive benefits depending on the circumstances of their employment.) If this is something you may qualify for, we recommend making inquiries not just with your current employer but with past employers as well.

Early retirement requires preparation. Health coverage is essential, but it can put a dent in your retirement budget. If this is something you’re considering, make it an agenda item for your next meeting with your wealth management or financial planning team.

*****

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.

Equity Research Analyst Kate Austin talked about the dangers of trying to predict how markets will respond to politics, and Vice President Steve Johnson discussed a number of contrasts he’s seeing in consumer sentiment, the markets and the economy.

Looking Ahead

Next week’s report slate will help inform our view on the state of the consumer, with reads on consumer confidence and sentiment, together with personal income, spending and savings data, on the calendar. Additionally, we’ll be looking at fresh data on inflation, home prices and new home sales, durable and capital goods orders, and the latest update on second-quarter GDP.

As always, you can 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, August 21, 2020, before the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

Third-party publications referenced in this article (e.g. CityWire, Barron’s, InvestmentNews, CNBC, etc.) are independent of Adviser Investments. Readers should note, that to the extent any third-party publication linked to in this piece also contains reference to any of the newsletters written by Dan Wiener or Jim Lowell, such references only pertain to the respective newsletter(s) and are not reflective of Adviser Investments’ investment recommendations or portfolio performance. Newsletters are operated independently of Adviser Investments. Opinions and statements contained in third-party articles are for informational purposes only; they are not investment recommendations.

© 2020 Adviser Investments, LLC. All Rights Reserved.

85 Wells Avenue, Suite 109
Newton, MA, 02459

info@adviserinvestments.com
1.800.492.6868

© 2020 Adviser Investments, LLC

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.