Hope Buoys Markets - Adviser Investments

Hope Buoys Markets

June 22, 2020

Please note: This update was prepared on Friday, June 19, 2020, before the market’s close.

After last week’s worries caused a stock market wobble—and despite this week’s news of rising coronavirus infections both at home and abroad—stocks got back on an upward path.

Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 7.5% and 2.7% for the year, respectively, continuing to claw their way back from the markets’ March lows. The MSCI EAFE index, a measure of developed international stock markets, is down 10.4%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index was 1.31%, up from 1.27% last week, but down from 2.31% at year end. On a total return basis, the U.S. bond market has gained 5.9% for the year.

Markets Surf Second Wave  

Between increased infection rates from Beijing to hotspots in the U.S., and instances of renewed lockdowns, politicians and pundits are debating whether the latest coronavirus blooms are just a continuation of the first wave or the beginning of a second wave.

Call it what you want. What matters most is any recurrence’s impact on the reopening of the U.S. economy. Distressing as it is to say, investment markets appear better prepared to absorb and overlook even dramatically more COVID-19 deaths than another quarter or two of a nationwide return to lockdown.

For now, despite revived travel restrictions in China and mounting concerns over reopening and COVID-19 recidivism here, investors have remained relatively upbeat. That’s largely the result of a confluence of two recurrent headwinds: More and bigger stimulus proposals and rumors that an effective anti-viral drug will soon be accessible.

We think investors are prematurely optimistic. That said, expect the trend of markets soaring on hopeful medical reports and swooning on new fears to persist for the foreseeable future.

Lower-Case “v” for Victory

The overarching question on the minds of consumers, investors and economists alike is, “What shape will the recovery take?” The jargon may have you humming the alphabet song— the L, the U, the V, the W, the swoosh—but the debate is serious and, like the cause of this recession, far from over.

One month in, many economic indicators are exhibiting a V-shaped recovery. But we’d recommend caution before concluding that this sharp upward trajectory is a repeatable trend.

In Wall Street parlance, it’s said that even a dead cat will bounce if dropped from a towering height. But then it returns to the ground. We may be seeing just that type of “dead-cat bounce.” Or at least a partial dead-cat bounce.

Investment markets and economic data may not fall again to prior lows, but in our view it’s unlikely that the bounce off the bottom is going to continue apace on its current trajectory. And even if it did, we would still have a long way to go before calling the recovery complete.

For instance, take a look at retail sales, which rebounded from April’s 14.7% fall by a whopping 17.7% in May. That’s all fine and well. However, retail sales remain 6.1% below where they were a year ago.

Note: Chart shows reported dollar value of month-to-month retail sales in the U.S. Source: United States Census Bureau.

Or how about manufacturing activity, which increased 1.4% in May but is still down 16.5% compared to a year ago?

Note: Chart shows Industrial Production: Manufacturing Index level. Source: Federal Reserve Bank of St. Louis.

We can also see a bit of a bounce in the number of people claiming unemployment for the first time. Claims are down massively from their mid-April peak, but are still well above anything we’ve seen in the past 50 years.

Note: Chart shows four-week moving average of initial jobless claims. Source: Federal Reserve Bank of St. Louis.

Those are but a few of the economic data points economists are using to predict where we’re headed based on where we’ve been. In fact, predictions on the depth of the recession this quarter are improving, though they’re still not pretty—and they are diverging.

At the start of the month, the Atlanta Federal Reserve Bank had been “nowcasting” that gross domestic product (GDP) would fall at a nearly 55% annual pace over the three months through June. As of Wednesday, that estimate had improved to -45.5%. Moody’s, which had also been forecasting a greater-than-50% contraction, now says second-quarter GDP will decline at a 39.7% annual pace.

What stands out is the magnitude of the difference in the forecasts. Six percent is a huge difference ($1.2 trillion) when we are talking about a $20 trillion economy.

May’s small-v economic recovery in various indicators reflects the “bad, but better” trend that we have been talking about for several weeks now. We are not out of the recessionary woods yet and it’s hard to say how meandering the path that eventually takes us out of the darkness will be.

Podcast: Is This Normal? Stock Market Performance During Recessions

You couldn’t miss it, but it’s official—we’re in a recession. The National Bureau of Economic Research, the trusted authority in making these calls, announced on June 8 that the U.S. entered a recession in the first quarter due to pandemic-related economic slumps. Yet, the stock market is up nearly 40% from its March 23 low and the NASDAQ Composite index has touched record territory.

In this episode of The Adviser You Can Talk To Podcast, Director of Research Jeff DeMaso and Portfolio Manager Charlie Toole analyze the history of dislocations between the market and the economy, and why using recessions to “time” the market is usually a losing strategy.

In this engaging conversation, Jeff and Charlie discuss:

  • Stocks’ returns during the past 11 recessions
  • Why the market is not the economy
  • Media hype that bored day traders are juicing stock prices via smartphone
  • The impact of government safety nets on Wall Street’s thinking
  • Risks at home and abroad that threaten recent gains
  • … and much more!

The logic of an economy in dire straits with a surging stock market is tough to square—and Jeff and Charlie have you covered. Click here to listen now!

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Financial Planning Focus:

Student Loan Forgiveness

Skyrocketing college costs have left many graduates paying off loans for decades—but there may be a light at the end of the debt tunnel courtesy of the federal Public Service Loan Forgiveness program (PSLF).

The program is aimed at helping college graduates who choose careers in public service (defined below). If such a borrower makes 10 years’ worth of timely payments on their loan, they are eligible to have the remainder of their loan balance wiped out. The process of qualifying for the program is complex, but the information below can help you or your loved ones navigate the maze.

Qualifying Employment: The first step in qualifying for PSLF is to be employed in a public service job while you are making payments. This means work through a government organization, a qualifying 501(c)(3) or a private non-profit that provides public services such as early childhood education or health services. Your employer will be able to tell you if they are a non-profit organization. (To learn more about what types of jobs and employers qualify, click here.)

Loan Eligibility: Not all loans are eligible for student loan forgiveness. Currently, to qualify for PSLF, it must be a federal direct loan. This includes direct subsidized and unsubsidized loans, PLUS loans and direct consolidations. Private loans do not qualify. However, you can consolidate non-eligible federal student loans into a direct consolidation loan to make them eligible for PSLF. We recommend checking in with your financial adviser before making that move.

Repayment Plan: In order to qualify for public student loan forgiveness, you must have made 120 qualifying payments under what is called an Income-Driven Repayment (IDR) plan. There are different kinds of IDR plans and they base your payments on factors such as your income, family size and debt size. Typically, the higher your income, the higher your monthly payment will be.

Make Timely Payments: To have your loan forgiven, you must make 120 qualifying payments after October 1, 2007. These payments must be made on time and in full while you have a job that qualifies. It is important to note that these payments do not need to be made consecutively. That means if you leave one qualifying employer and later return to another qualifying employer, you can continue building toward that 120-payment hurdle.

CARES Act Impact: As a result of the CARES Act passed in March, interest and payments on direct loans were suspended until September 30, 2020. For those under the PSLF umbrella, those suspended payments count towards the 120 payments needed to achieve loan forgiveness. That means you can stop making payments for the time being and still achieve loan forgiveness as originally scheduled.

Navigating student loan forgiveness is not easy, and requirements are subject to change over the next few years. But for those able to qualify, it can be a useful option to help lower your debt burdens and meet your other savings goals.

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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.

You can find two new Market Takeaways videos on our website this week, featuring Equity Research Analyst Kate Austin with a look at how news of a second wave of coronavirus infections is affecting the market and the economy, while Vice President Steve Johnson had comments on the V-shaped recovery debate.

Looking Ahead

Next week will bring a slew of economic data, but we continue to expect that COVID-19 headlines will have a greater influence on the market than the standard reports. Nevertheless, we’ll be looking at data on home sales, consumer spending and sentiment, manufacturing and services sector indexes, and revised GDP and inflation figures.

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, June 19, 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.

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