Jobs Data Stuns… to the Upside! June 8, 2020 Weekly Update Print Please note: This update was prepared on Friday, June 5, 2020, before the market’s close. Our expertise at Adviser Investments is in finance, not politics. But as human beings and as Americans, we stand with those who protest racial discrimination and disenfranchisement in its myriad forms. The disconnect between mostly bad economic news and an almost euphoric rise in stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. prices continues to confound. Despite the media’s broadcasts of mostly peaceful protests mixed with some disconsonant looting on Main Street, Wall Street remained focused on glimmers of economic data suggesting we are taking a turn from the worst of times to less worse ones. The market’s recent historic rally was given an additional boost this morning; initial Department of Labor figures showed that rather than rising, the unemployment rate fell to 13.3% in May from 14.7% in April. Forecasters were way off the mark, expecting to see the ranks of the unemployed rise by 7.5 million people. Instead, 2.5 million jobs were added, suggesting employers are moving rapidly to rehire laid-off workers as pandemic restrictions are loosened and adding to the already voluminous evidence that Wall Street’s crystal balls have gone from cloudy to fractured. Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 6.8% and 2.8% for the year, respectively, continuing to rise from the markets’ March lows. The MSCI EAFE index, a measure of developed international stock markets, is down 9.5%. As of Thursday, 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 was 1.40%, 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 5.0% for the year. Market’s Massive Gains Sustained by Macroeconomic Data Trend When it comes to the stock market’s performance over the last month, one simple question seems to be on every investor’s mind: “Why?” In our view, the 40% gain over 50 trading days is more than just a snap-back from the declines of March. Traders’ optimism about not just a V-shaped economic recovery, but also a V-shaped earnings recovery, has been unbridled—but is it justified? By the numbers, things are bad, but getting better. Take this week’s unemployment claims report. Yes, fewer people applied for unemployment for the first time during the past week, but the number is still multiples higher than where it was a couple of months ago. And those who continue to claim unemployment benefits number 20-million-plus. OpenTable reservations (a near-real-time gauge of consumer dining activity, which we view as a trajectory of a return toward normal) are up hugely from the lows of pandemic closures. But any time you’re starting from near-zero, practically any level of increase will be astronomical in percentage terms. The same goes for airline passengers. Yes, more people are flying now than were a month ago. But it’s still only a small fraction of what’s normal at this time of year. In our view, markets are way ahead of any data that proves that our economy has begun a rapid recovery. If the recent stock market rally continued at its breakneck pace for a full year, we’d earn a 440%-plus return—obviously an irrational outcome. After all, despite the monster market rally, the U.S. and major foreign economies are in recession. The massive stimulus that central banks are applying both here and abroad is the result of dire straits. (Just Thursday, the E.U. announced an additional $700 billion commitment to their bond buyback stimulus program.) Recent forecasts of how badly the U.S. economy has contracted during the second quarter have gone from bad to worse. Expectations are that we will have shrunk at a 50% annual pace in the second quarter—which would be the biggest contraction on record. Alarming Forecasts Aren’t What They Seem The Federal Reserve Bank of Atlanta is estimating that the economy is on course to have contracted at a 51.2% rate in the second quarter. Moody’s economics group is estimating the economy shrank at a 50.4% rate. Those are devastating numbers on their face, but maybe not as devastating as you might initially think. The confusion is due to the way many important data points are reported on Wall Street, as annualized figures—particularly those related to stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., earnings, dividendA cash payment to investors who own stock in the company. growth or the economy. GDP, or gross domestic product, is a measure of the size of the U.S. economy. When we look at growth rates, the standard is to look at the inflation-adjusted size of the economy and to annualize quarterly changes, meaning we come up with a number that assumes the performance in a given quarter is sustained for three more quarters, or a full year. It’s one way of looking ahead when you don’t know what the future holds. But it often presents a very distorted picture. In fact, former Federal Reserve Chair Janet Yellen once called GDP “a pretty noisy indicator” precisely because of this annualization. The chart below shows both annualized quarterly GDP figures and rolling 12-month numbers—the second way of measuring smooths out the picture a bit. It’s still not perfect, but it does avoid the extremes of a single quarter’s performance. Note: Chart shows quarterly annualized GDP growth along with year-over-year GDP growth from March 2000 through March 2020. Source: Bureau of Economic Analysis. GDP numbers for 2020 are going to show wider swings than normal, whether considering annualized or rolling 12-month figures, due to the sharp shock to the economy posed by the pandemic. Based on the most recent estimate for the first quarter of 2020, the U.S. economy shrank from $19.22 trillion to $18.97 trillion. That’s a decline of 1.3%, or 5.0% in annualized figures. The economy did not, however, simply shrink 5% in the first three months of the year. (It’s also important to remember that these are inflation-adjusted numbers. The true size of our economy in March 2020 dollars is $21.5 trillion.) Why go into all this detail? To put these 50% contraction forecasts in context. No, the economy will not have been cut in half in the second quarter. Estimates right now are that the economy will shrink about 16% between the end of March and the end of June. Don’t get us wrong, those are really bad numbers. A 16% decline in GDP is equal to a loss of economic activity of nearly $3.5 trillion. It’s bad. On top of that, not only is GDP pretty noisy, it’s also released with a lag. It tells us more about where the economy was than where it is going. We know the economy ground to a halt in March and April, but that things began moving in a better direction in May. So, try to keep those 50% headline numbers in perspective. Podcast: Bad, But Getting Better: A Fact-Based Look at Reopening the Economy What does “reopening” the economy mean? What does it look like? And is it working? Consumer spending, manufacturing and mobility numbers remain very low, but they are getting better. So how are we using a variety of medical, economic and societal data to inform our economic and market outlook? Listen in as Adviser Investments’ Director of Research Jeff DeMaso and Research Analyst Liz Laprade discuss: Earlier pandemics and what they can (and can’t) tell us about COVID-19’s economic and market impact How other countries have reopened and what their experiences may portend for us Different states’ phased approaches to reopening and the impact on medical data …and much more Gain a useful window into how investment strategists are analyzing current data and what the path to some semblance of normal could look like. Click here to find out more! ***** Financial Planning Focus: Life Insurance Made Simple What separates successful investors from the rest of the pack? Knowing how to anticipate and manage 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.. It’s a skill that’s even more important when it comes to securing your family’s future. That’s why life insurance can be a cornerstone of any financial plan. Here’s a quick read on how to determine how much insurance you may need and the type you should buy. How Much You Need The purpose of life insurance is to replace the family breadwinner’s earning power if they pass away unexpectedly. The amount of coverage you should have depends on your family’s needs as well as your potential lifetime earnings. The aptly coined acronym LIFE—liabilities, income replacement, final expenses and education costs—is a good guide for estimating how much life insurance you need. LiabilitiesLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). Income replacement can be trickier. A comprehensive estimate anticipates variations in income over time—in some professions these may be steep. (A surgical resident might be expecting her income to climb sharply in a few years, for example.) But a useful rule of thumb is to multiply your current income by the number of working years you’d like your insurance to cover—10 years is a good starting point. Final expenses include funeral costs and the legal fees necessary to dispose of your estate. A standard estimate is $50,000. Education costs include college tuition and/or school fees if your children are privately educated. Several factors (such as current tuition, expected tuition increases, your child’s age and how much you plan to pay for) go into making a precise estimate. Fortunately, there are online calculators that can run the numbers for you. We like the ones from The College Board and Vanguard. Adding up the four LIFE numbers can help you determine the amount of life insurance you should get to ensure that your beneficiaries won’t have any financial worries. What Type to Get Figuring out the size of the policy you need will help determine the type of insurance to purchase. If you need more than $1 million in life insurance coverage, “term life” insurance is generally the most cost-effective option. Term life means that the policy is only in place for a set period—usually 10, 20 or 30 years. When that term comes to an end, the policy expires, and you’ll have to purchase a new policy (or renew your old one) to continue the coverage. “Whole life” or “permanent” policies have no expiration date. The policy runs from the moment you buy it until your death, and the amount your beneficiaries will receive is guaranteed. Those two conditions can buy considerable peace of mind—but come with a hefty price tag. Premiums for whole life policies can be 10 times as much as term life for the same individual. Ultimately, the kind of life insurance you purchase should match your needs and situation. Since these will change over time, it’s a good idea to review your life (and disability, if you have it) insurance policies yearly. ***** 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. This week, 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 shares a look at China’s recovery from the coronavirus and what it means for the world economy and Vice President Steve Johnson discusses how to put the market’s recent rally into perspective. Looking Ahead Next week, we’ll get reads on small business confidence and consumer sentiment, new data on April job openings and inflation gauges, along with a Fed meeting and interest rate announcement with a live press conference featuring Chair Jerome Powell. Our view remains that medical data matters more than economic data for sustaining the hope that the economy will continue on a path to recovery. 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 Investments 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, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $7 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. Our minimum account size is $350,000. 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. Please note: This update was prepared on Friday, June 5, 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. 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