Reopening Realities and Relapse Fears May 18, 2020 Weekly Update Print Please note: This update was prepared on Friday, May 15, 2020, before the market’s close. Global markets and their underlying economies remain propelled by and prone to virus-related news. Reports of the economic toll taken by measures imposed to manage the virus vie with hopes that gradual reopenings in many states and countries will bring progress toward normalcy, however ill-defined that may be. StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. and 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. markets here and abroad have yo-yoed between gains and losses all week. Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 16.5% and 11.1% for the year, respectively, well off the lows experienced in late March. 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 21.2%. 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 1.32%, down from 2.31% at year end. On a total return basis, the U.S. bond market has gained 4.9% for the year. Inflation Fears Are Misplaced As the federal government has pumped trillions of dollars into the economy, we’ve been hearing concerns about U.S. government policymakers “printing money” and the growing federal debt and deficit sparking a debilitating bout of inflation. We think those fears are, at best, premature. First, the same crowd worrying about inflation today was sounding the inflation alarm during the financial crisis over a decade ago. Not only did those concerns never come to pass, but quantitative easing contributed to the longest expansion and bull marketA period during which stock prices rise significantly from recent lows for weeks, months or years. in U.S. history. Second, the extraordinary global economic shutdown has been a massive deflationary force. This is readily seen in falling oil prices worldwide and, here in the U.S., the drop in core consumer prices in April, a decline unmatched in more than 60 years. In fact, we would welcome some inflation. In our view, inflation’s return would signal an economic rebound. And while we agree that the government needs to be more disciplined about its finances in the long run—which demands an honest conversation both about the government’s spending as well as its income (i.e., taxes)—we think the immediate focus on trying to keep the economy afloat is a justifiable first-order priority. Worrying about inflation right now is putting the cart before the horse. Down the road, when the economy is on more stable footing and people are back at work, policymakers can talk about and tackle any inflationary concerns that arise. ‘Lasting Damage’ of Unemployment On Wednesday, Federal Reserve Chair Jerome Powell noted the 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 “lasting damage” to the economy if the recession is drawn out. His concern that “the recovery may take some time to gather momentum and the passage of time can turn 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). problems into solvency problems” is especially acute for low-income workers. About 40% of U.S. households earning less than $40,000 a year experienced at least one lost job in March, according to the Federal Reserve. If people aren’t earning paychecks, they’ve got less to spend. If they aren’t spending, businesses aren’t earning as much, which may lead to reducing staff, or at least hesitating before bringing back former workers. That in turn means fewer people earning paychecks, ultimately creating a negative feedback loop that weighs on rehiring plans. As Powell reiterated, the economic path is highly uncertain and subject to significant downside risksThe 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.. We noted last week that the headline April unemployment number (U-3) jumped from 4.4% to 14.7%—that’s the tally of those out of work and actively seeking a new job. We also regularly look at a broader measure of joblessness, the U-6 unemployment rate, which includes people who have given up looking for a job and part-timers who can’t find full-time work. The gap between those two figures went from 4.3% in March to 8.1% last month (when the U-6 rate rose to 22.8% from 8.7% in March). The long-term average gap between the two is 4.6%. The story here is that a lot of people who were already out of work in March simply didn’t bother to pound the pavement (real or virtual) in April. And we get it. Outside of e-commerce, grocery stores and food delivery, most companies weren’t hiring last month. That tells us there’s a bigger unemployed population than even the daunting headline numbers suggest. The good news is that there are industries (think technology, health care, online retailers and alternative energy) that are currently hiring and likely to hire more as we move from lockdown to reopening. Some workers won’t return to their “old jobs” but will find new ones. As the economy reopens, we expect to see some disruptions in the way we work and play. In conversations with portfolio managers, we’ve found they are already aware of these trends and working to identify those that will emerge in the post-pandemic era—they are actively looking for investment opportunities to take advantage of them. Podcast: Should the Pandemic Change Your Financial Plan? With the pandemic bringing profound changes to the way we live and work, it’s natural to ask how this will shift the way we plan for our financial futures. That’s certainly been something on the minds investors and financial planners nationwide. This week in The Adviser You Can Talk To Podcast, Senior Financial Planner Andrew Busa and Vice President Rick Winters sat down to talk through how the pandemic has changed the way they work as advisers, the advice they’re giving clients and how to know if your investment strategy needs to be adjusted. Topics include: The importance of understanding each client’s unique circumstances Reviewing old plans in a new context Remaining disciplined and thoughtful about change Preventing present anxieties from derailing future plans New risks bring new worries—but some old-fashioned planning and perspective can help. Click here to listen now! ***** Financial Planning Focus: Contemplating Early Retirement Uncertainty persists about when and if the economy and job market will return to normal—it’s left many people pondering (or being forced into) retiring earlier than they may have planned. Whether it’s a deeply personal decision or a suddenly imposed one, if you’ve found yourself wondering (or worrying) about retiring earlier, here are four general factors to consider: Get a Handle on Your Expenses. The big concern on your mind is likely, “Will my current savings be enough to meet my goals over the rest of my life?” Our financial planning team is here to help you answer that question. But, a key first step is understanding how much you need to spend on those goals. Adviser Investments’ Budget Worksheet can help you get started—it allows you to compare, side by side, your current expenses and income to what you expect to be spending and earning following a lifestyle change. Remember Health Care. This often goes overlooked when considering retiring before Medicare eligibility at age 65. It’s important to know how you will bridge the gap between retirement and blowing out the candles on your 65th birthday cake—COBRA eligibility through your former employer is often the first line of defense. From there, explore the private marketplace for health plans. Evaluate Your Social Security Benefits. If you’ve retired ahead of schedule, it may be tempting to file for Social Security benefits early. However, that might not be the best option for your situation. We have a host of content on social security—including a series of three podcasts and a special report—to help you think through the decision. Explore New Employment Opportunities. Retirement may not mean a full stop. Consulting on a part-time basis has become an ideal career transitional phase for many of our clients. With expertise from your former position and an inclination to work on your own schedule, don’t rule this one out—you may have more options than you think, and we can help you work through them. ***** Adviser Investments’ Market Takeaways Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begin providing Today’s Market Takeaways, short videos in which one of our investment team analyzes what the market’s telling us. We also posted 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 with a wrap on first-quarter earnings and Vice President Steve Johnson giving his notes on a recent call with one of the fund managers we invest with. Looking Ahead Next week, we’ll get backward-looking reads from March on leading economic indicators, data on homebuilding and home sales as well as homebuilders’ confidence in May. Obviously, May data matters much more than that from March or April in determining the state of the economy at this point, now that the effects of the pandemic are much further along in defining the new normal. And June data will matter more than May’s to help build perspective on what lies ahead. 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. 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