Second-Wave Fear Tempers Wall Street Cheer - Adviser Investments

Second-Wave Fear Tempers Wall Street Cheer

June 15, 2020

Please note: This update was prepared on Friday, June 12, 2020, before the market’s close.

After weeks of trending higher on hope, stock markets sold off as fears of reopening risks resurfaced.

Until yesterday’s plunge, stocks had staged a remarkable rebound from the March 23 lows—the S&P 500 had gained 45% in 53 trading days to return to positive territory for the year. That the ascent occurred as evidence grew that the economy was gripped by recession was all the more extraordinary.

But yesterday’s 5.9% drop for the S&P 500 and 6.9% decline for the Dow Jones Industrial Average may well have reflected economic pessimism catching up with investor optimism. Or not. As we write this, the stock markets are showing modest gains for the day.

It’s worth noting, and we’ll dive deeper into the topic in a moment, that markets do not move in lockstep with the economy—instead, markets tend to run out ahead. Given the risks and unprecedented uncertainties regarding the potential duration of this global pandemic, until we see hard evidence for a medical solution to pandemic-related economic issues, we’ll keep our defenses up while enjoying any interim gains we earn.

Through Thursday, the Dow and the broader S&P 500 index were down 10.9% and 6.2% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 11.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index was 1.27%, down from 2.31% at year end. On a total return basis, the U.S. bond market has gained 5.9% for the year.

Recession Is ‘Official.’ Now What?

The obvious became official this week: The National Bureau of Economic Research, the arbiter of the beginnings and ends of recessions, noted that the economy peaked in February then fell into recession in March.

The proclamation comes as we continue to hear many reasonable questions about why the stock market has climbed so far while the economy continues to struggle. The divide between the market and the economy over the past two months may have seemed strange, but history shows it’s not really that unusual.

Note: Table shows Dow Jones Industrial Average Price Index returns, which do not include reinvested dividends. Sources: The National Bureau of Economic Research, S&P Dow Jones Indices. Analysis: Adviser Investments.

During six of the past 11 recessions, the Dow Jones Industrial Average actually gained ground—and that number jumps to eight when you include dividends. On average, the Dow rose 0.5% during the 11 recessions the U.S. economy has experienced since 1948. Nothing to crow about, but not a loss, either.

It’s logical that a shrinking economy should lead to a declining stock market. And during the Great Recession, stocks performed as you might expect: The Dow fell 36% from December 2007 through June 2009. Of course, that stat masks the fact that, at its worst, the Dow declined 54% from its October 2007 peak to its March 2009 low, having turned down before the recession hit and rallying before the economy reached rock bottom.

Fast forward to recent months, when the market’s fall and rise happened with record-breaking speed. One could even argue that the market’s behavior has, so far, been about average. Including yesterday’s decline, the Dow is pretty much where it was at the end of February when the recession started, down 1.1% through Thursday’s close.

We don’t offer this as a forecast of further drops or to say the coast is clear. Another leg or two down for stocks is entirely possible. The virus could mount a second wave of infections and ongoing economic hardship still lies ahead. The return of flu season in the fall is but one of myriad risks we’re minding.

Two points: First, it’s not unusual for the stock market and the economy to appear disconnected at times. Second, even if you had a crystal ball telling you when recessions started and ended, the knowledge wouldn’t necessarily translate into investment and trading success.

So, when will this recession end? Our approach to answering this question is threefold, and points more to the structure of our analysis rather than any absolute predictions. First, we’re paying close attention to the verifiable medical data and what it portends. We are also watching what Federal Reserve policymakers are doing as well as what they’re saying. And, finally, we continue to monitor what the fundamental data, particularly corporate earnings, tell us about the state of economic growth or contraction. Absent a vaccine, as summer ends and flu season begins, the medical data may actually drive stock prices more than economic data. We’ll be watching.

Fed Commits to ‘Lower for Longer’ Policy

“Lower for longer” is a phrase you’ve heard us mention before. It expresses our sense that we may be in an extended period of low, low interest rates for longer than the consensus believes.

This week, Chairman Jay Powell faced the press at the close of the Federal Reserve’s scheduled two-day meeting. Powell made it crystal clear that the Fed is going to toe an ultra-defensive line for the foreseeable future: “We’re not thinking about raising rates,” he said. “We’re not even thinking about thinking about raising rates.”

According to the central bankers’ latest estimates, they don’t expect to raise rates from the current 0.00%–0.25% range at any point through 2022—at the earliest. That may seem like a precise date, but it’s more arbitrary—their estimates don’t extend beyond 2022.

The last time the Fed took rates down to the “lower bound” of 0.25% was December 2008—where they remained for seven years. Could we be looking at zero-bound rates until 2028? We’re investment strategists, not economists, but we don’t think a repeat is likely. The economy should snap back faster than it did during the Financial Crisis, though returning to pre-COVID-19 levels of economic output could take longer. We’d caution that reports of economic “expansion” will not mean we’ve recovered all we’ve lost, but simply that the economy has returned to some form of growth after being in contraction.

Podcast: Investment Risks of Misleading Headlines

Speaking to the difference between expansion and full recovery, a steady diet of news can be both irresistible and overwhelming during stressful and uncertain times. Obtaining and maintaining a rational perspective that rises above the daily noise is tough even on the best of days, let alone during a turbulent year like 2020. Yet, as long-term investors, it is our job to do just that, separating emotion and day-to-day headlines from how we make disciplined investment decisions.

In this special episode of The Adviser You Can Talk To Podcast, Chairman Dan Wiener and Chief Investment Officer Jim Lowell sit down for a conversation about the latest market, economic and medical trends, and how to avoid being misled by the headlines during a volatile period of pandemic and protests—click to listen now!

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Financial Planning Focus:

Long-Term-Care Insurance

As a long-term investor, you’re accustomed to taking the long view when it comes to investments. And it’s a good thing, too—medical advances mean we’re living longer than previous generations. With life expectancy of older Americans on the rise, so too is the potential need for long-term care (LTC) and a way to pay for it.

The facts are somewhat sobering: A person turning 65 today has a 52% chance of needing LTC at some point; 14% of LTC patients need care for more than five years. And at an average of $100,000 a year for a private room in a nursing home, those costs can really add up. Fortunately, you can protect yourself, your family and your money with LTC insurance.

Do I Need LTC Insurance?

It’s a common misconception that you can rely on Medicare or other types of health insurance to cover “activities of daily living”—for instance, bathing, dressing, eating and bathroom needs—if you come to need such help. Medicare pays for medically necessary nursing or home care, not the more involved (and expensive) daily care; the same goes for most supplemental insurers.

This is where LTC insurance comes in. It covers a broad range of services that other insurance doesn’t, from home health care and modifications (e.g., wheelchair ramps) to assisted living and nursing homes.

Key Features in an LTC Policy

If you are interested in LTC insurance, here are five key factors to consider:

  • The track record of the insurer. Your insurance company should have a high financial rating—look for an “A” rating or better on ambest.com and a record of on-time payment of claims.
  • How benefits are paid. These come in three ways—reimbursement, indemnity or cash. A reimbursement policy will pay based on the amount of your bill or the daily limit on your policy, whichever is less. Indemnity plans require proof of services but pay the full daily benefit regardless of the cost of your care. Cash plans offer the most flexibility—as the benefit is paid to you without any restrictions or receipts—but are also the most expensive.
  • How the plan is administered. It’s important to understand how much your benefits are, how long they last and whether they are paid out monthly or daily. Monthly benefits are becoming more common, affording more flexibility since you may not receive the same level of care every day.
  • Waiting period length. Called the “elimination period,” this is the number of days you must wait before the policy starts paying—90 days is most common. To minimize premiums, consider an elimination period that only starts paying you back after you’ve used a reasonable amount of your personal assets.
  • The impact of inflation. Nursing home costs have risen at an annual rate of about 3.5% in the last five years and costs of assisted living facilities are up 67% since 2004. If you are purchasing a policy when you are younger (say in your early 60s), you’ll want to make sure that your benefits include inflation protection.

LTC insurance isn’t for everyone—you may have family to care for you or enough assets to pay for care out-of-pocket—and, of course, as with other insurance, you may be buying something you won’t end up needing. If you have any questions about whether you need LTC insurance, we recommend speaking with a trusted financial planner or insurance adviser.

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Adviser Investments’ Market Takeaways

Calm and clarity remain 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, Equity Research Analyst Kate Austin covered the latest unemployment figures and Portfolio Manager Steve Johnson analyzed Thursday’s stock market sell-off.

Looking Ahead

Next week: Surging COVID-19 infections tied to states reopening will vie with economic data, which includes a look at last month’s manufacturing and homebuilding activity. We’ll also get a read on May retail sales and a report on the Leading Economic Indicators.

Typically, none of the above are market movers; with a light slate, news relating to medical data, human nature and Mother Nature will likely have a greater impact on trader sentiment on any given day.

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 12, 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.

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