Traders See Glass as Half-Full - Adviser Investments

Traders See Glass as Half-Full

April 20, 2020

Please note: This update was prepared on Friday, April 17, 2020, before the market’s close.

Is a COVID-19 treatment within reach? Promising, but very preliminary results for Gilead’s experimental drug “remdesivir” sparked a Wall Street rally Friday morning. That’s great for traders, but we’d continue to urge caution—there’s much more we don’t know than do know about the virus and its current and lasting impacts on the global economy.

Recent stock market gyrations have shown, once again, that prices don’t always respond to news as you might expect. Over the past four weeks, the Thursday-morning reports showing record levels of new claims for unemployment benefits might have led you to think that stocks would tank based on the news. Yet, as claims totaling 22 million were reported, the stock market rallied.

A clear-eyed view tells us that we’re not out of the woods yet: The materials, logistics and money needed for a testing and tracing program that would give the American public confidence to return to life as normal are still insufficient. A vaccine remains months and months away. From an economic growth and earnings perspective, the views shared by corporate executives on the prospects for 2020 are more suggestive of a kaleidoscope than a telescope.

Ultimately, public health conditions will dictate the fate of economic and market activity. “Infinite stimulus” from the Federal Reserve and potential additional funding from Congress form a welcome safety net. We see no reason not to hope for a good recovery outcome—but hope is not an investment discipline or strategy. A solid financial plan and an investment portfolio tailored to your individual needs and desires is key—and something we continue to recommend as a balm for uncertain times.

As dire as the situation may seem, the current bear market has lost a good deal of its bite already. That’s not to say that another decline couldn’t be in the cards, but so far this year’s stock market drop hasn’t been particularly severe or out of the ordinary, apart from the speed with which it occurred. Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 17.0% and 12.8% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 21.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index had fallen to 1.40% from 2.31% at year-end. On a total return basis, the U.S. bond market has gained 5.0% for the year.

Data Begins to Reflect Recession

We continue to believe that the medical data is going to matter more than the economic or earnings data in the months to come. That said, we’re beginning to get real numbers on the economic impact of the pandemic and, as expected, they’re not pretty.

The Federal Reserve reported that industrial production—factory, utilities and mining, oil and gas output—fell 5.4% in March, the biggest monthly drop since 1946. Manufacturing dropped 6.3% from February, again the largest drop since World War II’s aftermath.

Most retailers fared even worse, as sales dropped 8.7% from February’s tally, the largest one-month decline on record since 1992. Auto sales, down 25.6% for the month, were a huge part of that, as were clothing store sales, which plummeted 50.5%. The report may not even reflect the full picture of how spending has dried up; hotel stays and airline and movie theater tickets were not included.

Plus, keep in mind that the first two weeks of March were fairly normal, so this data reflects the impact of the shutdown just in the month’s final half. April retail sales, reflecting a full month of stay-at-home policies and excluding the initial rush to stock up on supplies, will likely be worse.

You’ve heard us say it before: As goes the American consumer, so goes the U.S. economy. We are in a recession, but there are some positive points to consider.

Some Silver Linings

One bright spot in the retail sales report: “Non-store retailers,” which account for 14% of all retail purchases, saw sales increase 3.1% in March. Certain components of this measure—gasoline sales, traffic at street vendors, vending machine transactions and door-to-door sales—almost certainly declined in March. That tells us that the 3.1% gain must be in large measure due to ramped-up demand for home delivery from the likes of Costco, Amazon and Walmart. We’d expect that number to keep climbing. The trend could be one reason why Amazon’s stock is at an all-time high and up more than 30% for the year.

Speaking of bright spots: Procter & Gamble, Johnson & Johnson and Costco all raised their dividends this week. The increases weren’t huge, but investors will take any “pay raise” they can get in this environment. With the 10-year Treasury yielding around 0.60%, corporate dividends look all the more attractive.

For more on how companies are managing their dividends in this challenging market environment, check out Chief Investment Strategist and Dividend Income Portfolio Manager Charlie Toole’s voice of reason on CNBC.com and Barron’s this week.

(For more from our team, on Monday, Equity Research Analyst Kate Austin recapped news from the weekend and gave a preview of earnings season in a Market Takeaways clip, while earlier today, Portfolio Manager Steve Johnson summed up the week’s market rally in the latest Market Takeaways video.)

Recovery Predictions or Alphabet Soup?

The questions on most people’s minds are: How do we “reopen” the country and how will the markets react? You may be hearing about “U-shaped” and “V-shaped” recoveries.

We think a sharp V-shaped recovery seems unlikely, but Moody’s is now talking about a “W-shaped” recovery. What does that mean? According to Moody’s, it encompasses “the deep slide in the economy that we are suffering now, a bounce when businesses begin to reopen, and then a modest slump as consumers and businesses remain cautious until a vaccine becomes available and the economy fully engages…”

The fact is that there simply aren’t a lot of facts to go on right now, thus, forecasts are all over the map. To give one example, consider analysts’ estimates for corporate earnings.

Note: Chart shows changes in 13 analysts’ 2019 and 2020 earnings-per-share estimates.
Source: CNBC Market Strategist Survey.

Normally, you’ll see analysts’ expectations grouped together—there’s safety in the herd. If you’re wrong, well, so was everybody else. But this year, the chart showing changes in their earnings projections looks like a prism refracting light. In fact, three of the 16 analysts surveyed by CNBC threw their hands up and pulled their 2020 estimates entirely.

So, U or V or W for the economy or earnings? Maybe more analysts should take after those who dropped the pretense and simply admit they don’t have a C, an L, a U or an E.

Keeping Your Accounts Secure

With the rise of the pandemic, cases of fraud and scams have been on the rise—the Federal Trade Commission has already received nearly 17,000 coronavirus-related complaints this year.

Adviser Investments has written up a list of some new scams making the rounds, which you can read here. For steps you can take to keep your accounts secure and protect yourself online, please see this Investor Protection Checklist.  

Special Podcast: The CARES Act’s Impact on Your Finances

The federal government’s $2-trillion virus relief bill, the CARES Act, is intended to help dull the economic pain the pandemic is causing—and many provisions in it may affect your family and your finances. Two Adviser Investments financial planners, Andrew Busa and Diana Linn, sat down for a special episode of The Adviser You Can Talk To Podcast to break down the big changes in this bill—and offer some strategies it opens up for financial planning.

This podcast discusses the bill’s most important provisions, such as:

  • Direct payments to taxpayers
  • RMD waivers for 2020
  • COVID-related withdrawals from retirement accounts
  • Unemployment benefits

Click here to listen now. And there’s plenty more to say about the CARES Act—for additional details about the RMD waivers, check out Adviser Investments’ post here, a broader overview of the Act is available here, and read on for an update on key provisions for contractors, the self-employed, small businesses and their employees.

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Financial Planning Focus

The CARES Act’s Paycheck Protection Program

We’re continuing to unpack the CARES Act for you with a look at another important provision, the Paycheck Protection Program (PPP).

The PPP authorized the Small Business Administration (SBA) to distribute around $350 billion to banks to lend to small businesses, independent contractors and the self-employed. The SBA reported Thursday that it had maxed out its initial funding. More is needed, and we think it’s likely lawmakers will add to the coffers; Treasury Secretary Steven Mnuchin requested $250 billion more from Congress last week.

Here are the guidelines for these in-demand, forgivable government loans when they become available again:

  • All Small Businesses (and Some Large Ones) Welcome. Broadly speaking, any business with 500 or fewer employees (or self-employed individual or sole proprietorship in operation) as of February 15, 2020 can apply for a PPP loan at a base rate of 1%. Additionally, corporations in fields like hospitality and entertainment that have been disproportionately impacted by COVID-19 can apply even if they employ more than 500 people. Those are really the only hurdles to clear; PPP borrowers do not have to provide collateral or personal guarantees to receive the funds. Plus, neither the banks nor the government will charge fees on the loan.
  • Maintain the Status Quo and Be Forgiven. The PPP aims at smoothing some of the disruption caused by the coronavirus by covering major expenses for roughly eight weeks after disbursement. These major expenses include payroll and benefits costs, along with mortgage interest, lease or utility payments. Perhaps the biggest benefit is that the PPP loans could be forgiven provided that the borrowers follow these two guidelines:Over that eight-week period, businesses must retain current employees and their payroll (as of February 15). In order for the loan to be fully forgiven, no employee can be terminated and their wages cannot be cut. (If a business has already let its employees go, it can still qualify for loan forgiveness by rehiring those employees at their previous salary.)
  1. The borrower is required to provide documentation of payroll and business costs to its lender. If the loan does not qualify for forgiveness, the amount borrowed will accrue interest at a rate of 1%. No payments will be required until six months from the disbursement date.
  • Be Ready to Act. Applications went live on April 3, 2020 for small businesses and sole proprietorships and April 10, 2020 for independent contractors and the self-employed—and any new funds added to the program are to be doled out on a first-come, first-served basis as well. You can find the Paycheck Protection Program application here. If you’re interested in applying, you should contact a lender as soon as loan funding is appropriated by Congress. Act fast: The demand is certain to remain high in this time of widespread need.

The relief provided by the PPP has been popular and remains economically necessary. We’re keeping a close eye on news out of Capitol Hill for new developments.

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Looking Ahead

First-quarter earnings reports will continue to trickle in next week, though the figures won’t capture the brunt of the coronavirus’ impact on individual businesses. Instead, we’ll be listening closely to executives’ outlooks for the months and years ahead, at least from what little they’re able to know and see at this early stage.

We’ll also get additional data on March home sales and durable goods orders, as well as April surveys on consumer sentiment, manufacturing and the service sector, along with the latest update on first-time unemployment claims.

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, April 17, 2020, before the market’s close.

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