Welcome to the June 2020 Newsletter. This month, we’re covering more details on the coronavirus (COVID-19), its effect on the economy, and other news. Please read on for more information.
The COVID-19 virus continues to spread throughout the U.S., even as many people have begun to call for more openness. No vaccine has yet been developed, but over 100 antiviral drugs are being tested around the world.
As judged by stock market internals, an outright buying opportunity has not yet developed. We remain vigilant to see if one develops in the weeks and months ahead. We do not expect the stock market to return to the March lows.
Employees should continue to make their weekly, biweekly, or monthly contributions to their employer’s retirement plan or personal and spousal IRAs. At this time, additional money can be added to an investor’s stock market allocation, but only on a dollar-cost-average basis. All portfolios remain fully invested
U.S. nonfarm payrolls declined in April by 20.5 million, and the unemployment rate increased by 10.3 points to 14.7%. This is the highest rate and the largest over-the-month increase in the history of U.S. unemployment data.
The March payroll number was revised down to -870.000 from -701,000. The February payroll number was revised down to +230,000 from +275,000. The rolling three-month payroll average decreased to -7 million this month from -71,000 last month. Without a vaccine, the COVID-19 virus has become a disaster for our economy and working families.
We have had some unbelievably high initial unemployment claims in the past two months, but at least the data is dropping each week.
The Bureau of Economic Analysis said the second estimate of the 2020 first-quarter GDP was -5.0% compared to the first estimate of -4.8%. This is bad, but not falling off a cliff. The decline in the first-quarter GDP reflected the response to the spread of COVID-19, as governments issued stay-at-home orders in March.
Annual inflation dropped in April to 0.5% from March’s adjusted 1.3%, as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, dropped to 1.0% from March’s adjusted 1.7%.
These numbers have become dangerously close to deflation, or negative inflation. Deflation is the reduction in the general level of prices in an economy, and it’s very hard to fight. Deflation was one of the significant problems of the Great Depression. The extreme dangers of deflation are why the Federal Reserve’s official target of inflation is 2%, not zero.
Long-term inflation expectations can be determined by calculating the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:
|Bond Maturities||Annual Inflation Expectations|
Thankfully, inflation numbers above are 0.1% higher on average compared to last month’s numbers. Higher long-term inflation expectations this month are a good thing, as we must avoid our worst potential economic enemy: deflation.
From its closing low on March 23, 2020, the S&P 500 Index has risen 36% as of the May 29 close. So many commentators on TV are scratching their heads and almost complaining, “Why has the market gone up so much, so fast?”
To us, the answer is simple.
First, the stock market is always anticipating what is coming next. The market typically looks ahead six months or so.
Second, we do not like the phrase, “This time it’s different,” because history tends to repeat itself as opposed to selecting a different path. But it can be said our economic recovery IS different this time. Here is why.
Most recessions have multiple and complex root causes. For example:
With just these two examples, it’s easy to see that each recession has multiple root causes.
Third, the 2020 recession has a singular root cause: the coronavirus! It also has a singular fix: a vaccine! So, this time it is different. Knowing this, the stock market is not looking six months ahead, but in our opinion, the market is anticipating the availability of a safe and effective vaccine. We believe the market is looking 12 to 18 months down the road, not just six.
That is why we believe the market has recovered so much so fast. This is not to say the market will have no downturns during the next 12 months.
With so many S&P 500 companies removing earnings guidance for the rest of 2020, there is no way to predict company earnings. Without a reasonably intelligent prediction of earnings, we cannot perform a fundamental analysis of the market or even a simple PE Ratio. We probably will not be able to do this until well into 2021.
Hopefully no one sold during the panic selling in March. If so, just hold on. This will be a difficult year, but even with added volatility, we might squeak out a small gain for nearly everyone by year end. We are looking forward to a favorable 2021 and 2022.
In the short term, buying should only be done on a dollar-cost basis. Keep your stock portfolio diversified and low cost.
Obviously, there is an unemployment crisis causing a painful lack of family income across the country. We also have had over 100,000 deaths nationwide due to COVID-19.
We now have enough daily data in the “Daily New Cases” chart below to show a downward trend. As we open businesses up, hopefully only a small upward trend will develop.
The chart below showing “Daily Deaths” also shows a downward trend. The much lower deaths reported every weekend is due to less staff working in hospitals on weekends. Higher numbers of deaths are then reported on the following Monday.
In mid-May, the FBI issued a cyber-warning regarding efforts by China hackers to steal COVID-19 medical research from U.S. universities and pharmaceutical companies. There should be no short-term hopefulness that China’s unethical treatment of others will cease anytime soon.
We expect second-quarter economic numbers to be some of the worst in our country’s history. But we also expect the second quarter to be the bottom of this recession. We are hopeful there will be a return to economic growth in the third quarter as businesses reopen and workers return to the workforce.
Over the past 90 days, the Federal Reserve’s balance sheet has expanded from $3 trillion to $7 trillion as the Fed buys Treasury bonds. With fewer bonds on the market, existing bond prices have increased, and corresponding bond yields have decreased. The lower bond yields are designed to motivate people and institutions to move their money out of bonds and to use the money to create economic expansion.
The U.S. Treasury auctioned its first 20-year bond on May 20, 2020 since 1986. The initial annual yield was 1.22%. This complements the Treasury’s 10- and 30-year long-term bonds. Treasury officials estimate they will borrow a record $2.99 trillion in the second quarter, 2020, more than five times as much as the quarterly borrowing during the height of the 2008-09 financial crisis.
Our bond recommendations are limited to the five categories below:
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.