“There’s a battle outside and it’s ragin’. It’ll soon shake your windows and rattle your walls, for the times, they are a-changin’!” These lyrics from the 1963 song recorded by Bob Dylan sum up the last six months as much as they did when they were written.
It boggles the mind how so much has happened in such a short period of a couple of months. From the start of a rather benign year in which the U.S. economy was continuing to chug along and unemployment at its lowest levels in decades came the multiple slaps of the Covid-19 virus, a worldwide oil price collapse, economic shutdown, protests against police and volatile riots and looting shops and stores across the nation. Divisions on multiple subjects have split the population in historic number. Hopefully, cooler heads will prevail on both extremes and we can come together as a nation in a peaceful manner.
The lockdown of most of the country in the attempt to contain the spread of the Coronavirus has dramatically altered the path of growth that the year started with. As businesses shuttered their doors, tens of millions of workers were furloughed and joined the unemployment lines. The providing of goods and services came to a standstill. Fear and panic erupted as worries about paying for rent, mortgages, and groceries became real for the newly unemployed. Corporate revenues were immediately reduced and the outlook of future earnings downgraded substantially.
The ensuing sell-off in the stock market worldwide produced the quickest decline in values since the great depression. Market indexes fell on average about 35% with many individual sectors declining much more. Stocks that were already out of favor by many investors prior to this year became even more hated and the flow out of equities reached multi-year highs.
To add to the panic, Saudi Arabia and Russia initiated a price war in oil, and oil prices collapsed to below $10 per barrel. This sent oil stocks into a freefall and quickly put many drillers and producers in very real danger of default on their debt.
As markets looked to spiral out of control in a similar fashion to the last freefall in 2008-2009, the Federal Reserve again stepped in to provide the liquidity to the markets to keep them solvent. Interest rates were lowered to zero and the Fed basically agreed to guarantee the oil industry debt to prevent widespread bankruptcies. Along with the Fed, our elected representatives in Washington put plans together to print enough cash to help offset the decline in consumer spending due to the mandated closing of the economy due to the virus. Low interest and forgivable loans were offered to small businesses to help pay employees. Checks were mailed to all citizens to help offset lost wages. Since consumer spending makes up 70% of the total revenue in the U.S., it is important that consumers continue to have cash to spend. Obviously, these payments will not completely cover the gap of a decline in corporate earnings that economists predict to be over 40% in this quarter. Small businesses are feeling the brunt of the shutdown with hundreds of thousands having permanently closed, or are expected to close.
In regards to the financial markets, not only have we experienced the quickest decline into bear market territory (described as a 20% decline) but also the fastest rebound to new or nearly new highs in the indexes. In the emails over the past few months we have detailed the decline and rebound statistics so we will attempt to look at recent progress and look forward from here.
The July 4th holiday shortened week brought a stronger than expected jobs report of 4.8 million jobs created which caused the unemployment rate to fall to 11.1%. Pessimistic analysts predicted a loss of 8 million jobs due to the virus. The result was a gain in the S & P 500 of 4% for the short week.
Pessimism is still running rampant with investors. They are unconvinced that stocks are not overpriced and continue to move money out of equities and into money market funds and bonds. We have included charts illustrating the reaction of investors since March of this year and the unprecedented flight to safety. Do not allow Fear to drive your financial decisions.
A recent survey showed that 33% of those over age 65 have sold all their stocks. All of this flight from equities has resulted in a record amount of cash on the sidelines to the tune of over $5 trillion! Not often will you see a top in markets with this much cash. Investors clearly are very nervous and freaking out about another possible economic lockdown due to a second wave of the virus along with continuing political turmoil.
With current numbers for earnings this quarter looking to be better than projected, employment numbers continuing to increase, and the progress being made in trials for a vaccine for Covid-19, markets could be setting up for a nice run into year-end. Household disposable income is growing at a record pace since less has been spent while quarantining the past few months. This pent-up demand will boost the growth outlook when the economy returns to normal.
A quote from this great investor, Sir John Templeton, comes to mind: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Be safe and be well. And remember that although change is inevitable, the rate and the direction is solely in our hands as citizens of this great country.
The Lesjak Planning Team