In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
STATE OF THE MARKETS (S&P 500 -12.71% YTD THROUGH 5/13/2020)
Following the fastest bear market on record (down 35% in 23 trading sessions), stocks turned in their best April in 82 years and their best monthly gain since 1987. The S&P 500 Index finished April up 12.7%.
Why have stocks rallied 35% off the lows when the economic fundamentals are deteriorating? The fact is we are in a recession and GDP could drop 30% annualized in the 2nd quarter, 30 million workers have lost their jobs, and major segments of the economy are virtually shut down – travel, leisure, and hospitality just to name a few.
The primary reason that the stock market has improved so much since late March is that the Fed and Congress acted swiftly and in unprecedented fashion to protect businesses and institutions from failing. This gave the market confidence, along with a decline in new Covid-19 cases, the re-opening of some states, and the hope that a treatment may not be far off.
Economic Update
The economy has unsurprisingly entered the worst economic period since the Great Depression and while it remains to be seen how long or how deep this recession will be, the fact that the health impact of COVID-19 has not been as dire as predicted and states around the country are beginning to re-open provides some hope that the economy will begin to recover later this year, and 2021 could be a year of economic growth.
Oil Demand Could Drop 50%
Since most of the country has been quarantined in their homes, gasoline demand may drop to less than half of normal levels in the coming 4-6 weeks. As a consequence of the virus and price war, oil prices have dropped to their lowest level in 18 years – briefly going below $20 a barrel.
Low prices are great for consumers because it acts as a tax cut. For every penny that gasoline prices decline, it’s equivalent to a $1 billion in savings to consumers. And if these low prices stay with us throughout the year, it could mean savings of $100 billion or more. That’s a nice boost for consumers as we start to venture out from our homes.
Investment Themes
In addition to opportunities that exist broadly in the current economic and market climate, there are several areas we are emphasizing in client portfolios:
- Asset Allocations
Since stocks have rallied 35% off the lows, we are re-examining everyone’s asset allocation. If someone’s ideal asset allocation is out of balance, we are using these wild swings in the stock market to adjust stock and bond mixes where appropriate.
- Tax Loss Harvesting
This is also an excellent time to harvest losers and fine tune portfolios by getting rid of companies that may not perform well when we come out the other side of this pandemic.
- Dividends – More Important Than Ever!
With fixed income paying so little, dividends are more important than ever! However, as a result of the coronavirus, many companies have elected to suspend their dividends for the foreseeable future. These companies are signaling to investors that they lack financial resources, that their debt is too high, and they are not confident about their future. We try to avoid these kinds of companies.
We want to own companies that increase or at least maintain their dividends in tough times and meaningfully increase their dividends in good times. For nearly 2 decades we have invested in a number of high-quality rising dividend strategies with a focus on companies that have the ability to maintain or even grow their dividends in all economic climates.
Bottom Line
Stocks have now rallied 35% off the March 23rd lows as the Fed and Congress acted swiftly and in unprecedented fashion to backstop the economy. Caution is advised regarding investing in stocks in the short run, but many opportunities still exist in this volatile market and economic climate.
What is happening in quarantine?
Ashley has mastered home haircuts – as you can see little Cameron is sporting the 2020 Quarantine Spike. Dave and his wife Mary built the perfect relaxation station- a hammock. Melissa’s pup, Mia, continues to make large pieces of art with the stuffing in her toys (she’s missing her coworkers) and Lara let her teenage daughter raise ducks in the house for a few weeks… yes, you read that correctly. Casey taught a fitness class in a parking lot while practicing good social distancing and rest assured, Doug is being taken care of by his lovely wife Becky and getting his meals delivered to his home office. Hope this finds you well!
