September 2020 Update: A Recession and a Rally Like No Others

Published By Kerry Meath-Sinkin & Bob Meath

We have been through a recession and rally like no other, and no one knows for sure what is coming next.  No one has a crystal ball. There is no consistent thought on what is coming next, and the opinions of experts and economists vary widely.

Imagine you had the foreknowledge that a global pandemic and economic collapse was on the horizon at the beginning of 2020, how might you have positioned your investment portfolio?

Many would have correctly anticipated a swift sell-off in stocks as the virus swept across the globe and the U.S economy went into hibernation. The safety of cash or long-term Treasury bonds would have been alluring.

But consistently picking the peaks and valleys in stocks, or even something close, is a fruitless endeavor. We know that intuitively.

When might the investors who had fled to safety decide to repurchase equities, returning to the proper asset allocation designed to achieve their financial goals?

Would the unending drumbeat of bearish sentiment have kept them out of the market and in the safety of cash or government bonds? For many, it’s difficult to pull the trigger when the news is bleak, and there’s no light at the end of a dark tunnel.

The swift sell-off in stocks is in the record books. It was violent but short-lived.

As the economy was on the precipice of its worst quarterly decline on record (St. Louis Federal Reserve GDP data, April – June quarter, quarterly records began 1947), the major market indexes touched bottom in late March and began a remarkable rally that few thought possible.

According to a mid-August article by Barron’s (https://www.barrons.com/articles/the-s-p-500-is-resting-on-the-100th-day-of-the-rally-51597337402), the Dow Jones Industrial Average registered its best 100-day advance since 1933 (March 23 bottom – 100 trading days).

While the Dow has yet to eclipse its prior high, the S&P 500 Index set a new record on August 18 and proceeded to set six new closing highs by the end of August (St. Louis Federal Reserve S&P 500 data).

Strength in a few large technology stocks have helped fuel the rise in the S&P 500, while strong technology performance has fueled a spectacular advance this year in the Nasdaq.

Table 1: Key Index Returns

Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch

MTD return: Jul 31, 2020—Aug 31, 2020

YTD return: Dec 31, 2019

The pandemic changed the rules. There’s no playbook to model outcomes. The Fed, economists, and analysts are all playing by new rules.

Aided by fiscal and monetary stimulus, price action in the market since late March accurately called the bounce in economic activity that began in May and has continued into August.

However, let’s acknowledge that the recovery did slow in July (based on the broad-based Chicago National Activity Index, which is comprised of 85 monthly economic reports).

And the economy is very uneven.

We’re seeing a strong stock market, which has been supported by unprecedented liquidity supplied by the Fed, rock bottom interest rates, and a slow improvement in the overall economy.

Buoyed by low mortgage rates and pent-up demand, housing activity, a traditional leading economic indicator, has surged (U.S. Census data, National Assoc of Realtors, NAHB).

Retail sales, as measured by the U.S. Census, have surpassed pre-Covid levels. Thank pent-up demand, generous jobless benefits, and stimulus checks.

The Atlanta Fed’s GDPNow model (https://www.frbatlanta.org/cqer/research/gdpnow), which inputs economic growth into a complex GDP model as new economic reports are released, is tracking an annualized growth rate of 28.5% in Q3 (as of September 1).

While we could see moderation in activity prior to the quarter’s end, anything north of 16.7% annualized GDP growth, which occurred in the first quarter of 1950 (St. Louis Fed), would set a new record.

Blemishes remain on the economic landscape

It has been an uneven recovery. While companies have been recalling furloughed workers, total employment remains well below the pre-Covid peak. For example, the U.S economy has yet to reclaim even half of the 22.1 million jobs lost in just March and April (U.S. BLS through July).

July’s unemployment rate (August will be updated Sep 4) of 10.2% is down from the April peak of 14.7% but remains above the 10.0% peak that occurred in the Great Recession (St. Louis Fed).

First time claims for unemployment benefits have been hovering near one million each week, well above the 665,000 peak registered in the Great Recession (St. Louis Fed).

Meanwhile, the economy may need another shot of fiscal stimulus, but lawmakers are at an impasse.

A liquidity crisis was avoided when the Fed flooded the financial system with cash, but economic output remains subpar, and potential solvency issues among homeowners and businesses may create new hurdles down the road.

Final thoughts

We remain bullish on the long-term prospects for the U.S. economy, but we are monitoring short-term risks.

Outsized gains in a few technology shares leave the market vulnerable to a pullback. When we see stocks priced at lofty levels, any unexpected surprises can create volatility.

The path of the virus remains top of mind. The mid-summer spike in cases nationally has subsided (Johns Hopkins). Yet, could we see a second wave in the fall or winter?  Might we see a resurgence in the virus as some schools re-open? What if the massive effort to develop a vaccine gets delayed?

The election is barely two months away, which could create headline risk. Or, might tensions between the U.S. and China generate waves in the market?

While markets don’t always get it right, they attempt to price in the future. Markets are made up of millions of investors that have a financial stake in their decisions. Current price action suggests the economy will continue to improve, though the pace of improvement is uncertain.

As I said last month, the economy may not be the same when the pandemic is behind us, but we are a resilient people, we will persevere, and we will adapt.

The important takeaway here is that planning matters. These times continue to confirm what we know that goal-based planning is essential. When you can understand your time frame, your goals, and your risks you can build a plan that helps improve your confidence and ease during these highly volatile times.

If you have any thoughts, questions, or concerns, feel free to reach out. That’s what we’re here for.

All the best,

Bob Meath, Founder & Wealth Advisor

Kerry Meath-Sinkin, Partner & Wealth Advisor

This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Converting from a traditional IRA to a Roth IRA is a taxable event.

The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

 Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries..

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 26 Emerging Markets (EM) countries*. With 2,372 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.

The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.

Information is provided by Meath Wealth Advisors and written by Horsesmouth LLC, a non-affiliate of Cetera Advisor Networks LLC and CWM, LLC.