June 2020
Market Update

“The Economy is not the Market.”  

In May, states across the country began the painstakingly slow and delicate process of getting people back to work, as businesses began to re-open with new guidelines in place. The anticipation of a return to “normal” has buoyed optimism in the stock market with all major indices recording gains for the month. Technology continues to lead the way, but it was also nice to see small and mid-size company stocks join the rally. Continuing declines in the number of positive cases of the virus in Europe and Asia also helped drive positive markets overseas. By month-end, the S&P was officially out of “correction” territory and within 10% of its all-time high. 

A look behind us at the past three months would make most anyone wonder how we managed to be where we are in the stock market today. There have been 40 million people file claims for unemployment through last week. Just a point of comparison – in the Great Recession of 2008-2009, the largest single week of unemployment claims was 600,000 vs. 6 million during this crisis. The unemployment rate, due out the end of this week, is expected to show an unemployment percentage of 19%. In 2009, the unemployment rate peaked at 10.6%. We do not believe we will recover all of the jobs lost during this crisis any time soon, but the number we are watching most closely is the Continuing Claims for Unemployment. This is the total number of people who filed for unemployment and have continued to file every week. That number has finally begun to decline with the last week’s reading, dropping a substantial 3.8 million claims from the prior week. It is this trend that has given markets some hope. 

In terms of growth of sales in manufacturing and services, we have seen similar devastation to demand, with statistics rivalling the 2008-2009 correction. The latest estimates from Goldman Sachs would have GDP dropping 36% for the second quarter, and that is an improvement from prior estimates. Again, as bad as that sounds, they are seeing signs of recovery with the re-opening of the economy. 

Real estate will lag the other economic factors as this market has been put in a state of suspended animation with restrictions on evictions for both residential and commercial rentals, and a myriad of complicated laws at both the federal and state levels with respect to whom this affects. We have seen, not surprisingly, sales of new and used homes fall dramatically, yet prices and rents have been stable to higher across the country.  

We expect this to change as the evictions and loan forbearance rules are lifted toward the end of the summer and we begin to understand how many will be unable to truly pay their rents and mortgages. 

With all of this as a backdrop, how did the market recover from the correction so quickly? Hope, in the form of states re-opening, and Help in the form of record amounts of stimulus from both the Federal Reserve and the Federal Government. During the Great Recession, the Federal Reserve stepped in numerous times – you may recall the many references to Quantitative Easing, or QE 1, 2, 3 - to help prop up the economy to allow for a recovery. They did this through numerous financial tools, but the effect was to increase the size of their balance sheet. The result was a bull market as those dollars found their way into the stock market. Where is the Federal Reserve balance sheet now? 

It took almost five years during the 2008 recession for the Federal Reserve to add the same amount to their balance sheet that they just added in less than three months. That liquidity, that $3.8 trillion increase in their balance sheet, has pushed into the stock markets. Even though the markets should reflect the health of the country, it is true more than ever now: the stock market is not the economy. 

Make no mistake, we do not feel it is clear sailing moving forward. There are plenty of challenges ahead to our economy and our nation and there will be a new “normal” as we work through these issues. Growing tensions with China, civil unrest, the threat of new outbreaks, all have the potential to create volatile days once again, so we remain watchful.

In your portfolios here we have been fully invested on the bond side – with very nice results – for over a month now. In the stock portfolios, most are fully invested and picking up the gains from this tailwind. Over the coming months we will be launching a variety of Dave Talks to talk about how various portfolios work, so watch here for coming links.

And finally, we would be remiss if we did not acknowledge the events occurring recently around our country. Like most of you, we have watched with horror, sadness, and disbelief as events in Minneapolis have launched a series of reactions around our country. We have come together as a firm for our response here: (See Notable and Quotable)

Stay safe. 

If you have questions, please contact us.

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