Recent Market & Economic Updates
For stock markets this week, it was positive to see 3 days of strong positive returns strung together, but ontinue to anticipate volatility both ways as markets are still very much on edge. I have been receiving inquiries of people who have money that they would like to put to work and see this as a long-term buying opportunity. Again, regarding the timing of that it’s still difficult to say if we have come off the bottom to stay or if we have further fear to go for the markets over the days and weeks ahead. Regardless of what happens over the next few months, it seems likely that money you are able to add should look like a solid investment several years down the road with the declines that we have experienced.
Miscellaneous thoughts collected from conference calls & readings:
Active fund managers, like those from American Funds (one of the calls I listened to) & others, have been very active behind the scenes in looking at the opportunities to adjust their portfolios. They have also had a lot of opportunity to talk directly with CEO’s and leaders of the different companies they are invested in. Remember that for any portions of your portfolio that are allocated to active funds, that even if we aren’t changing the allocation, there is plenty going on behind the scenes to try to position the portfolios well.
We will likely experience an industrial renaissance in the US coming out of this, especially focused on less reliance on China. Every company has had to take a close look at their supply chains to see where disruptions have occurred. This was already happening to a degree with the “trade war” with China, but this has exposed some companies and industries (e.g. the production of certain prescription drugs in China) to their vulnerabilities. A great point was brought up about the difference between “efficiency” and “resilience”. Some companies have been so focused on efficiency in relying on other companies and countries for parts of their process that they will have more difficulty being resilient through this time. Expect many companies to look at that closer coming out of this.
Speaking of resilience, a focus on debt levels of companies has been very important in assessing the companies they currently own as well as ones to buy. It’s no small surprise that companies with lower debt exposure are in the best position to navigate this crisis and come out faster and are more likely to be able to maintain dividend payouts, while other higher leveraged companies may need to scale dividends back. This is certainly something that I am seeing play out with clients as well. As a Dave Ramsey local provider here in San Diego since 2004, many of my clients have come to me on that solid financial footing related to debt and the lack of panic of going through this time has been very different than the responses I hear about with other advisors. I’m grateful for that.
“Don’t give up on ingenuity”. That was a great line referring to both the expectations for health and tech related breakthroughs related to this illness, but also for the ideas of investing as we go forward.
Also, recognize when the negativity is too intense and leave the possibility open for surprise positivity. Remember that the markets are forward looking and much of the data that we will be hearing (unemployment claims, low earnings, etc.) have been priced in very quickly with these sudden drops. We know that there are going to be bleak economic numbers coming out in the weeks and months ahead. Recession (as technically defined by 2 consecutive quarters of negative GDP growth) is almost a certainty. Going forward though, it will be more about are things relatively worse or better than expected. The markets always tend to swing too low or too high in volatile times.
Per David Kelly with JP Morgan, the biggest impact financially so far has been on employment, with many of the jobs lost to this point on the lower end of the wage scale in the entertainment, travel, and hospitality industries. While corporate earnings will clearly be impacted, a small saving grace is that those most hard-hit industries, while having grown in importance, are still a smaller component of the investment universe compared to the impact on financial companies and homebuilders etc. in the 2008 crisis.
Jerome Powell and the Fed have been very clear through this that they will be active in doing what it takes to provide liquidity to all areas of the market that may need it through this challenging time. Another hopeful benefit of the last financial crisis is that the Fed has more experience in what tools they can use to maintain access to capital for the markets to function with fewer shocks related to liquidity. One concern of that would be an overconfidence that they think they can solve any issue and that traders and investors don’t act prudently by always expecting the Fed to “fix” things.
Along those lines, another positive for this market situation compared to 2008 is that our banking system is significantly healthier than it was during that previous crisis. All of the testing and requirements that came out of that have given us a much more robust and prepared banking system.
*This material is for general information only and are not intended to provide specific advice or recommendations for any individual. 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.