Investment Update: June 23, 2020

Ann Miller |

Good Day!  We trust that you are safe and well.

 

The markets had enjoyed a significant rebound until Thursday, June 11th when the Dow pulled back over 1,800 points.  As we have explained many times, the markets are often “two steps forward and one step back”.  It is normal for the market to retrace its gains or losses one-third or even one-half before resuming direction. 

 

We do see some potential weakness in one major technical indicator that we monitor, so a pullback of six to eight percent is possible.  The markets are particularly sensitive to headlines right now – good or bad. 

 

Our asset allocation has served our clients very well and are happy with this going forward as well. We average a minimum of 20% high grade corporate bonds and U.S. Treasuries along with 8% gold.  We exited the majority of our high yield bonds and international positions early in the downturn in favor of U.S. stocks, which has proven to be the proper move.

 

The markets are focused on three major themes:

 

The Rate of Covid-19 Case Growth

 

While COVID cases are increasing in some areas and declining in others, we may actually still be in the first wave of infection. Any resurgence would be impacted by our re-emerging economy. The markets have responded well as our economy attempts to climb the ladder of economic recovery and we hope to maintain the momentum, but this is truly an unknown at this point.

Many states and municipalities will limit how much of their economy will re-open utnil there is a vaccine and a vaccine with limited testing could be 6 to 12 months away. The pace of positive data will gradually slow and we will shift our focus from the direction of economic data to the level of the data. For example, the markets cheered a recent 17% month over month increase in retail sales, but we are still 8% behind January retail sales.

 

The Federal Reserve Legislative Economic Relief:

 

The Federal Reserve suggests that interest rates will remain at or near zero through 2021. Additionally, they are committed to purchase corporate bonds in the secondary market. Legislative action taking shape includes a one trillion-dollar infrastructure package, extended unemployment benefits and another round of stimulus checks.  A concern is the unintended consequences of massive long-term public debt or the impact of another negative economic event.  Are we leaving ourselves an empty toolbox?  The bond markets will provide guidance on this issue.

 

 

The Strength of Corporate Profit Growth Over the Next 18 Months:

 

While the markets approach a “seasonally weak” period for stocks, a critical eye is on a re-opening economy and trending economic data.  The months of August, September and October have been statistically weaker months for stocks in general and August has been weak for retail stocks in particular.  As of today, we do not foresee a re-test of the March lows however volatility will certainly remain.

 

As always, please feel free to call with any questions.