John Iammarino gives his insights into the May 2020 markets.
May Market Watch Video
So March was an absolutely brutal month for the markets, but April showed a strong recovery. So what does the future have in store for this coronavirus market? Hi I'm John Iammarino your Premier holistic retirement planner and we're going to discuss this on the May 2020 market update
Before the Coronavirus, the US economy was cruising for what looked like 3% annualized growth in real GDP in the first quarter. But the effects of both natural social distancing and government-mandated lockdowns crushed economic growth in March.
As we have discussed, the second quarter, which we're already in, is going to be worse. How much worse? Put it this way: Since 1947, the worst quarter in our history was a 10% annualized drop in the first quarter of 1958, on the heels of the Asian Flu.
2nd quarter real GDP is likely to drop at about a 30% annual rate, rivaling declines last seen during the late-1945 wind-down from World War II as well as the Great Depression.
We also expect an unemployment rate that flirts with 20%, compared to highs of 10.0% in the aftermath of the Great Recession in 2009 and 10.8% at the end of the brutal 1981-82 recession.
To put in plain terms are once strong economy is in a free-fall. A health crisis has morphed into an economic crisis, with the economy contracting at lightning fast speed.
APRIL - Best monthly gains since 1987
But despite all this, April was a great month for the markets??? Yes! April saw the best monthly market gains since 1987! Dow was up 11% while the SP 500 was up 12.7%. How is this? Well to put it mildly, It’s an incredible disconnect between the financial economy and the real economy.
One of the recurrent themes too emphasize is that bull markets occur during economic expansions and bear markets coincide with recessions. Expansions outlast recessions, and expansions drive the economy to higher levels. And stocks follow, albeit unevenly.
The four-week 34% decline in the S&P 500 qualifies as a bear market. Stocks imploded at a stunning pace as investors sensed the economy was running into COVID-19 pandemonium (or I like as I like to call it March Madness)
But the rally over the last month has been nothing short of astonishing given today’s dire economic environment.
How might we explain the disconnect?
There are a couple of explanations for this:
The First reason is that investors don't buy shares of GDP, they buy ownership stakes in a distinct set of companies, many of which are doing quite well despite the general economic carnage.
Imagine a company that has a major competitor nearby. One day, completely out of the blue, the competitor's facilities are all destroyed by a meteor. Obviously, no one would celebrate this catastrophe. However, when competitors go away the enterprise value of the surviving company rises, and you don't have to be an astrophysicist to figure that out. This is a reason why dividend paying stocks do well in recoveries, they take over the smaller market share that have gone away.
Second, the Fed’s unlimited firepower has not been enough to prevent a debilitating economic decline, but its unprecedented steps have kept an economic crisis from morphing into another financial crisis, with a massive amount of liquidity and a promise of more support aiding stocks.
Furthermore, government stimulus of over $2.5 trillion is helping sentiment. Talk of a vaccine or treatment that would end the pandemic has been a factor. And, some analysts believe, investors are looking to 2021, when there is the anticipation that corporate profits will turnaround.
So is the bottom in sight?
No one has a crystal ball. And Of course, the outlook is very uncertain. Look how things have changed over the course of 2 months. To further add to the frustration is the continuous conflicting information we are inundated with everyday.
Now, In a recent press conference, Fed Chair Jerome Powell, alluded that additional government spending and support may be needed to jumpstart economic activity. Deficit hawks may cringe at talk of new spending and new programs haven’t been problem-free. But so far, fiscal stimulus has received strong bipartisan support. However, as with past spending
Meanwhile, the reopening of large swaths of the economy may or may not go as planned. Each state has their own plans and their reasons…
Another wildcard will be consumer behavior. Prior patterns are unlikely to return to pre-crisis behavior, at least right away, and social distancing at restaurants, airlines, and industries that require person-to-person interactions could limit activity and sales.
Some recent analysis shows the near-term impact on growth to be far greater than that of the 2008 Global Financial Crisis – and is the largest contraction since the Great Depression. But the cumulative impact over time may only be a fraction of the 2008 crisis, provided policy makers are successful in preventing the shock from morphing into more systemic financial pressures. Overall, the financial system is in much better shape than in 2007.
BUT The more prolonged the shutdown – the greater the likelihood that cracks appear, exposing hidden financial vulnerabilities that could lead to more permanent damage.
WHAT TO LOOK FOR?
In the months ahead, investors should focus on two key pieces of macro-data. First unemployment claims. It looks like initial claims peaked at 6.9 million the week ending March 28 and have since declined three weeks in a row, to a still humongous 4.4 million the week ending April 18. However, continuing unemployment claims are still rising every week and will likely keep doing so for at least another month.
Watch continuing claims carefully: analysts expect a peak in continuing claims, and when it happens, that may signal the bottom for the recession.
Second, we're following the federal government's receipts for withheld income and payroll taxes, which are reported daily. Those are down around 10% from a year ago, but are very volatile from day to day. We're waiting for that year-ago comparison to hit bottom and then start getting less bad, which would suggest an economic bottom, as well.
We will continue to see market volatility in the foreseeable future,
No one has a crystal ball. No one can tell you where stocks might be at the end of the year. There are too many unknown variables. Those who make forecasts are simply offering opinions.
I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced.
We will continue to see market volatility in the foreseeable future. One piece of advice, don’t try to outsmart the market recovery. It will take time and markets are likely to twist and turn in the battle between economic damage and stimulus efforts. Instead, be focused on the weathering the crisis and maintaining a disciplined, risk appropriate, diversified portfolio. Stay your course, retirement is a long-term strategy.
And Please recognize that you are not in this alone. We are here to assist you with reviewing or helping you design a fundamentally sound retirement plan.
Putting a plan together is critical. It’s half the battle. This crisis may have taught you that you can’t wing this, especially if your livelihood in retirement depends on your investments. Plus, You may find you are in a much better position than you realized, which will relieve an enormous amount of stress. You may find the plan is ultimately more important than your investments.
Either way be proactive, not reactive.
This was the Market watch for May 2020.
I hope you’ve found this to be helpful and educational.
Let me emphasize again that it is my job to assist you. If you have any questions or would like to schedule an appointment, please feel free to give me a call or click on the link in the email.
Stay healthy and god bless.
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