June 27, 2020 Weekly Market Update. Led by big banks, the markets sold off Friday after the Federal Reserve said in its stress test results that it would restrict dividends and share buybacks on financial companies for the third quarter. The Fed stated the action was to “ensure large banks remain resilient despite the economic uncertainty from the coronavirus event.” Hence, all U.S. major equity indices gave back several weeks of gains as the Dow Jones Industrial Average lost -3.31% followed by the S&P 500 Index declining -2.86%. On the technology front, social media stocks including Facebook, Instagram and Twitter also came under pressure due to their policies on censorship. Other market jitters related to Thursday’s new case tally surpassed 40,000 for the first time. States reporting record new cases include Florida, California, Arizona and Texas. Nearly 1.5 million workers filed new state claims of unemployment last week which was higher the expectations. Given the disconcerting news there should have been no surprise when consumer sentiment slipped to 78.1 in the final June reading, down from the 78.9 reported earlier in the month. Consensus economists expected a reading of 79.2; the index of consumer sentiment reached a high of 99.3 back at year-end 2019. 

June 20, 2020 Weekly Market Update. The market edged upward after last week’s sizable losses - S&P 500 Index +1.86% & Dow Jones Industrial Average +1.04% - on news that retail sales is showing some new life with recently released double digit recovery figures (but retail still down -8% since February). In the 1st half of the week the market rallied on retail sales, yet gave back about one-half those gains in the 2nd half on concerns about spiking COVID-19 infections in many states including Texas, Arizona, California, Utah, Florida, Oklahoma and several southern states. The U.S. government also discussed a potential new infrastructure bill and future stimulus, but nothing is imminent. Of interest, a June 2020 WSJ article highlighted the following: “Grappling with the most economic uncertainty in decades and a head-spinning stretch of volatility in the U.S. stock market, many investors have rushed into money-market funds. Assets in the funds recently swelled to about $4.6 trillion, the highest level on record, according to data from Refinitiv Lipper going back to 1992.”  A recent Bloomberg article offers insight on what might be a good part of this unusual market recovery “The role of retail investors in 45% rebound since late March has been intensely analyzed, as a swarm of tiny buyers chased after recovery plays and insolvency stocks. A record number opened new trading accounts in the first quarter.”  Hence, there is market concern of a growing cadre of smaller investors  becoming day-traders and taking outsize speculative market bets (perhaps like the tech bubble of 2000).
 
June 13, 2020 Weekly Market Update. For the week, the Dow Jones Industrial Average fell -5.55%, S&P 500 Index dropped -4.78% and the Nasdaq finished down -2.30%. The focus of the equity price contraction across the board were concerns over COVID-19 spikes related to the economic reopening, along with comments by Fed Chair, Powell. The Federal Open Market Committee’s (FOMC) Summary of Economic Projections indicated the Fed expects a steep 6.5% contraction in real GDP in 2020, with an unemployment rate at 9.3%. Also, weekly initial unemployment claims totaled 1.542 million for the week ended June 6, the Labor Department said in its weekly report.  We sent the following email to clients back on June 8th: “Equity markets have rallied on continued news of business reopening and potential COVID-19 vaccine by late September and insofar as we believe these are justifiable positive catalysts for market gains, we believe market valuations are overextended.  U.S. equity markets are priced similar to where we were at the end of 2019 with the economy running without any foreseeable obstacles and with earnings growth slated for +9%, yet the current economic makeup is nowhere near the robust levels of last year. We therefore are looking for the normal periodical market correction to place additional risk back into portfolios. As Warren Buffett once remarked “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard” and as such, in the short run the stock market acts like a “voting machine” (reflecting all kinds of irrational attitudes and expectations), while functioning in the long run more like a “weighing machine.” It is also notable that this "world’s best investor" is sitting on a record level of cash totally $139 billion and recently sold Goldman Sachs, Airlines, Energy stocks and Travelers. In closing, as stewards of capital for long-term goals we must weigh the risk-return trade-offs and it is our view that the current market valuations have disconnected with earnings and economic growth, particularly given the consumer (70% GDP) has yet to show a sign of spending at 2019 levels. Hence, we will look for redeploying additional equity risk when valuations have aligned with fundamental earnings measures, or in the event Congress moves to initiate “monthly” stimulus checks (which would certainly reengage the consumer).”


June 6, 2020 Weekly Market Update. The month of May’s employment number was a big surprise for Wall Street, showing a gain of 2.5 million jobs versus an expected 7 million loss.  The markets rightful celebrated and finished the week with the following gains: S&P 500 +4.91%, Dow Jones +6.81% and Nasdaq +3.42%. This positive economic indicator was justifiably supportive of the capital markets upswing. Further, with a potential COVID-19 vaccine slated for potential availability by late September, there remains a number of fundamentally positive aspects to having the economy move into high gear. Our equity outlook issue is now more about equity valuations.  Should the stock market be priced back to where we had a very robust economy at the end of 2019 where we were moving into 2020 with another +9% growth in earnings? To be clear, we are not bearish and hold no shorts or inverse ETFs - rather we believe portfolios should have sufficient cash to offset the risks of lofty equity valuations. For instance on the jobs front, there were a large percentage of simply temporary “furloughed” workers that were easily brought back online and we think the May job report reflected that shift. Keep in mind that employment is still 13% (absolute number) below February figures and, ultimately, consumer spending will dictate the economic recovery path – you can reopen businesses and rehire, but you need the same active consumer mindset (& wallet size) as 2019.  Yes, we are going to see “sequential” increases in weekly and monthly sales across the board since the economy was essentially paused for months – however, all this “recovery” trend will be far below last year’s figures, yet equity valuations will be the same (or higher)?  Investors should have equity exposure to benefit from the recovery, but also keep sufficient cash to offset valuations being over-stretched. Final thought, China trade tensions are escalating.