Happy Monday August 31 to everyone.
It’s Presidential Election season, and without trying to support one political party over another, or to say anything offensive, let me try and explain some of the rationale behind why the markets can be volatile during election time. Most print and TV news networks seem to be at bit more “liberal” leaning and will favor the Democrat ideology. Fox News seems to favor the Republicans whom favor a more conservative approach to things. With President Trump being a Republican, and the Democrats wanting to get Biden/Harris in, we will see news favoring numbers for the Democrats. We will also likely see “polls” showing Biden ahead. Regardless who is elected President, if Biden wins, that is a change. Good or bad, it is still a change and change brings uncertainty. Markets don’t like change, thus it creates volatility and the markets are likely to be going both up and down the closer we get to the election. Watch for the debates and commercials as they will tend to get nastier and more mean spirited as well.
Think of 4 years ago. The news was projecting Hillary Clinton to win, and win easily. Even on the election day, the media was showing the “polls” were ahead for Clinton. Clearly that didn’t end up being the case. In my opinion, of 24 years, I find the President is less important to some things, where Congress is more important. Having an all Democratic congress or an all Republican congress is better than a split/divided congress. The reason is, getting stuff agreed on and implemented. For example, President Trump has already announced the next round of stimulus as the Federal unemployment checks ran out at the end of July and our elected officials are having a very difficult time agreeing to anything. Most experts still fully expect it, and I believe the markets have already priced that in. Yet here we are, the last day of August and no stimulus yet. Congress simply cannot agree on the details.
As a reminder, we are still in a dividend paying bond portfolio looking for just the smallest of dips in the market, so we can buy into some stocks on a down turn. However, we all need to sleep at night, and if you are more comfortable getting back into the market now, even if we, at Affinity are not ready ourselves, please understand we are happy to honor your request. You just need to call us, tell us what your thinking so we can make it happen for you.
Next Monday is Labor Day, wishing everyone a fun, relaxing and safe weekend. THERE IS NO MONDAY EMAIL NEXT WEEK. We will skip this week completely and start back up on Monday September 14th
Performance DJIA:
Mon 8/17 +1.35%
Tues 8/18 -0.21%
Wed 8/19 +0.3%
Thurs 8/27 +0.57%
Fri 8/28 +0.57%
Last week +2.59%
Since 2/19 market high -2.37%
Bond model you are in:
Last week +0.02%
Comparison:
Bond model last 30 days +0.58%
Tid Bits:
Fox Business: What does Trump’s payroll tax deferral mean for you?
The IRS issued long-awaited guidance on President Trump’s payroll tax deferral last week, just four days before the executive measure is set to take effect, putting the onus of the financial break on employers.
Companies can stop withholding employees’ payroll taxes beginning Sept. 1, but workers are still on the hook to pay the taxes by the end of April 2021. It only applies to individuals earning less than $104,000 annually, or no more than $2,000 per week.
The rules came about three weeks after Trump signed an executive action on Aug. 8 giving workers temporary tax holiday — a move that he said would help households weather the coronavirus-induced economic recession.
Critics, including Democrats and some Republicans, have argued that temporarily pausing payroll taxes is an ineffective way to boost the nation’s beleaguered economy because it does nothing to aid the millions of out-of-work Americans who are currently not receiving a paycheck.
Currently, all employees and employers pay a 6.2% payroll tax on wages capped out at $137,700. That money goes toward Social Security. Right now, an employee earning $50,000 per year would pay $3,100 in payroll tax. Workers also pay a Medicare tax of 1.45%.
Deferring those payments for a four-month period will give Americans an average paycheck increase of about $1,200, according to White House economic adviser Larry Kudlow. The maximum boost that Americans could see is about $2,149.
https://www.foxbusiness.com/money/what-does-trumps-payroll-tax-deferral-mean-for-you
What’s Driving The Market’s All-Time Highs? AUGUST 26, 2020 • BRAD MCMILLAN Brad McMillan is the chief investment officer at Commonwealth Financial Network.
With investors getting excited, many expect the run-up to continue. Sentiment is increasingly positive, and the fear of missing out is becoming a powerful driver for nervous investors to get back in the market. But should they? The best way to figure that out is to look at the conditions that have caused the current records and try to determine whether they are likely to continue. Here, there are three factors that I think are most important.
Low Interest Rates
Even as the stock market is at all-time highs, interest rates are close to all-time lows. This scenario makes sense, as lower rates generally equate to more valuable stocks. As such, this is indeed a condition that has supported values. Looking forward, though, there simply is very little room for rates to keep dropping. More, with the Fed now looking to get inflation back to higher levels—and quite possibly on the verge of explicitly endorsing higher inflation for a time—the possibility of higher rates is real, although likely not immediate. Even in the best case, this is one tailwind that looks to be subsiding, which should limit any further appreciation even if it does not turn into a headwind.
Growth Stock Outperformance
The majority of the stock market’s records come from a handful of tech stocks. These companies have disproportionately benefited from the Covid shutdown, and they have been one of the few growth areas of the market. As the virus comes under control, that tailwind will fade. More, since these companies are such a disproportionate share of the stock market as a whole, slower growth there could bring the market down by much more than the actual slowdown in growth. Again, we have a situation where a tailwind is fading, which could bring markets down even if that tailwind never actually turns into a headwind.
Natural Limits?
It is not just stock prices that are at all-time highs; other valuation metrics are as well. While price-to-earnings multiples are very flexible, other ratios provide less room for adjustment, and they are very high. The ratio of the stock market to the national economy, known as the Buffet indicator since Warren Buffet highlighted it, is at all-time highs. Can the stock market keep growing as a percentage of the economy as a whole? The price-to-sales ratio is showing the same thing. No tree grows to the sky. Once you get above the highest levels of previous history—which in both cases are those of the dot-com boom—you have to ask how much higher you can get. Is it really different this time?
Not An Immediate Problem, But . . .
Markets are known to climb a wall of worry, and there are certainly many worries out there that are more immediate than the ones I have highlighted above. None of these issues is likely to be the one that knocks the market down. But taken together? They do create an environment that could make for a substantial downturn.
As regular readers know, I have been relatively positive about the Covid pandemic, recognizing that it could and, eventually, would be brought under control. Similarly, I have been relatively positive about the economic recovery. Despite some concerns, I still hold that position. We will discuss why in more detail later this week.
Risks Ahead?
For the market, however, all that positive sentiment (and then some) is now baked into prices. That doesn’t mean that a downturn is likely any time soon. It does mean that we should not get caught up in the excitement. All-time highs are great, and they often lead to further highs. But they can also signal increased risk. Let’s keep that in mind as we look at our portfolios.
Facts:
Coronavirus
Global 25,418,413 cases 851,134 deaths
US 6,175,600 cases 187,232 deaths (+3.66%, +6,618 increase from last week)
KS 41,993 cases 452 deaths
MO 84,924 cases 1627 deaths
Highlights from analysts and economics
From JP Morgan
Weekly Market Recap
After dropping -34% from peak to trough earlier this year, the S&P 500 has recovered and hit an all-time high. This advance has primarily been driven by a handful of growth stocks, leading many investors to wonder if value as an investment style has finally met its demise. First, we think it is important to differentiate between investing in value as a style and value investing. That said, many investors have been asking what type of environment would support the outperformance of value relative to growth. In general, our work suggests that value tends to outperform growth in environments where economic growth is accelerating or inflation expectations are rising. However, pandemic-induced shutdowns earlier this year led people to spend more time at home, accelerating trends related to technology and e-commerce, and resulting in the significant underperformance of key value sectors such as energy and financials. Looking ahead, however, this performance gap may begin to narrow; economic growth should accelerate once a vaccine is available and a willingness at the Fed to allow inflation to run hot would both be supportive of value. While there is a secular theme favoring growth and a cyclical theme potentially favoring value, the years of growth outperformance have left it looking more expensive than any time since the tech bubble. As a result, we believe that long-term investors should not underweight value, but take a relatively balanced approach to construct diversified equity portfolios.
Weekly Strategy Report
Risk sentiment improved in August amid hopes for a coronavirus vaccine, upside inflation surprises and solid global activity data; the explosive, post-lockdown growth recovery fueled by pent-up demand appears to be over but growth remains above trend.
Stocks rose along with bond yields and developed equity markets outperformed emerging markets. Tech stocks led the S&P 500 to record highs as the U.S. continued to outperform Europe, Japan and emerging equity markets.
Yield curves steepened, pricing in the prospect of modest inflation overshoots consistent with the Federal Reserve’s new monetary policy framework.
We retain a tilt toward risk assets, overweighting high yield credit and equities, expecting monetary policy to aid growth and markets for the foreseeable future. We favor certain emerging and European equity markets and anticipate a gradual, contained rise in real yields over the medium term.
Notes on the Week Ahead
Data due out (last) week should show a some further recovery from the coronavirus recession but still with very significant slack. In particular, continuing Unemployment Claims are likely to remain above 14 million, down from a peak of almost 25 million in early May but more than double the 6.6 million seen in the worst week following the Great Financial Crisis. In addition, Real Consumer Spending for July should see a year-over-year decline of roughly 4.5% year-over-year, as an almost 5% bounce in consumer spending on goods is swamped by a 10% decline in services. Inflation data should continue to reflect this slack with year-over-year Consumption Deflator inflation rising from 0.8% in June to 1.0% in July, still far short of the Fed’s current 2% target.
However, long-term investors should consider how the policy landscape will likely look after the election and the pandemic. Fiscal policy is likely to be very expansionary under either party, as there now appear to be no fiscal hawks among either the Democrats or the Republicans. Moreover, as the pandemic ends, pent-up demand for services should generate very strong economic growth, potentially absorbing economic slack much faster than in previous expansions. While this would be positive for the stock market it could also push inflation well above 2% in 2022.
While this would be in line with the Fed’s new average-inflation targeting plan, there is a risk that inflation could rise further, beyond a range that the Fed feels comfortable with. If, at that point, the Fed applies the brakes by refusing to further increase the size of its balance sheet or even tapering its holdings of Treasuries, long-term interest rates could rise fairly sharply. This would clearly be a negative for long-term bonds and possibly for growth stocks relative to value stocks.
While many may doubt the ability of the Fed to raise the inflation rate after so many years of falling short, investors need to recognize the change in the Washington environment. The disappearance of both monetary and fiscal hawks suggests that, in a best case scenario, average inflation targeting will succeed and that in a worse case outcome it will fail not by undershooting an average inflation target but by overshooting it. Either way, investors should prepare themselves not just for higher inflation but for higher interest rates in the years ahead.
From Northern Trust
The battle between public health officials and COVID-19 continues, and, as we had feared, cases in the United States increased significantly in recent months. However, global economic activity continues to rebound from its historic drop, new cases in the U.S. have started to decline and financial markets have remained buoyant. While the economic momentum is noteworthy, we still see risks on the horizon and believe some prudence is warranted.
The COVID-19 resurgence in the U.S. has led to reopening rollbacks, school closings and new travel restrictions. Even countries with relatively small case increases like Australia and New Zealand have implemented significant new restrictions. Fiscal policy has been a critical lifeline in recent months. Income support programs across Europe have systemic resiliency, while the supplemental unemployment insurance and stimulus payments in the U.S. are one-time affairs. The U.S. presidential election is less than three months away, and may be complicating negotiations on a fourth fiscal package. It is critical that further support be given to those whose incomes have been devastated by the economic downturn, including consumers and state and local governments.
Economic growth in recent months has been better than we expected, although the U.S. has lagged its major peers as shown below. The composite U.S. Purchasing Managers’ Index nudged just above 50 this month, while both China and Europe are nearing the 55 level. The pace and level of growth from here is still clouded by the health outlook, however. While U.S. cases have declined in recent weeks, we may face a flu season without a widely distributed vaccine. The corporate earnings outlook improved somewhat after June quarter earnings, leading to a bump of 2.5% to our 2021 U.S. forecast. Earnings expectations were little changed outside the U.S., however.
There are significant uncertainties through 2021, including the path of COVID-19 and its impact on growth, the U.S. election and U.S.-China relations. We have moved the tactical asset allocation recommendations in our global policy model “closer to home”. This included reducing our recommended overweight to high-yield bonds after their recent strong performance, and reducing our recommended underweight to emerging market equities as their relative return potential has improved. While markets have staged an impressive rebound, investor surveys indicate that few expect a “V” shaped economic recovery to continue. That cautious sentiment could provide some cushion should disappointing economic reports appear in months to come.
From Blackrock
A prolonged period of U.S. dollar gains has reversed abruptly. The policy revolution to cushion the pandemic’s blow is a key driver, as it has eroded the dollar’s interest rate advantage and helped lift risk appetite off its March trough, in our view. The different restart dynamics in the U.S. and Europe have also pressured the dollar, underscoring our preference for European equities and caution on U.S. stocks.
The bottom line: The shifting pandemic and restart dynamics in the U.S. and Europe have helped weaken the dollar and strengthen the euro, underpinning our overweight on European stocks and caution on their U.S. peers. A weaker dollar generally is positive for EM assets, yet we see the relatively weak public health infrastructure and limited policy space more than offsetting such benefit across much of the EM complex. We are underweight EM equities overall and EM dollar debt, as many of developing countries have limited capacity to control the virus spread and cushion the blow to the economy. We are neutral and more constructive on EM Asia equities and local-currency EM debt.
Opportunities:
Community Café is Wednesday, September 9nd at 8:00am for 30 minutes. Topic will be on: “Banking Through Uncertainty during COVID-19”
- Will live stream on Facebook Live anyone who is friends with me on Facebook or Click Here to Follow The Community Café Facebook Page
- Invitations will go out via email with a link to join on zoom.us, plus those who are friends with me on Facebook
- Speaker this week, Mark Roberts
- Invitations will go out via email with a link to join on zoom.com, plus those who are friends with me on Facebook
Estate Planning Webinar Tuesday September 8th at 6:00pm or September 9th at 12:00pm
Click Here to Register for September 8th or September 9th Or email Stacy at [email protected]
- Pros and cons of a Will based estate plan
- Pros and cons of a Trust based estate plan
- Co-hosted by Glenn Stockton with Stockton & Stern Law firm
If you would like a copy of my 30 minute recording of Community Café on the topic of “Tax saving Strategies”, please contact Stacy and we can email it to you.
Referral rewards program:
Reminders:
Don’t forget that the news creates drama. The stock market moves for 2 reasons which are greed and fear.
Any service work you would like us to do for you, please email your request to us.
Please feel free to share this email with anyone you know, as the best way to battle stock market anxiety is education.
Thank you for your time in reading these updates.
Stay safe and stay healthy,
Mark Roberts
