Hello again,
Today, this email is about “Uncertainty”. We have a few really good articles and numbers below. As your professional money managers, we are assuming some of you (not all of you) are wondering what is going on and why hasn’t my money been bought back into the market yet?
Having said this, I want to be very clear on this next point, and do not wish it to sound rude. I realize an email does not have the same nuance as speaking with someone and hearing a voice, and I want the following statement to be taken in the manner it is intended – with respect. If you want to get back in the market and get back into your model, you just need to call us please. We very much appreciate you listening to us and the trust you place in us is tremendous. A pandemic virus is unusual. The US government telling people to not go to work or go anywhere is also unusual. We are simply in uncharted times. We understand it is only so long until that itch you are feeling needs to be scratched by getting back in the market. Affinity’s perspectives on things come from the constant gathering of information daily from analysts and economists. We simply have access to so much more data and research than our investor’s do (that’s not the news on TV or the internet creating drama).
We have seen lots of graphs and charts of how the stock market reacts during a recession and after the government gives us a large stimulus package. So we can base some knowledge on past experiences. However, some of what we are going thru is very much unchartered waters. Trust me when I say we want all our monies to be invested, capturing these gains, and we all make money. Though in times of large uncertainty, protection is first and growth is second. We have yet to have a single dip in the market since the first drop of 35% (a dip worth buying at). Most of you moved your money to us from other accounts or other financial advisors because they were not “managing”. They just sold you some investments and left it alone and even in good times, the risk was too high and the returns you were getting were too low. Plus those advisors were not advising on social security strategies, tax savings strategies, and retirement planning, and creating income strategies.
The psychology of this…if you stay in bonds what are the pros/cons? Pro, if the market was to drop, then you don’t lose a lot of money quickly and you have money in bonds that can be used then, to buy into the stocks for that next growth run. Con, if the market continues to go up, then you miss out on growth right now, and the feeling of FOMO (fear of missing out). If you go into stocks now, what are the pros/cons? Pros are if the market continues to go up, then you capture those gains and make money. Cons are if the market drops and we finally get that 4th data point, then you lose a lot of money quickly.
As you will see below, the market dropped 35% (block 1 of time), went back up (block 2 of time), was flat (block 3 of time), then up some more (current block 4 of time). We have not had a drop or any sort of dip to buy in yet. At this point, the market has recovered all but 7.62% of its losses. Think of it this way, February 19th, 2020 was the all time high for the stock market. According to analysts and economists and the views of Affinity’s investment committee, there is a larger risk of the market to drop than there is for it to continue to go up from here. Then, adding on the economic issues that haven’t shown up yet (because we are still dependent on the stimulus package) including the official announcement that at we are in Recession (which wont come until July), we have a lot of lingering issues out there that will take the US economy plenty of time to heal from.
Conclusion, we want to be there for you no matter what. Yes, we receive endless amounts of data from analysist and economists and have a plan in place but at the end of the day, we want to honor and respect your wishes. We have not had a single client tell us they would like to be bought back into the market, but we know it is simply logical to assume that there are those out there thinking this…
Teleconference back on this week, Wednesday June 10th 2:00pm CST.
Phone number: 800-747-5150
Passcode : 3814800# (must hit the # at the end)
2:00pm CST
Please check your junk/spam folder for any emails from [email protected] please. Kellie is Affinity’s Vice President. We are being told by some that they are not receiving emails when we have verified those emails are being sent to correct email addresses. We want to make sure you are seeing any invitation to the webinars, Community Café, and other Affinity communication.
Performance DJIA:
Mon 6/1 +0.36%
Tues 6/2 +1.05%
Wed 6/3 +2.05%
Thurs 6/4 +0.05%
Fri 6/5 +3.15%
Last week +6.81%
Since 2/19 market high -7.62%
Bond model you are in:
Last week +0.43%
Comparison:
Bond model last 30 days +2.11%
Tid Bits:
1. Theme this week: for this email and the Wednesday Teleconference (UNCERTAINITY)
2. DJIA
2/19/20 – 3/23/20 -36.65% 23 business days (Block 1) (data point #1 #2)
3/23/20 – 4/17/20 +30.39% 19 business days (Block 2) (Data point #2 to start)
4/17/20 – 5/22/20 +0.92% 25 business days (Block 3)
5/22/20 – 6/5/20 +10.81% 9 business days (Block 4) (Data point #3-and still a moving data point)
3. The market is still -7.62% since the market high on Feb 19th. These 4 blocks of time, are telling a story but honestly not a story that is sustainable. Look at Tid Bit #1 and see the number of stock market days related to how much the market moved during that time. Since February 9th, the market dropped 36% in 23 business days, followed by a quick 30% increase in 19 days, followed by a flat period of 5 weeks or 25 business days. Now over the past 2 weeks with the stay at home order lifting, people getting back out, and jobs number for May are better than expected there is enthusiasm.
4. PE Ratios 6/5/20 1 year ago
a. DJIA 22.90 17.84
b. Russell2000 54.63 35.63
c. NASDAQ100 29.10 22.83
d. The 25 year average of the S&P500 PE ratio is 16.35. Today, the PE ratio of the S&P500 is 20.85
5. What are these PE ratios telling us? Market is over priced. Stock prices are too high. PE ratios are at levels we had just before the 2000 Dot.com bubble pop. This is way above a 25 year average of PE ratios.
6. Seeing graphs of PE ratios dropping so low at the beginning of the Coronavirus, then swing too far back to now being so high, it’s like the market is potentially overshooting. Drastic decrease and then drastic increase of PE ratios is unhealthy for the market.
Facts:
1) Coronavirus
a) Global 7,119,232cases 406,655deaths
b) US 2,007,696cases 112,473deaths (5.9%, 6,265 increase from last week)
c) KS 10,476cases 235deaths
d) MO 15,065cases 826deaths
Highlights from analysts and economists
1) JP Morgan
a) The May jobs report showed a surprise 2.5 million rise in nonfarm payrolls, as the unemployment rate declined to 13.3% from 14.7% in April, defying expectations of 19%. Half the rise in payrolls occurred in food services and drinking places, with solid gains in retail, construction, manufacturing and health care. Gains may be stickier in construction and manufacturing, while gains in restaurants and retail may have been supported by PPP loans requiring employers to maintain payrolls. It should be noted that without reporting misclassifications, temporary layoffs would have been higher, boosting the unemployment rate by 3 percentage points. Still, this report reflects the gradual reopening of the economy. It also sheds light on various measures of unemployment. Many have focused on the over 42 million cumulative initial jobless claims filed since mid-March. However, that likely reflects people having to reapply after applying to the wrong program or encountering technological issues, or workers who were rehired or found new jobs. Adjusted for timing issues, the true number is probably closer to 20 million, reflecting the change since March in continued jobless claims, payrolls and employment as measured by the Household Survey. Although the jobs report was better than expected, unemployment is still extremely high, labor market recovery will likely be slow and not linear and the unemployment rate could remain in double digits at the end of 2020, challenging the exuberance of the equity market.
b) Market Update call with Jack Manley, Global Market Strategist (6/5/2020)
i) Stocks are expensive – may result in a drop. Wariness to the market should be welcome.
ii) US/China tensions remain elevated.
iii) Economic data is improving. The worst may be behind us. Economy is still contracting, but it is better than last month.
iv) Jobless data is better, but still not good.
v) Double digit unemployment is expected through 2020.
vi) There is still risk of a market downturn. Potential negative surprises outweigh potential positive surprises.
vii) There is the probability of a hangover effect in some industries, such as airlines and hotels.
c) Conference call with Gabriela Santos
i) Stock/bond diversification is working again.
ii) Activity is returning back to normal in countries like S Korea, Taiwan, and China. But their markets are still catching up.
iii) Europe has recovered only 56% of their market loss.
iv) The US has recovered around 75% of market loss.
v) She is optimistic, but cautious – more optimistic than in March.
vi) The next 6 months in the market will not be easy.
vii) The market is vulnerable to a 10-15% drop.
2) From AP News
a) Even as the U.S. economy begins to flicker back to life, even as job cuts slow and some laid-off people are called back to work, the scope of the devastation left by the viral pandemic has grown distressingly clear to millions who’d hoped for a quick return to their jobs: They may not be going back anytime soon. The harsh reality is that last month’s re-hirings aren’t expected to continue at the same pace. Forty-two percent of the layoffs caused by the pandemic could become permanent job losses, according to a study by the University of Chicago’s Becker Friedman Institute for Economics. Many businesses, from tech start-ups to small shops and big retailers, may not survive the loss of revenue despite federal rescue aid.
3) From Bloomberg
a) If you were to look only at the stock market and nothing else, you’d probably have no clue that 21 million Americans are still out of work. You’d probably think everything in the world is fine. Great, even.
After all, the S&P 500 just posted its fastest 50-day advance in nine decades, and the Nasdaq 100 hit a record high, putting the entire blow from the pandemic behind it. Maybe it’s all justified, and the markets have been right all along. But skepticism still exists, particularly among people who say the equity advance could lull the ruling class to sleep. The argument is that market buoyancy such as that on June 5—when a climb of 2.5 million jobs in payrolls sent the S&P 500 up 2.6%—will undo the urgency for more economic stimulus at a time when unemployment still sits above 13%. And while you always find bears that see the downside of everything, including a recovering economy, anything that weakens the flow of stimulus is of concern to investors in a rally as forceful as this one. “The market has been relying on another stimulus package coming,” says Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. If the markets do well and continue to improve, the risk is that Congress may decide not to do more—or at least not to do as much as investors have been counting on.
4) From Financial Advisor
a) In late March, GMO founder Jeremy Grantham and his asset allocation team found “most risk assets” to be bouncing around fair value or even at cheap levels. At the time, the team was factoring a hit to fair value into its calculations that would account for “a severe recession.” But after seeing equities provide four to six years of normal returns compressed into a mere two months, GMO has reduced the net equity exposure in its benchmark-free asset allocation strategy from 55% to 25%. Furthermore, it is exploring long-short trades. The gap between stock market expectations and economic reality may never have been wider. Grantham notes that equity valuations stand in the top 10% of historical highs, while the U.S. economy is in the bottom 10%, or “perhaps even the worst 1%.” Markets would appear to be pricing in “a widely available” vaccine for Covid-19 or a “strikingly effective treatment.” That scenario is “certainly possible,” but if it fails to materialize, investors could suffer “substantial losses,” in Grantham’s view. As his colleague Ben Inker writes, uncertainty has never been higher—nor has the stock market, except perhaps in 1999 or 1929. In Inker’s opinion, anything is possible, ranging from a V-shaped recovery to an extended global depression. The speed with which employment and industrial production have fallen has no historical parallels. “Covid-19, unfortunately, is a true global menace,” Inker writes. When the scope of economic contraction became “clear to investors,” global stocks fell 33% in just over four weeks. Junk bonds tumbled 33% and REITs declined 44%. Since March 24, the rebound in U.S. equities has been striking, prompting many respected investors like Stanley Druckenmiller and David Tepper to argue the risks now severely outweigh the rewards. Many believe that gain of more than 30% is driven largely by liquidity provided by the Federal Reserve.
5) From CNN Business
a) *The stock market is not the economy. But rarely has the gap between Wall Street and Main Street felt so wide. *Joe Brusuelas, chief economist at RSM International, said he can’t recall a time when the disconnect between Wall Street and the real economy was this great. He blamed in part the sharp decline in the number of public companies in the United States. *”The market is broken. It no longer reflects a forward outlook that is truly aligned in the real economy,” he said. “That’s a problem because at some point, the public will say these markets are rigged. *Robert Shiller, the Nobel Prize-winning economist, told CNN Business that this backdrop of rising risks and surging stock prices leaves the equity market “vulnerable” to a setback. *Shiller, the author of “Irrational Exuberance,” said many investors have FOMO, or fear of missing out, because they didn’t participate in the last bull market: “They remember not catching it last time.” *And then there’s the impact of Trump’s public confidence in the economy’s ability to rebound rapidly. “Donald Trump encourages a sort of self-confidence. You don’t have to believe Trump — you only have to believe that other people believe Trump,” said Shiller.
Opportunities:
1. Community Café is Wednesday, June 10th at 8:00am for 30 minutes. Topic will be: Why Can Income Taxes Go Up When I Retire? Part2 (capital gains vs dividends and taxable vs tax deferred)
Will live stream on Facebook Live anyone who is friends with me on Facebook.
a) Email invitations were sent to join on the Zoom.com platform
b) Co-Hosted by Chris Toman and First Option Bank
c) Invitations will go out via email with a link to join, plus those who are friends with me on Facebook
2. Estate Planning webinar on Tuesday, June 9th at 12:00 noon for 1 hour.
a) Pros and cons of a Will based estate plan
b) Pros and cons of a Trust based estate plan
c) Co-hosted by Glenn Stockton with Stockton & Stern Law firm
d) Interested in attending? Please email Stacy at [email protected]
3. If you are still working, call your 401K company, (not your HR department of your employer) and ask if you have access to an “in-service rollover”. And if you do, let us know ASAP as there are potential large benefits that you don’t have at work in that 401K.
Reminders:
1. Don’t forget that the news creates drama. The stock market moves for 2 reasons which are greed and fear.
2. Any service work you would like us to do for you, please email your request to us.
Please feel free to share this email and/or the teleconference information with anyone you know as the best way to battle stock market anxiety is education.
Teleconference this week, Wednesday June 10th 2:00pm CST.
Phone number: 800-747-5150
Passcode : 3814800# (must hit the # at the end)
2:00pm CST
Thank you for your time in reading these updates.
Please share them with anyone you want to help
Stay safe and stay healthy,
Mark Roberts
