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When we sent the last newsletter in April, things looked pretty bleak. The stock market was down more than 20%, unemployment was spiking, and cases of Covid-19 were on the rise with no definitive answer on when the lockdown would end. We were being ushered into the “New Normal”.
In spite of this, the S&P 500 has climbed over 30% (as of 6/8/2020) since April 1 st . Fortunately, we have been playing the rebound since the middle of March and have fully participated in this recovery. In addition, we took opportunities on select days over the last two months to remove our “safe haven” holdings like consumer staples and have reallocated to growth-oriented companies and cyclical companies, we believe will benefit as the economy reopens.
Remember, the economy and the stock market are two different things. Investors in the stock market look to the future of corporate productivity and profitability, which rarely represents current economic data. We’re not there yet, but we’ll get there.
“We don’t have to be smarter than the rest, we have to be more disciplined than the rest.” -Warren Buffet
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We are in a recession. After gross domestic product (GDP) contracted by 5% during first quarter 2020 on an annualized basis, consensus expectations for the second quarter are calling for a mind boggling 32% contraction on an annualized basis. We see a strong second-half rebound in economic growth as more of the economy opens up, and this recession may end up as one of the shortest ever, but the recovery is unlikely to be strong enough to return economic activity to 2019 levels by year-end.
Signs that the recovery is underway are encouraging. Policymakers have taken a depression off the table. Improvements in the data over the past several weeks are encouraging as states have moved their re-opening plans ahead. We have seen increases in vehicle and air travel, hotel occupancies, restaurant dining, and public transportation use, though from depressed levels. There is some pent-up demand.
But a large portion of the US economy cannot be easily socially distanced, which may limit the pace of the recovery by capping the amount of economic activity that can be recovered quickly. Capacity limits for restaurants and restrictions on large gatherings are two examples. Per the US Bureau of Labor Statistics, over 10% of U.S. jobs are in leisure and hospitality, and some of those jobs unfortunately won’t come back. More broadly, it will take time for stranded assets and affected employees to be re-tooled and re-deployed.
Even with the surprising improvement in the June 5 employment report from the US Bureau of Labor Statistics, the true unemployment rate is likely several percentage points higher than the reported 13.3% rate after adjusting for those classified as employed but absent from work. For perspective, the unemployment rate peaked near 11% during the 2008-2009 financial crisis.
We remain optimistic about a gradual recovery in the second half, and are encouraged by recent signs of improvement. However, there are constraints on the pace of recovery in the second half and the next leg gets tougher.
Securities are offered through LPL, member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a Registered Investment Advisor. WCG Wealth Advisors and Abound Financial, LLC are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries