The debate of whether or not to reopen the economy is highly polarized — and not just among individuals. We’re starting to also see the effects of economic cabin fever as some businesses, such as Tesla, have opened their doors even against local ordinances. This disconnect has led to anxiety and further dividing the nation. We’re continually bombarded by divergent, strong opinions from all sides.
Clearly, the future is unknowable and uncertain. But investors continue to watch for indications of the length and severity of the downturn. Chairman Powell said last week that the path ahead is highly uncertain and subject to significant risk. At GWS, our goal is to present an independent view that is based on data, analysis, and economic theory.
Death Rates Are Still Declining
Daily deaths from COVID-19, though sporadic, continue to decrease overall. As of last week, the CDC reported 51,495 total COVID-19 deaths, which peaked in mid-April.
Fear of the disease is beginning to subside, but there’s still concern about a possible second wave in the fall. Germany and South Korea have reported some news of a second wave, which we will continue to monitor, but as of now we believe the claims are a bit premature.
When we look at the data, Germany’s new cases still seem to follow a declining trend line. South Korea has had a bit of a blip, but it still reports fairly low numbers.
Sweden, though on the higher side of the data, is not statistically different from other countries. As you may remember, Sweden didn’t lock down the country like others did. This means that, with or without lockdown efforts, the virus does fade naturally. This would suggest relieving the lockdown would NOT cause a significant second wave. The key word here is “significant.” The virus will likely be with us for some time. It just should not have the exponential growth rate it had back in March and early April.
Inflation Risk Is High
We continue to review our first theme, the risk of inflation.
As expected, the Consumer Price Index declined in April. The overall Index declined 0.8 percent, the largest monthly decline since December 2008. A 20.6-percent decline in the gasoline index was the largest contributor to the monthly decrease.
The indexes for apparel, motor vehicle insurance, airline fares, and lodging-away-from-home all fell sharply as well. On the other hand, food indexes rose in April, with the index for food-at-home posting its largest monthly increase since February 1974. The prices for food at home increased in the month by 3.5% and the prices for food away from home increased by 4.21%.
Most interesting, the indexes for rent, owners’-equivalent -rent, medical care, and household furnishings and operations all increased. Medical care services for the month climbed by 5.8%. We mentioned fear subsiding, we expect the travel related price indexes to flatten out.
If restaurants open with restrictions and the takeout habits are NOT maintained, we may see substantial price increases for restaurant dining. Restaurants are on very thin margins. If you cut there seating in half, they will need to increase prices. If we are bottoming, we could see CPI begin to rise as early as next month.
Our Fiscal Situation
Receipts are down, as certain taxes from individuals and corporations were deferred until July. On a rolling 12-month basis, receipts were just $3.265 trillion, the lowest since March 2017, and down 3% Y/Y.
Government spending, or outlays, exploded by 161% to a record — missing the $1 trillion mark by 20 billion. This was largely due to the release of assistance related to the COVID-19 outbreak.5
Only four times in American history have we run $1 trillion deficits annually. At this point in the pandemic and recession, we are looking at costs of close to $1 trillion per month. This may be only the beginning as new stimulus bills and additional tax relief is being proposed.
As can be seen in the Price Points chart below, the S&P 500 has tried to break through the 2950 resistance twice, with a selloff going back near its 2850 support. The S&P 500 is still well below the year open.
This is not the case for the Nasdaq 100.8 Though still not a new high, it is positive for the year.
The pause in the market aligns with the Fear Index.9 To review, the reason we reference this Fear Index is to help clients decide during volatile times if it’s ok to temporarily take some money out of the market (e.g., for a 401(k) rollover
We saw days in the last few weeks that were up 10%, and you did not want to take your 401(k) out at that moment. Now, though, we may be in the range where you don’t have a substantial risk of losing a big upside in the market. We believe there’s actually a little more risk of a downside movement at this point, although it wouldn’t be significant.
If you were waiting, this is likely a good time to move 401(k) plans and other assets that will need to be out of the market temporarily as the market is trying to find a base.
Due to the previous slides, considering the market and economic data, and because account values are nearing their January values, we have made the following updates.10
First, it’s okay to fill the cash hubs back to target. The correction and recovery was quick, so the hub accounts should be near their targets and would not require a significant “cash raise.” This would help reduce some risk while not requiring much change in investment allocations. We do not consider the market as a “bargain sale.” Instead, we believe it is “fairly priced” but expect it to continue to climb the wall of worry.
At the moment, we are recommending following a monthly dollar cost average into the market. We do not consider the market as a bargain. Instead, we believe it is fairly priced so, at the moment, we are not recommending expediting any dollar cost averaging into the market. Continue as planned. This doesn’t mean we can’t change this approach, if we do get a selloff and move back to lower prices.
As a quick update, Large Cap Growth/Technology continue to indicate an overweight. Gold is losing some momentum but still above the S&P 500. Mid Cap Growth is also doing well. We believe many are “hiding out” in the Large Cap Growth names. To see the Mid Cap and Small Cap Core indexes above the S&P 500 would give us greater confidence in a broad expansion across the economy and a belief in a new bull market.
We would not be surprised to see a rotation from Tech names into smaller companies. However, we will let the process guide us on these changes versus taking the risk of “trying to guess the correct trade”. We believe the process is our best long-term strategy.
If you would like to discuss any of the above themes, please don’t hesitate to reach out to your Lead Advisor or visit the “Contact Us” page. GWS is committed to being a resource for our clients and the community during this unprecedented time.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
 Stockcharts.com. internal excel visualizing the information as a gauge.
 Internal excel on recommendations for cash hubs.