When the COVID-19 pandemic reared its ugly head at the end of Q1, no one in the world was immune to its effects. From economic dislocation to social isolation and even the sickness and death of loved ones, the pandemic left an indelible mark on societies around the globe.
Q2 market activity was directly correlated to the government’s and public’s reaction to the pandemic. Humans are adaptable by nature, and as a society, we’ve already learned how to live and even thrive in this “New Normal.” Although the S&P 500 bottomed out March 23rd at 2,304, we have already bounced back to 3,100 by the end of the quarter. As consumers gain more confidence in the economy, the market reflects that renewed faith.
Since the start of the economic crisis in March, Gatewood Wealth Solutions has hosted weekly webinars to address market dislocation, give updates, and provide education on relevant economic and financial principles necessary to process the deluge of news. We consider it our job to filter through the media and give you our honest, objective take – so you can trust us as a resource and feel informed and empowered during these tumultuous times.
While this document will provide an overview of the market activity we’ve seen this quarter, we also encourage you to follow our GWS YouTube channel to access full recordings of our weekly webinars and visit our blog for highlights of specific topics.
As the economy reopens, our goal at GWS is to present an independent view that is based on data, analysis, and economic theory. Feel free to also forward our weekly call invitations to anyone you think would find them helpful. We want to be a resource for you and the people you care about, especially in these unprecedented times.
Monetary Policy & US Debt
Markets are up, which is of course great news for the economy, but we need to remember that this is largely due to the amount of money the government has been printing. These growth rates are not sustainable, so we are advising clients to be cautious in making any major financial or investment decisions.
The US national debt has already reached an unprecedented $26.5 trillion. This equates to $78,000 per UAnd the debt only continues to run up, despite a Republican President and Senate who market themselves as fiscally responsible. This is a “pox on both houses” situation. The Democrats are proposing an even higher stimulus package than Republicans, so both are contributing to the issue. Based on current rates, the national debt would reach $45 trillion in 2024. Where is the government getting this money? They keep printing it, and inflation is the likely outcome.
The Bureau of Labor Statistics released the latest Consumer Price Index (CPI) numbers earlier this month. They came in at 0.6%, which may seem low. But let’s look under the hood at the data. Food at [Home and Away] were up 4.1 and 5.6% for the year. In June, Energy all types increased 11.7% in one month, and gasoline was 12.3%. These are off big selloffs, but this is a warning.
What This Means for Investors
The S&P 500 index has traded in a tight range for the month of June, with 3009 marking the lowest point and 3232 the high. The index had not closed below its 50-day moving average since April 23, and that line is rising fast just below current levels. We are building up to a “golden cross.”
One of the biggest headlines in the last few weeks was that the Q3 estimate for GDP increased by 3.4%; now, it’s in positive territory. What’s more, the estimate for Q2 has even risen by 2.7% (Source: New York Fed). As Chairman Powell said, “At the Federal Reserve, we are strongly committed to using our tools to do whatever we can—and for as long as it takes.” To us, that means the Fed will continue to print money.
Given this uptick, we get many questions from clients asking if they should put excess cash in the market. We say yes, over time.
Remember after 2008 how many people moved to cash, but then they continued to sit on it? They were waiting for an opportunity to put cash back into the market—waiting for the perfect time when there would be no uncertainty. However, there is never a point in time where you look up to the proverbial market skies and see clear blue. The risk of holding onto cash for long periods of time is that it keeps you from being able to find a good entry point. Years go by, and you miss out on all that compounding.
What we try to explain to clients is to take a long-term point of view on this and strategically put cash in throughout the year. We believe, it’s the next best thing to timing the bottom (which is impossible), and you won’t see much of a difference in 10-20 years between what those returns would have been.
Looking outward at the rest of the year, the key things that are going to impact the market are the presidential election and the length of the closing. Regardless of what happens, the market is likely to stay up at least through the end of the year due to the amount of money back in the system.
We’ve come a long way over the last quarter. Just think of how fearful and shocked everyone was a few short months ago. But the root of the issue — the amount of the debt burden we’re taking on — is still alive and well, if under the surface for now. It’s important that we keep an eye on the nation’s debt and its implications moving forward.
At the end of the first quarter, people were essentially in shock over the pandemic. But in a relatively short period of time, we have learned to live with it and have found ways to adjust.
Still, there is a fundamental distortion in the market due to the amount of money pumped into it and our national debt. There will be a lot happening over the next few months as the market adjusts, so it will be important to stay tuned into our weekly broadcasts to stay up to date. Join us each week to hear how we are adapting clients’ portfolios and our investment thesis for the upcoming investment horizon. We’re here to help make sure you’re doing the appropriate things to preserve your wealth, which is part of our mission to help people become and remain financially self-reliant.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
The opinions expressed are those of John Gatewood as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss. With fixed income securities and bonds, when interest rates rise, bond prices usually fall because an investor may earn a higher yield with another bond. Moreover, the longer the maturity of a bond the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. At maturity, the issuer of the bond is obligated to return the principal (original investment) to the investor. High-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase and reverse repurchase transaction risk.
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