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Market Soaring with the Recession and Pandemic Surging in Most of the U.S. Why? - Outlook & Risks –

The stock market is ignoring the deep coronavirus recession. As quickly as the S&P 500 spun out of its 11-year bull run, it soared out of bear-market territory and surged to near its all-time high in early August.

Why? 
The Fed
has been indirectly safeguarding the stock market  by reducing investor worries around how much the coronavirus will hurt corporate profits and strain outstanding debt. The Fed salvo of support programs are considerably more aggressive than what happened during the 2008-09 financial crisis.

Dallas Fed’s President Robert Kaplan says that the Fed still has “plenty of fire power” to support the economy but repeated his view that the pace of the economic recovery will depend on the management of the virus and whether people wear masks. - 8/6/2020 Reuters

The Fed is providing  temporary monetary support until the economy can recover from the coronavirus pandemic. While the Fed mostly supports the credit markets and corporations, it is up to Congress to support the consumer.

Consumers were sent checks to help them keep spending.  While unemployment nearly erased all the job gains since the 2008 financial crisis, unemployment benefits provided support with some folks making more money unemployed than when they were working - especially true in states that pay about $700/week and the federal payment added $600. Arizona has one of the smallest maximum benefits of $240/week.

The wealth gap widened as stocks (mostly held by the wealthy) soared, but many less fortunate experienced increasing hardship. While near record-numbers of folks are hurting and many not benefiting from these measures, overall consumer savings still have soared.

US household debt declined $34 billion in Q2, the first decline since 2014 and the steepest decline on record. Credit card balances fell $76 billion, the largest drop on record. The flood of money has stabilized the finances of many households and even left some in better shape than before the pandemic—at least for now.

Jobs Recovery The jobs recovery continues, and at a moderately faster-than-expected pace in July. That’s the good news. The bad news is the pace of recovery is slowing.

Retail Sales of Goods at pre-virus High

Manufacturing’s purchasing managers' indices were mostly in recovery mode in July. The ISM manufacturing index rose to 54.2, its highest level since March 2019. Additionally, ISM’s measure of production also increased to 62.1 from 57.3 in July, its highest level since August 2018.

ISM Non-Manufacturing Activity Broadens.  The Institute for Supply Management’s (ISM) services sectors activity index unexpectedly rose beyond forecast to 58.1 in July from 57.1 for a second monthly increase. An index about 50 represents expansion.

Exports – Record increase  On August 5th the Commerce Department reported the trade deficit fell in June as exports posted a record increase. This is partly the result of the rebounding of economies in Europe and China, as they were more successful in fighting COVID-19. Even after the increase, however, exports were almost 16% off last year’s pace.    

Corporate Profits the lifeblood of stock values

Corporate profits have overwhelmingly exceeded their low expectations, but the wild card for the rest of the year is the uncertainty related to COVID-19. As of 8/6/2020, S&P 500 components have beaten their June-quarter estimates by 23% in aggregate. With about 90% of S&P 500 reports in, more than 80% of companies topped profit expectations.

Chart since 1996 as of 7/31/2020 by Fed: Corporate profits excluding inventory valuation and capital consumption adjustment (depreciation tax expense excluded)

Outlook
“Central bank stimulus in 2020 represents a liquidity supernova that will continue until either a melt-up on Wall Street trickles down into Main Street wages or if the unemployment rates drops below 5% while inflation rises above 2%” - 8/7/2020 Business Insider.

Marketwatch 8/5/2020: “The stock market will be flying high in a year, for 2 simple reasons.” Article argues that within the year we will have vaccines for COVID-19 – at least some by the end of 2020. In addition to vaccines there are also many promising therapies in the works.

By next June, the massive stimulus dumped on the economy by politicians and the Federal Reserve will have kicked in in full force, sending the economy into overdrive. That could push markets much higher, Marketwatch reports.

Risks
The Fed and many economists point out the need for another probably $2 trillion of fiscal stimulus from Congress to further support the economy as the US has been unable to significantly reduce  COVID-19 infections and deaths.

The big risk is that none of the vaccine trials pan out. Another concern is that even if we get a vaccine, people will not take it.

Further, there has been a lot of damage to the economy, with so many businesses closing for good. But the amount of fiscal and monetary stimulus put into the economy is so big, we could be nevertheless in a market “melt-up” and economic overheat scenario by next June, predicts Leuthhold Group strategist and economist Jim Paulsen. Especially if vaccines get people back to work.

If we have good Phase III vaccine results rolling out between September and November, this would be an important de-risking event for investors.

It is important to use proven, independent sources to analyze investments  and have risk-control measures in place – such as our participate yet protect investment philosophy.

Action Plan Recommendations
I can discuss individually specific recommendations based on one’s goals, objectives, and risk tolerance.

In general related to a total portfolio, I suggest investors have a diversified portfolio using managers with long-term track records of outperformance compared to the category they invest in and compared to the risk taken (Alpha vs. Beta in investment terms) – not just raw returns.  While U.S. has a major COVID-19 risk, we have a comparatively stronger recovery potential than most global economies, even those that have done better in the fight against the virus.

US Small-Mid Caps often have the potential for faster growth, and with so many more smaller companies than large, good research can potentially find hidden gems.  Smaller companies’ stocks are often more volatile with less trading volume, but over the long term have rewarded investors. 

I avoid “dumb” index funds with no stock selection based on individual company outlooks, or similar ETF’s (only make sense for traders, not investors). For those seeking income or for the more conservative allocation in a diversified portfolio, I suggest various bond alternatives, without the interest rate risk of many bonds at this point in the economic cycle.

Part of our "participate-yet-protect" strategy in a growth-oriented portfolio is to have alternative investments so that in a significant equity market decline when you also need cash, you do not have to lock in large losses in a market downturn.  Markets have always returned to new highs - only the timing is uncertain.

Required Disclosures:  Past performance does not assure future results. There is no assurance that objectives will be met. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, you may receive more or less than originally invested.  No system or financial planning strategy can guarantee future results.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

The S&P 500 is an index of 505 stocks chosen for market size, liquidity and industry grouping (among other factors), designed to be a leading indicator of U.S. equities, and is meant to reflect the risk/return characteristics of the large-cap universe. 

The views and opinions expressed are as of the date of the report and are subject to change at any time based on market or other conditions. The material contained herein is for informational purposes only and should not be construed as investment advice since recommendations will vary based on the client’s goals and objectives. Information is believed to be from reliable sources; however, no representation is made as to its accuracy. Hutchison Investment Advisors, Inc. is an Arizona registered investment advisor. Part II of Form ADV (Disclosure Statement) has been given to advisory clients and is available upon request, and is also at http://dhutch.news/RIADisclosure