Your Weekly Update for Monday, July 13, 2020.
Beacon Rock Wealth Advisors is a financial planning and registered investment advisory firm in Camas, Washington. We are always available to answer your finance questions. Give us a call at (800) 562-7096 or send an email to[email protected].
With this volatility in the markets you may have questions about your portfolio.Ā We are both available by Zoom or Skype to answer your questions. Call or email and we will get it set up.
Please support your local small businesses. Go get some take-out from your favorite restaurant!
If you or someone you know is worried about retirement, send us and email or give us a call for a no-obligation Retirement and Social Security Analysis.
If you find this information useful, please forward this newsletter to a friend and ask them to subscribe at https://newsletters.beaconrwa.com/subscribe.
Have a great week!
Mike Elerath
CERTIFIED FINANCIAL PLANNERTM
CERTIFIED IN LONG-TERM CARE
NATIONAL SOCIAL SECURITY ADVISOR
Bill Roller
NMLS #107972
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
For more information about Beacon Rock Wealth Advisors, check out our brochure here:Ā https://beaconrwa.com/wp-content/uploads/2020/04/BeaconRockBrochure.pdf
Summary
Markets were up last week. The Dow Jones Industrial Average rose 0.96% to 26,075.30, while the S&P500 rose 1.76% to 3,185.04. The Nasdaq Composite rose 4.01% to 10,617.44. The annual yield on the 30-year Treasury fell 10.3 basis points to 1.326%.
A light calendar of economic data for the week included a record increase in non-manufacturing, lower producer prices, and stronger job openings.
Global equity markets rose last week, as stronger economic data outweighed mixed results of pandemic infections around the world. Bonds fared well with credit spreads contracting in the U.S., and weaker dollar helping foreign bonds. Commodities were generally higher due to strength in industrial metals, while crude oil prices were little changed.
Economic Notes
(+) The ISM non-manufacturing index for June rose by 11.7 points back to an expansionary 57.1āsetting a record for a single months, and beating market expectations calling for a near-neutral 50.2. The underlying components of business activity, new orders, and employment experienced the strongest gainsāall in double-digits. Supplier deliveries fell, but remained expansionary, indicating that supply chain delivery hang-ups have actually eased (a positive sign). Prices paid rose to a lesser degree, further into expansion.
(0) The producer price index for June fell by -0.2% on a headline basis, below the 0.4% increase expected by consensus. Removing food and energy, PPI was down -0.3%, also below market expectations of 0.1%, while adding back in the trade services category pushed PPI to a gain of 0.3%. Under the hood, an energy price spike of 8% during the month, which was offset by a -5% drop in food prices and mixed results in other categories. Prices for crude materials rose, along with commodity prices generally, but weak consumer demand has kept inflation generally contained as the economy attempts to recover.
(+) The government JOLTS job openings survey for May showed an increase of 401k from the prior month to 5.397 mil., surpassing the 4.500 mil. openings expected. Additionally, the number of layoffs fell dramatically, to 1.8 mil., from 7.7 mil. the prior month, with the layoffs rate falling -4.5% to 1.4%. The job openings rate fell by two-tenths to 3.9%, the hiring rate rose 1.8% to 4.9%, and the quits rate rose 0.2% to 1.6%. These results were all in keeping with strong employment numbers reported for May generally, with hiring focused on leisure/hospitality and construction.
(-/0) Initial jobless claims for the Jul. 4 ending week fell by -99k to 1.314 mil., below expectations for 1.375 mil., but remaining high. Continuing claims for the Jun. 27 week fell by -698k to 18.062 mil., also below the median forecast calling for 18.800 mil., but also continuing to be a significant proportion of the U.S. workforce. Initial claims fell most sharply in NY, FL, OK, oddly since the latter two were hit recently with an increase Covid caseload, while claims rose in TX and CA, as expected, with a resurgence in infections.
Question of the Week: Are the financial markets (āWall Streetā) and the real economy (āMain Streetā) disconnected?
Although they may appear to be disconnected on the surface, and near-term outcomes are impossible to predict, theyāre likely no more disconnected than usual.
One of the more important considerations to keep in mind about financial markets is that theyāve always been forward looking. Economic data, by its nature and difficulty in tabulation, always reflects the past. Folks who sold in March probably donāt need a reminder of this, but many of the better buying opportunities for financial assets have surfaced during past recessions. As such, the state of the economy at the time had little bearing on prospects for future returnsāin fact, the two are often negatively correlated. Additionally, by the time the recession is over, the larger discounts for risk assets are often long past.
Credit goes to Professor Jeremy Siegel at the Univ. of Pennsylvania (and author of Stocks for the Long Run) for the continual reminders of this during the time of Covid, but earnings for the next year or two represent a very small percentage of an underlying stockās valuation (or for that of a broader stock index), when using a traditional dividend discount-type model. Although most investors arenāt modeling valuations constantly, the focus does remain on the futureāthe past is already done with and an investmentās value at any given point is reliant on longer-term future growth and cash flows. That said, with reopenings already occurring around the country (even if not working out ideally from a medical standpoint, especially during the last few weeks), the broader economy has moved on from deep self-imposed trough, and into recovery.
This recovery will likely be a gradual one, and as weāve seen over the past few weeks, surprise virus hotspots, or comments from officials, may still result in market volatility. The main question now has moved from āifā a recovery would happen, to still a degree of āwhenā it would happen, as well as āhow longā it will take. The latter remains an open question, with social distancing and societal reluctance putting a damper on V-shaped sentiment. There will likely be additional bad news to come, especially for lower-margin businesses like restaurants and retail, where 25% or 50% of normal volume may not be enough to make ends meet. Additional government stimulus may be necessary (and is likely forthcoming), but there could be further economic damage for more indebted firms or others on the brink. Not every business can be savedāthis is the nature of the risk involved with capitalism and unfair and unpredictable events. Just because the government has infused money into āfallen angelā portions of the high yield bond market is not an all-clear signal for no more risk. This may also continue to exacerbate rotations away from challenged sectors, like brick and mortar retail, into new economy industries, such as certain segments of high tech, that have already been in progress prior to the pandemic.
Another factor that has taken a back seat amidst the Covid news is the upcoming election. While many are hesitant to trust early results from polling (due to the surprise outcome that challenged the reliability of polls in 2016), former Vice President Biden has jumped to a substantial lead over President Trumpāespecially in key battleground states. Aside from the current divisive political landscape, financial market trepidation of a Biden presidency, and possible Democratic takeover of the Senate, are focused on the āBiden Tax Plan,ā which includes promises to re-raise corporate tax rates from 21% to 28% (albeit not all the way back up to the previous max 35%), and on the highest personal tax brackets. The direct impact is that a corporate tax increase would lower equity earnings, which lowers fair values. Naturally, with concerns over getting earnings back to normal in 2021, downward shocks arenāt being welcomed. Election probabilities will likely continue to be in the minds of investors through the summer and fall. Historically, recessions have been the Achilles heel of incumbent presidents for the last half-century, regardless of the cause.
Financial market reactions were certainly as extreme as weāve seen in decades over the past few months. With the medical landscape and prospects for a solution remaining uncertain, it would not be surprising to see volatility persist. As before, near-term financial market results remain generally tied to hopes/timing for a vaccine, further fiscal stimulus, and ānormalizationā of life (financial and other). However, long-term results have been tied more closely to human innovation and ingenuity, which has been a difficult trend to derail.
Market Notes
| Period ending 7/10/2020 | 1 Week (%) | YTD (%) |
| DJIA | 0.98 | -7.44 |
| S&P 500 | 1.79 | -0.38 |
| Russell 2000 | -0.63 | -14.09 |
| MSCI-EAFE | 0.50 | -9.68 |
| MSCI-EM | 3.50 | -4.07 |
| BBgBarc U.S. Aggregate | 0.42 | 6.71 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2019 | 1.55 | 1.58 | 1.69 | 1.92 | 2.39 |
| 7/3/2020 | 0.14 | 0.16 | 0.29 | 0.68 | 1.43 |
| 7/10/2020 | 0.13 | 0.16 | 0.30 | 0.65 | 1.33 |
Stocks rose last week as optimism for improvement over the depths of shutdowns a quarter ago, despite the resurgence in cases throughout the Sun Belt. This is due to stronger economic growth, per the result of national reopenings (now at risk those same locations), as well as vaccine progress that appears to moving at a faster pace than expectations. Updated news about Gileadās controversial remdesivir Covid treatment, showing that it substantially reduced death rates, lifted spirits by the end of the week.
By sector, communications, consumer discretionary, and technology led the way last week with gains of 2% or more. Energy lagged with nearly a -5% decline.
Earnings season for Q2 is scheduled to begin next week, although expectations are lackluster to say the least. As with estimates for economic growth overall, earnings decline expectations year-over-year fall in a broad range of -40% to -60%. On the positive side, in conjunction with the economy, earnings for 2021 look to be 30-50% higherāalbeit a very wide and imprecise measurement at this point.
Foreign stocks showed positive returns broadly, with Europe and Japan ending the week with similar results, while the U.K. lost a bit of ground. Emerging markets outshined developed, led by China, up nearly 10% for the week alone, followed by Brazil, despite continued challenges in the latter with Covid infection rates.
Much has been made of the resurgence in Chinese stocks over the last few weeks, due to a lower Covid caseload, but also, it appears, strong government stimulus. Specifically, government rhetoric endorsing equities in state-owned publications fueled the recent surge in prices. Due the current pace of rising infection rates in the U.S., the working assumption is that the Asia-Pacific region will emerge from the pandemic more quickly and in stronger condition than the rest of the world. Cheaper starting valuations for emerging market stocks helped this rotation somewhat.
U.S. bonds were up slightly last week, due to long-term treasury rates falling and contracting credit spreads for corporate debt; however, bank loans declined. A weaker dollar lifted foreign developed market sovereign debt up nearly a percent, as were local-currency emerging market bonds.
The Federal Reserve now owns nearly $7 bil. in individual corporate bond ETF assets, and $3 bil. in individual bonds. Then again, issuance was also robust, with $146 bil. in high yield alone for Q2. According to JPMorgan data, however, the default rate for high yield rose to 6.9%, which is a 10-year high. Over the past year, half of defaults have been in the troubled and heavily-leveraged energy sector.
Commodities gained generally across the board, with help from a weaker U.S. dollar. Industrial metals benefitted from reports of stronger Chinese activity, precious metals continued to show strength, in addition to gains in natural gas prices. The price of crude oil fell slightly to around $40.50/barrel.
Mortgage Rates
āThe summer is heating up as record low mortgage rates continue to spur homebuyer demand,ā said Sam Khater, Freddie Macās Chief Economist. āHowever, it remains to be seen whether the demand will continue if COVID cases rise to the point that it hinders economic growth.ā
The 30-year fixed-rate mortgageĀ averaged 3.03% with an average 0.8 point for the week ending July 9, 2020, down from 3.07%. A year ago at this time, the 30-year FRM averaged 3.75%.
The 15-year fixed-rate mortgageĀ averaged 2.51% with an average 0.8 point, down from last week when it averaged 2.56%. A year ago at this time, the 15-year FRM averaged 3.22%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgageĀ (ARM) averaged 3.02% with an average 0.3 point, up slightly from last week when it averaged 3.00%. A year ago at this time, the 5-year ARM averaged 3.46%.
The Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for theĀ Definitions. Borrowers may still pay closing costs which are not included in the survey.
Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check us out at https://beaconrwa.com and our affiliated websites atĀ https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com.
Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poorās, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.