Back in the days of the Normal World things were quite a bit different than they are today. As a reasonably well functioning society we relied on things like predictability to inform and guide a lot of our decisions. And then along came the year 2020. Nothing’s been predictable since.

The year started with the disastrous effort to impeach a president and then it was the Coronavirus Pandemic which shut down the country and the economy leading to the subsequent collapse of the financial markets and the ensuing recession. Then we had Killer Hornets, locust invasions, the tragic death of George Floyd…and the ensuing demonstrations; which were in many cases then hijacked by opportunistic rioters and looters. Indeed…a whole pond of black swans.

It is the nature of black swans to swim against the tide of predictability. Their economic impact is such that they are often seen floating on seas of red ink.

As the pandemic increasingly confounded those whose responsibility it was to get the virus under control, GDP, employment, consumer confidence, and just about every other measure of economic health turned rapidly and heavily southward. Financial markets shed as much as 30%.

Fortunately, an amazing percentage of those losses have already been made up. But why? Aren’t the most-used economic reports still pretty awful? Aren’t the corporate earnings reports full of doom and gloom? Well, they certainly are. So, what gives? Let me offer a couple of thoughts.

First, it’s increasingly clear that the light at the end of the tunnel is NOT an oncoming train. Secondly, the tunnel is not as long as the prior consensus would have had us believe. One strong piece of evidence is that although the Fed promised in March to buy bonds of companies who would need to raise cash, not a single one has been bought. It appears that the mere announcement of the policy was enough of a confidence builder that it precluded the need for action. It’s hard to second guess the psychology, but maybe companies who could have qualified for the bond sales didn’t want to be tarnished by appearing to be so weak that they needed to sell bonds to raise cash.

It’s a bit early to draw conclusions but it appears that the public is fairly eager to get back to its old routines of going to work, going shopping, and just going out. Another thing that I think is good for shareholders is how the workforce of companies will likely be improved after all the dust settles. No doubt that the first to be recalled back to work will be among the most talented and useful. That’s another way of saying ‘productive’.

So, in the face of all the ugliness, is this bull rally justified or is it a giant head-fake courtesy of the bears? The bulls are saying to not put much credence in Q2 earnings or last month’s employment data. Things could change, but at the moment we are with the bulls.

Ron’s Market Minute — The Hole may Not be as Deep as we Thought!

My habit is to make a guess on late Thursday afternoon as to the main market-moving forces of the week, and then on Friday morning (usually early) I flesh the idea out into the Market Minute for the week. This normally works out pretty well. But not today! When I checked the futures about 5:30 this morning I was met with extremely unexpected and VERY market-driving headlines. 

While our estimates of the unemployment numbers were more positive than the headline numbers (and we added a bit of risk-on to client portfolios yesterday in anticipation), I was personally blown away by the official numbers from this morning. 

The consensus had expected another serious decline in payrolls with another 7.5 million jobs lost in May. Who would have thought the number would come in at a GAIN of 2.5 million jobs!?? (Nonfarm payrolls). And who would have thought that the unemployment rate for May would be LESS than April?

Needless to say, the futures were bright green in the US, Europe, and most of the rest of the world. 

So, what does that mean for us? It appears that the US economy is healing WAY much faster than anyone had expected, perhaps justifying the recent optimism in markets growth, and showing the benefits of easing lockdowns. 

It looks to me like the market believes that we’ve turned the corner on this current bear and also on the self-inflicted damage to the economy. Hurray! (and, whew!)

The pundits and analysts appear to believe that we’ve passed the peak of economic impact – the economy stopped on a dime. So, it can only get better from here, right?

I don’t blame the bulls for celebrating. And in addition, I keep hearing snippets of positive news that a vaccine could be available this year. 

However, given the tsunami hit to the economy (the ‘biggest decline since the Great Depression’), it’s more than a little bit odd to see the S&P Index only down 10% from its peak- in a matter of months. And speaking of strange, the Nasdaq Index has now placed intra-day numbers that have been an ALL-TIME high this past week. (Yes, I’m aware that small US stocks and value stocks are still down nearly 20% from their peaks.) 

But then you’ve likely been reading this long enough to know that stocks are not priced based on the ‘now’, and certainly not based on the ‘past’. (Past performance and all that….) Markets look to the future and are priced based on expectations. So, the concept that the economy is coming around and that a new vaccine could take things back to ‘normal’ (whatever that means!) is the bedrock of the current rally. 

So, here’s my bottom line: I continue to remain a bit concerned that the markets may be getting ahead of themselves and perhaps the economy may not recover with as much speed as the markets have. We have been adding equities to client portfolios. We’ve been doing it selectively — and only to those sectors that are outperforming during the upswing. We are not yet back to our target weights for stocks, and we’re waiting on Ms. Market to give us some additional hints as to where she is going. (The first hint is that she’s going shopping!)

That said, total earnings are still down 6.1% versus a year ago, which means workers have less purchasing power generated by actual production, versus purchasing power coming from government benefits. The unemployment rate is going to remain at unusually high levels for at least the next few months, but today’s report is a testament to the entrepreneurial spirit and how quickly businesses have been able to adapt to a global pandemic and unprecedented shutdowns of the US economy. A full recovery is still a long way off, but there should no doubt at this point that the recovery has started.

Hooray and Hallelujah!  Go markets, GO!

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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