Well, it looks like the October Surprise arrived early. A shocker in the headlines but thus far the reaction is muted. Markets opened down but as of mid-morning have substantially clawed back. We’re keeping an eye on it.

Meanwhile, back to our regularly scheduled newsletter which we have titled “So, How’s That Recovery Going?”

The short answer is that the recovery seems to be intact, although with reduced momentum. The top line on Friday morning’s Non-Farm Jobs Report was a bit disappointing as it came in below forecasts. The number of jobs added in September was 661,000 compared to the expected 850K. Upon closer examination things look a lot better. The under-performance was entirely in government workers. Private non-farm payrolls added 877K and that is a very good number. Also, the August number has been revised upward adding in an additional 118,000 jobs. Not to be overlooked is September saw another drop in the unemployment rate, which is now at 7.9%

Various Shapes of Recovery

It was with raised eyebrow that I attempted to comprehend what some politicians are calling a ‘K-shaped’ recovery. In an attempt to argue that the economic policies of the current administration have been favoring the well to do (of course, at the expense of the less well to do) they have trampled the concept of trend lines — the fundamental purpose of which is to identify, and usually illustrate by a plot on a graph, the direction of a trend. By simple definition a trend cannot be bifurcated and go off in two directions simultaneously.  This does not mean that counter currents may not contemporaneously exist; indeed, it is an unusual day when parallel or opposing arguments cannot be made for almost anything. And they too have every right to express their own trend lines and offer their supporting data. Nevertheless, a ‘K-shaped’ trend line is not anything more than political gobbledygook designed to promote animosity.

Please follow along for a few paragraphs as we observe the good, the bad, the ugly and who is likely to benefit or suffer accordingly.

Retail Sector:

Estimates of national retail foot traffic from Unacast fell slightly when measured against levels from just before the pandemic. But the company’s analysis of 15 industries nationally showed visits were just 4% below where they were in 2019 for the week ended Sept. 26. That’s a bit of a surprise considering we are comparing a pre-pandemic 2019 to very pandemic 2020. The reporting of ‘Retail Foot Traffic’ is the typical, but old school, method of looking at retail activity. Today within the realm of retail we should take note that many of the big players are getting very good at what they call ‘omni-channel’. That’s a fancy way of saying they are finding more ways to get goods to customers than just having the shoppers come in and pick stuff up off the shelves.

King of the alternative channels is, of course, on-line sales. Here are a couple of examples of how that’s working out. In the second quarter, Walmart online sales grew by 97% (YoY). This week Bed Bath and Beyond reported an 83% gain (YoY). Yes, these are standout performance data but not that atypical as consumers become more skilled and more comfortable with transactions through the ether.

Estimates for 3rd Quarter GDP Growth

Thanks to the economy being put in a cryogenic deep freeze back in March the 2nd quarter GDP numbers showed a staggering drop of 31.4%. But, hold on to your hat and take a look at what the Federal Reserve Bank of Atlanta released yesterday:

The GDP Now model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2020 is 34.6 percent on October 1, up from 32.0 percent on September 25. After recent releases from the Institute for Supply Management, the U.S. Bureau of Economic Analysis, and the U.S. Census Bureau, the nowcasts of third-quarter real gross private domestic investment growth and third-quarter real personal consumption expenditures growth increased from 38.1 percent and 34.2 percent, respectively, to 45.1 percent and 36.8 percent, respectively, while the nowcast of the contribution of change in real net exports to third-quarter real GDP growth decreased from -0.28 percentage points to -0.56 percentage points.

So, it appears to be extremely likely that Q3 will far exceed any previous quarter’s gains. A confidence builder for sure. We never want to be overly (or underly) optimistic. Moves in the economy normally trigger movement in the markets, however the relationship is not hard-wired. Nevertheless, we expect the recovery to bode well in the markets for at least a 3 to 6-month time horizon.

Ron’s Market Minute – Diversification?

Well- as we mentioned above, the good news today is that even with a President that has Covid symptoms, the markets which opened low have bounced over halfway back.

But in answer to a few questions we’ve had lately, I felt that we needed to address this topic another time.  Let me phrase the question this way – ‘my portfolio doesn’t seem to be very well diversified’.

Many investors choose to ‘diversify’, which basically means putting half of your money into underperforming areas of the market.  I’ve never liked this theory. Warren Buffett (considered to be one of the best investors of all time) seems to agree with me. His quote is here, ‘Diversification is a protection against ignorance’. I don’t think he meant that to be mean, but rather that he was saying if you completely ignore what’s working in the market and put your money into things that are not working, you’re not getting the most ‘bang for your investment dollar’. One more thing. ‘Going up’ is not the same as working. If the indexes go up 20% and client accounts go up 10%, that’s going up but not really working. 

We continue to use relative strength to sort the weak from the strong parts of the markets.  A poster child for Buffett’s ‘ignorance’ over the past decade has to be energy stocks (as represented by XLE) which are lagging the market badly again at this time. I have NO problem owning energy names when they are strong, but look at this relative chart for the past decade.  If the chart slants downward then energy is losing strength vs. the S&P 500* index.

Most diversification strategies ‘rebalance’ their portfolios every quarter or every year, meaning that money is taken out of areas that have been outperforming the market and ‘rebalanced’ by putting those gains to work in areas that are underperforming- like energy in this chart.  Can you imagine taking money out of Apple (AAPL) or Amazon.com (AMZN) and rebalancing it buy buying energy? I can’t either. We know there are no guarantees in the investment world, but using relative strength to design out strategies often gives us a bit of an advantage.

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
www.denkinvest.com

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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Past performance is not a guarantee of future returns.