Head Fakes and Second Waves

June 19, 2020 · Written By J. Stephen Lee

As seasons move into summer and states relax lockdown protocols, we trust that you join us in finding some cautious feelings of relief.  While the easing of the overhanging tensions is welcome, we remain cognizant of the realities of the medical, economic, and social risks that remain. The COVID-19 human toll is still rising around the world, and societal convulsions around race and justice have added to many’s sense of dislocation. So, we write this communication to you with gratitude for the positive, and sorrow for the pain and heartache so many are still experiencing.

The pandemic-related events of 2020 have been difficult to adequately describe — writers have strained to find appropriate words.  As one cheeky commentator put it, there is unprecedented usage of the wordunprecedented.”  Indeed, Bloomberg noted in April that nearly 75% of corporate earnings calls to-date had used “unprecedented” in describing the impacts to their businesses.  Word games aside, the impacts of the pandemic have been no ordinary disruption, superlatives have indeed been needed to capture the magnitude and nature of the pandemic effects.

Yet, throughout this crisis, we have sought an unrelenting focus on facts, not speculation or supposition.  Doing so has often meant maintaining a view contrary to mainline media and news.  Mark Twain is credited with the statement “Never let truth get in the way of a good story.”  Consider some of the negative events whose “story” overwhelmed the “truth” of patience and long-term investing disciplines.

  • The shortest period in history to move from a stock market peak to a bear market.
  • The fastest ever declaration of an official recession by the National Bureau of Economic Research.
  • The worst first quarter for US stocks ever.
  • An all-time recorded low of 0.32% on the 10-yr US Treasury.
  • A record 20.5 million US jobs lost in April.
  • A record drop of 16.4% in US retail sales in April.
  • An International Monetary Fund forecast of negative (3%) global GDP in 2020 – the worst since the Great Depression.

You get the point — it’s been easy to despair.  Yet, the recovery that has set in since late March has been equally stunning, catching many completely by surprise. Some examples:

  • The fastest recovery in history out of a bear market.
  • Likely the shortest recession ever recorded.
  • A record jump of 17.7% in U.S. retail sales in May.
  • The largest gain of payrolls in history in May’s job report.
  • Record levels of mortgage applications.
  • Unparalleled support from global central banks – record levels of stimulus approaching 25% of GDP in the U.S.

Comparisons could go on, but of course the larger question is “is the worst over?”  As our title suggests, this could be just a very convincing head fake, but no one knows for certain, and as one analyst put it, this is a time of “radical uncertainty.”  In other words, make predictions at your own peril because truthfully, more remains unknown than is known. So avoiding crystal balls, what facts do we know?

There is much focus on “real-time data,” measurement of items that can be followed almost as soon as they occur.  Things such as vehicle traffic, energy usage, pollution levels, credit card spending, TSA screening totals, and mobility as measured by tracking of cell phones are all being watched closely.  For now, that data unequivocally indicates a sharp rebound in economic and social activity.  Across the world, countries have eased restrictions and people have rushed to get out of lockdown and become active once again.

Stock markets have embraced the turn in economic data, even while the medical side of the ledger is less positive. With little forward guidance that is clear or deemed reliable, markets have instead focused on the trending direction of data, along with the massive governmental support of payrolls and markets. Given the sharp positive turn in real-time measures, and the historical amount of governmental stimulus, stocks have “looked through the valley” and rallied.

Medical experts tell us that the typical course of pandemics is to experience a “second wave.”  Some even argue this is occurring now as cases and hospitalizations are once again rising here in the U.S. and also in Europe and China. There is optimism that hospitals are better prepared now and that some level of “herd immunity” is in place, given the fact that many people have likely contracted the virus with little to no ill effects.  If society can weather this then the rebound in stocks may well hold, but if economies once again contract severely due to either voluntary or governmental induced shutdowns, the market move may prove to be short-lived.  But the determination of governments and citizens to persevere after the initial shock is powerful, impressive, and so far has been persistently underestimated.

We are frequently asked if the stock market will rise or fall from here.  Tongue firmly in cheek, the answer is … yes!  The one thing we can be certain of is that financial assets, including stocks, will fluctuate in value — straight lines do not last for long.  As we have written many times, as a planning and advisory firm rooted in the pursuit of data-driven decisions, we believe that trying to guess market movements is not a productive use of time and energy, nor is it viable.  Instead, the focus should be on building the framework for financial success, a less glamorous and less exciting process, but ultimately more successful than confidently (and foolishly) predicting the future.  Maintaining a diversified portfolio balance with an emphasis on higher quality stocks and bonds, and planning thoroughly for current and future spending needs is key.

In this uncertain environment, bold prophecies are foolhardy — as one commentator put it, this is a time to “hold strong opinions weakly.” The remainder of 2020 is likely to continue to be, well, unprecedented. Coronavirus impacts will be the driver of economies around the world, global societal changes being initiated by protests and calls for systemic change are still playing out, and in the U.S. we will experience a certain-to-be contentious election cycle culminating with November’s vote. Much can, and likely will, happen between now and then. Know that we will continue to rely on proven strategies, not guesswork or momentum chasing, and manage your assets and your financial plans with care, humility, and gratitude for your confidence.  Please reach out to your advisors and teams with any questions.