As we close a memorable month of May, the country hit a sad pandemic milestone: More than one hundred thousand people have died from illness caused by the virus, four months after the first known case of COVID-19 in the United States. The most common reaction from our clients has been disbelief that this could happen in our lifetime.
- There continues to be wide variability in year to date market returns: While large growth stocks (e.g. Apple, Microsoft, or Visa) have done well (+5.4%) this year, mid-size and small companies (-9.5%) have seen negative returns, as have value stocks (-15.5%). Small companies that pay out dividends instead of reinvesting their profits (i.e., small value) have been clobbered this year (-22%). International stocks have lost -15.5% as well this year, continuing their underperformance vs. US.
- More firms cut dividends: Even as the stock market has recovered from the worst of its coronavirus-driven losses, dividend cuts or suspensions and buyback cancellations continued to mount. The damage has been heaviest among small companies, especially in the energy and real estate sectors – epicenters of the economic impact of COVID-19. 240 firms have announced dividend cuts and suspensions.
- US Savings rate hit a historic 33% in April. The tremendous uncertainty and fear are restraining spending. The US consumer accounts for more than 2/3 of the economy, so whether this is a short-term or longer-term change in consumer habits will determine the rate of recovery in the economy. Savings were increasing even before the virus hit, as boomers retire and become more cautious.
- Relations between the US and China have quietly deteriorated, at the same time the economy is at a precarious position. China is unlikely to achieve the ‘Phase I’ target purchases for two reasons: first, the targets were stated in dollars, and commodity prices are quite low. Second, demand in China for these products has fallen due to the virus. If the US and China retaliate and escalate responses as happened last summer, there will be new headwinds to the stock market.
- The Federal Reserve is launching a new lending program for the small and medium sized businesses with up to 15,000 employees. This is designed to bring significant liquidity to ‘Main Street’ businesses.
- The number of currently unemployed people (who get unemployment insurance payments) declined for the week ending May 16, and while new unemployment claims were over 2 million last week, that number didn’t grow as fast as in previous weeks. These are nice ‘green shoots’ of a possibly stabilizing labor market. In a nutshell, more people went to work than filed for unemployment benefits.
- Durable goods (refrigerators, furniture, sports equipment) orders fell 17.2% in May, after a decline of 16.6% in April. This second quarter is likely to be the worst economic contraction since the Great Depression. These are some of the very bad numbers we have been expecting, and backward looking.
- Tech stocks could be affected by the social media battle between the President and Twitter. The key question is who will be in control of what gets published on the internet: The President, the Congress, or private companies - or it could go to the courts.
Is it really possible to have ‘No Regrets’ in the stock market? We have learned over the years that in a volatile stock market, there are many points where people will feel regret, and each person usually has one particularly strong reaction from the following scenarios:
- Market goes down, and now feel they should have reduced their equities earlier (sold high);
- Market goes up, and they never invested their cash;
- Market goes down, and later feel regret for not buying more stocks at the low point;
- Bonds make a lot of money and they were primarily invested in stocks (who pays attention to bonds?);
- Gold goes up and they didn’t buy at a lower price;
- Inflation goes up and they have lots of CDs at low interest rates.
The theme is that all these regrets can only happen in hindsight. That means they are impossible to avoid, since the only way to recognize the ‘top’ or the ‘bottom’ is when it has passed. If you choose to take a strong action one way or another, there is a significant probability you will be wrong. Most frequently, the “not too much, not too fast” approach leads to the best long-term outcome. Taking a very strong position in any point in time is based on believing that “this time I’ll get it right” and seems to lead to regret, because there are too many variables at play.
Do you have some thoughts to share on these or other topics? We value your input, please let us know what you think!
We send our best to all of you and your family as we head into the final weekend of May. As always, we invite you to contact us if you have any questions or wish to schedule a meeting to discuss your financial plans. We’re here to help and will stay in communication going forward. Stay safe and enjoy the summer weather!
With acknowledgements to Morningstar, Axios, the Sevens Report, CNBC, and other sources used for this update. "No regrets" illustration from 123rf.com.