Hello, clients and friends of Integrity Wealth Advisors. First and foremost, we hope this finds you healthy in the midst of the continuing Covid-19 pandemic. Investments and market performance are certainly secondary to the physical challenges many face and we wish good health to all.
Integrity Wealth Advisors would like to begin by acknowledging all the front line workers in our community – including the amazing efforts of our colleagues at Integrity Bank who worked tirelessly this past quarter to process two rounds of Paycheck Protection Program loans, all while navigating the Covid-19 pandemic. Thank you all!
A quote that appropriately captures where we are at the midpoint of 2020 was written by Damian Barr: “We are not all in the same boat. We are all in the same storm.” Many have been dramatically impacted by Covid-19. For others, it is more inconvenience than calamity. In the second quarter of 2020 we experienced an amazing market recovery even as the economy sought to find its footing. Regardless of what happens next, Integrity Wealth Advisors is here to walk with you through all of life.
What a wild ride 2020 has been… and we are only halfway through! With all that is going on in our world, this headline may come as quite a surprise: U.S. Stocks finished second quarter 2020 with their best quarterly performance in more than 20 years! Not everything recovered uniformly, as seen here:
According to Horsesmouth, the divergence in the performance of the major U.S. stock indexes this year is the widest in more than a decade. The Nasdaq Composite’s dominance over the Dow and S&P 500 is the biggest since 1983. A handful of familiar technology stocks have outperformed this year specifically helping the Nasdaq and S&P 500 indexes: Facebook, Amazon, Apple, Microsoft, and Alphabet’s Google (abbreviated FAAMG). Each FAAMG stock is one of the top 10 largest US stocks by market capitalization.
The FAAMG stocks account for 40% of the Nasdaq Composite index and 20% of the S&P 500. Only Apple and Microsoft contribute to the Dow 30 index. The flight to these relatively few stocks can create a concentration risk to investors, exposing portfolios to downturns if expectations aren’t met for any one of these companies. Integrity seeks to address concentration risk through globally-diversified allocations and portfolio rebalancing according to each client’s investment objectives.
In the second quarter, many S&P 500 CEOs uncharacteristically chose to forego guidance on their company’s future earnings, claiming the pandemic’s impact has made projecting future earnings impossible. The forward Price/Earnings ratio (or forward P/E, a stock’s current price divided by projected earnings), a standard measure of the relative expense of current stock prices, relies on these earnings estimates. Nevertheless, with the high stock prices reflected in these indices, stocks are carrying elevated valuations nearing those last seen during the Tech Bubble. For example, on 6/30/20 the S&P 500 was trading 30% above its 25-year average despite being in the middle of a pandemic! Any new shocks, such as a resurgence in Covid-19 cases, could cause the stock market to reverse course quickly.
Beyond U.S. Stocks
Other than the Nasdaq Composite return (discussed above), a review of worldwide capital market sectors shows U.S. High Quality Bonds have remained positive for the year (table below). As is often the case in highly volatile times, high quality bonds provide a haven to balance out a portfolio.
While international stocks, whether developed or emerging markets, have underperformed their U.S. counterparts for the year, they are currently more attractively priced. Furthermore, they should not be ignored due to the portfolio diversification they provide. For example, Asia seems to have managed the pandemic better than most other geographic regions so far and that could be reflected in future international market performance. This is one reason Integrity Wealth Advisors recommends maintaining a diversified portfolio that includes international stocks and bonds.
The Covid-19 pandemic put most of the world on lockdown in the second quarter of 2020. In late June, the IMF (International Monetary Fund) projected the global economy will shrink by 4.9% in 2020.
As reported in Integrity’s first quarter 2020 newsletter, unprecedented action taken by the US Federal Reserve (Fed) and Congress has helped to soften the economic impact of the pandemic in the U.S. The Fed slashed interest rates and created a variety of facilities to keep the economy from shutting down. Congress authorized approximately $3 trillion in stimulus to stabilize the US economy. More may come.
Consumer spending, which fell a record 12.6% in April, rebounded by a record 8.2% in May (St. Louis Federal Reserve). Pent-up demand, stimulus checks, generous unemployment benefits, a rise in employment, and reopened businesses supported sales.
As the economy slowly reopens, a complicated balancing act is being undertaken: allowing an economic new normal to get established while trying to manage Covid-19 infections until a vaccine to fight the virus can be developed. A strong recovery is not assured. Market volatility may remain high. Ultimately, our individual response and government’s reaction to the virus will play the biggest role in how the economic outlook unfolds. A vaccine in early 2021 may already be priced into the market.
Prior to the pandemic, unemployment in February 2020 was at a historically low 3.5%. Then, a spike in unemployment to 14.7% in April set a new post-Depression record! Fortunately, the unemployment rate has been coming down steadily (13.3% in May; 11.1% in June). The trend is our friend, though it should be pointed out that an 11.1% unemployment rate still exceeds the pre-pandemic, post-Depression record of 10.8% in 1982. Furthermore, confirmed Covid-19 cases sky-rocketed in late June leading to some sectors of the economy and certain geographic regions re-closing businesses. Time will tell what happens to the unemployment rate in the second half of 2020.
Uncertainty leads to volatility in the financial markets. As if the uncertainty created by Covid-19 isn’t enough, much has been happening in the world that has the ability to destabilize capital markets.
- In the U.S. and elsewhere, thousands of cities have had some form of public protests aimed at bringing attention to racial injustice. The protests have raised awareness and initiated corporate response with minimal discernable impact on stock market performance to date. U.S. corporations including Bank of America, Pepsi, Walmart, Nike and Apple committed their money and brand-names to the issue. Corporations like Quaker Oats (Aunt Jemima) and Mars (Uncle Ben’s) are discontinuing household brand-names in response.
- A dispute over oil production between Russia and Saudia Arabia in March caused world oil supplies to expand while demand plummeted due to the lockdown caused by the pandemic. Oil prices crashed in late April before an agreement to slow production resulted in oil prices rebounding. That brought a fragile stability to the energy sector.
- China’s decision to impose a national security law on Hong Kong may further exacerbate tensions with the U.S. and destabilize the U.S./China Phase 1 trade deal. In late June, prior to China forcefully cracking down on Hong Kong, White House trade advisor Peter Navarro had to clarify his remarks that the China trade deal was “over”. President Trump quickly followed-up by affirming the deal is “fully intact”. Financial markets quickly reacted negatively before the remark was clarified. Clearly any disruption to the deal will lead to more market volatility.
- The U.S. presidential election is four months away. The prospects of an administration change, or the prospects of no change in the administration, creates uncertainty in the markets.
Preparing for What’s Next: Portfolio Diversification and a Financial Plan
The old axiom stands: change is the only constant. No one has a crystal ball, but that doesn’t mean you cannot be better prepared for what comes next. A professionally-managed, well-diversified portfolio that matches your risk tolerance is valuable when markets are as volatile as they have been in 2020.
Beyond portfolio diversification, having a comprehensive Financial Plan that pinpoints where you are today (Point A), targets where you desire to be tomorrow (Point B), and charts a path from here to there (your Financial Plan) can provide peace of mind despite volatile market conditions. Comprehensive financial planning and a disciplined investment strategy are keys to financial peace, a calming voice in uncertain times.
For our clients, we are honored that you have given Integrity Wealth Advisors the opportunity to serve as your trusted financial advisor. We are here when you need us, in the calm and the storm!