What is it with the alphabet soup that financial people always use?  It’s true. We love our acronyms and simple representations of complex subjects. To that end, I’m afraid we’re not hearing much about a Deep V recovery. On the bright side, there is growing consensus on a U Shaped Recovery versus that terrifying concept of another depression.

Over the past couple of weeks, there has been a growing consensus that the U.S. Markets may have bottomed out. Both Goldman and Morgan are on record as having called the trough this quarter and look forward to growth in the 2^nd half of the year. Of course, there is plenty of noise that “stock valuations can’t be justified given the levels of economic activity.”(Bloomberg) And they would be correct based on the technical of investing except for the Federal Reserve has provided unprecedented economic bridging to get the U.S. Economy to the other side of this health crisis.  

• Stocks are trading through the bad news helping reduce some of the volatility
• Bond markets are being buoyed by the trillions of dollars of the Treasury buying sprees and may be creating a new bubble
• Oil pricing seems to be on an upswing, this week
• Housing market pricing seems to be holding its own as supply has dropped further than demand
• New unemployment claims are slowing and hopes that unemployment has topped out at 33.5 million attributed to the health crisis
• The US Dollar remains stronger than desired and remains a key point for the Federal Reserve
• However, there remains a lot of uncertainty from concerns about re-opening businesses too soon, to a 2^nd wave in the fall, to lasting impacts of fear on consumer behavior, to the introduction of inefficiencies for safety measures in businesses, to the complexities that this new reality will add to the Federal Reserves’ plate as they shepherd us out of this mess. This week Barron’s called the markets a teenager ~ volatile, moody and difficult to explain. As a mother of 2, I found the description perfect!

As I sift through all the news, I keep going back to my grandfather’s favorite “Never bet against the Fed!” And that is all goodness!

In The Weeds ….

What does a U Shaped Recovery Look Like?

There are many theories being thrown around about timing of the economic recovery from early 2021 to 2022. The one number everyone from the Fed to doctors comes back to is 18 months. 18 months for mass production of a vaccine.  So that’s our duration for the entirety of the event. In the meantime, we’ll be living with our new normal. Our economy should see improvements and a return to growth in Q2 as long as we maintain safe measures avoiding massive breakouts. So the question is how robust will the recovery be in the short term?

1. 6 foot Social Distancing will continue to limit efficiency in all sorts of businesses from cafés to airplanes to meat packing plants. The addition of PPEs and extra cleaning standards will add to the cost of all kinds of services. All of this will put pressure on rising prices which will be a delicate balance given the unemployment levels and consumer spending habits. We need to watch for stagflation ~ rising prices and only sluggish economic growth.
2. Changes in Consumer Confidence & Consumption Patterns ~ think about your own confidence in your ability to move freely in the U.S. and not bring back the virus to your house. Unfortunately, not too great. Even with stores and businesses reopening, many consumers will not return consumption to their pre-virus levels evenly and consistently across the entire economy. As we all know, the U.S. is a consumer driven economy so sluggish consumer consumption and changes in consumption patterns means slow growth rates.
3. Labor Pull Back ~ With heightened health risks in Child Care and Elder Care, the Federal Reserve is watching to see who returns and does not return to the work force. Jobs that have been effectively “outsourced” by families may be pulled back into the home. It’s anticipated that they’ll look for In-Home Care or someone will have to stay home.
4. Unemployment levels will float down as businesses open back up. However, even the Federal Reserve expects to end the year with around 8 to 10% unemployment rates based on comments from James Bullard and Robert Kaplan, presidents of the St Louis and Dallas Federal Reserve Banks respectively. That’s double where we were when the virus struck.

The balance to these concerns is that the Fed has pledged to keep interest rates low for an extended period of time as well as maintain their monetary support through the end of the year.  Monday, Federal Reserve Vice Chairman Richard Clarida moved the markets back down when he publicly shared that both “the Fed and lawmakers might need to do more” to get the economy to the other side of this crisis.  Regardless, they have not let their guard down and continue to monitor all aspects of the economy.

Regardless of the timing, it’s clear there will be winners in this new environment. Just look at the S&P500. For the first time since 1980, it has a high concentration in 5 stocks: Microsoft, Apple, Amazon, Alphabet(Google) & Facebook. Tech stocks are among the big winners. Nor does the S&P have the high concentrations in financial services and industrial that the other indexes have so their numbers look stronger than a general mixed index.  Think about your new reality, what do you need, and then look at high quality U.S. firms to buy. There are definitely winners out there!

Please remember, it will take 2 to 3 years to return to pre-crisis levels. There is plenty of opportunity for the market to test the bottom so don’t invest any funds that you might need over the next couple of years!  Please consult your professional advisors as all of our risk tolerances and financial positions are different.

Why not a Depression?

Bank of America did a great comparison on the U.S.’s aggressive actions in this crisis versus the Great Depression. They highlighted the fact that going into the financial crisis which would become the Great Depression, the Fed cut monetary support and the Government cut fiscal support, and increased regulations further hampering market functioning.  Conversely, the Fed has lead the world in first to market delivery of monetary support, the government has provided record breaking fiscal support, and regulators have backed off to allow banks and businesses to focus on the dynamic nature of the crisis. The lessons of the past have lead our current leaders to act aggressively. For their forward leaning actions, I am grateful!

What can we do?

Stay calm, do your research before pulling the trigger on any investment opportunity, and take the long view on the market. More importantly, focus on staying healthy, helping those in need within your community, get outside in this beautiful sun, and be your amazing work-selves!

We are leading our families, our communities, and our teams calmly through this crisis! #BeTheCalm #RealLeadership!!!

Stay Safe! Susie