As the market rebounded significantly in April, capping one of the best performing months in more than 30 years, stock prices became strangely unhinged from the economic reality on the ground. During this time there was still widespread fear and uncertainty across the country, and we saw some of the most shocking economic data in history. Many numbers reached levels previously thought impossible. Oil futures went negative, further sinking the already devastated energy sector. Unemployment levels exploded reaching over 20%. Most GDP forecasts estimate a drop of 20-40% in the second quarter.
So how can we make sense of such a strong rally in the market? Nothing even close to our current economic situation has ever happened so the market is truly in uncharted waters. In the absence of any model for this sort of event, the indexes have swung from apocalyptic fear in March to relative optimism now. During the Berkshire Hathaway annual meeting over the weekend even Warren Buffett acknowledged that “nobody knows what’s going to happen.” He also added though, “I remain convinced that nothing can basically stop America. The American miracle, the American magic has always prevailed, and it will do so again.” The market seems to have adopted this long-term sentiment, choosing to focus on eventual recovery, the massive government relief programs and the resilience of America.
The current optimistic stance, however, seems a bit precarious given the underlying economic situation. We still do not know when things will return to normal, whether there will be a second wave of the virus or whether the massive financial shocks will cause long-lasting ripple effects across the economy and financial system. What we can say is that the range of outcomes has narrowed. We know that the best-case scenario did not happen, but we also know that the worst-case scenario, which some people envisioned back in March, is also not going to occur. We know that the government has made a massive commitment to providing various forms of stimulus and relief. We remain cautiously invested with a somewhat defensive position as we anticipate there could be further volatility before a true recovery takes hold.
We have seen a mixed earnings season and that sentiment should hold its course in the coming months. As such, investors should continue exposure in non-correlated asset classes that can help stabilize a portfolio in volatile times. The addition of more defensive stocks overs cyclical stocks can help mitigate downside risk in equity portfolios while maintaining exposure to momentum names, such as big tech companies which have seen a lessor impact from COVID-19. With April’s relief rally, we have looked to trim positions that benefited from the rapid bounce back in their stock price but will continue to be under pressure due to the limited economic conditions that have been imposed. As always, we stress the importance of adhering to your own specific financial plan that outlines your respective goals and objectives.
Unprecedented Spike in Unemployment
Though unemployment claims have been trending down, last week 3.8 million people applied for unemployment. To put this in perspective, prior to March 21, no single week had seen unemployment claims over one million. In the current crisis more than 30 million people have registered for unemployment.
Bailout Could be the First of Many
With the $2 trillion CARES Act, the massive expansion of the Fed’s balance sheet and more relief likely on the way, the government’s response to the crisis has been strong. While there is widespread agreement that these actions were appropriate, whether these programs were effectively targeted and what the long-term impact of such large-scale deficit spending remains to be seen.
What We’re Reading
Last time the U.S. incurred massive government debt was during WWII and the country managed to grow its way out rather than paying it off. Could that happen again with the growing Covid deficit? … (link)
If we want to restart the engine that made this nation a superpower, we need to do something big. I mean really, really big … (link)
Why does the stock market look nothing like the actual conditions of the real economy right now? … (link)
For the Month Ending 4/30/2020 (Cumulative Returns)1
Did You Know?
Clorox and Lysol Want to Kill Germs—And Each Other: The Messy 100-year Feud between America’s Favorite Toilet Cleaners
Each is more than a century old. Each is a leading name in cleaning wipes and disinfectant sprays. Neither can manufacture and ship enough product to satisfy America’s pandemic-driven demand for cleaning, with sales up two- to threefold over the same period last year. And each has it out for the other. They are the Coke and Pepsi of wipes. … (link)
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
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