Market Update: May 15 2020
- Market Expectations
- Negative Interest Rates
Here is a recap of our live Q&A session held on 5/15/20 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management. Please join our next Q&A on Friday, May 22, 2020 at 10 am.
Details for our next event can be found here
What should investors watch for over the coming months in the financial markets and the economy?
Dave: As we have indicated previously there has been a disconnect between the financial markets and the economy since the end of March. As we just stated the stock market has had a tremendous rally from the lows in light of terrible economic data. The market has been “virus” driven and has rallied on any good news on the virus itself, potential treatments, and the progress of opening businesses up in the country. We believe at some point market sentiment will start to focus on the fundamentals of the economy and corporate earnings. It is hard to predict when this will happen. A key variable that we believe will be relevant in the near term will be the number of unemployed who get called back to work as businesses reopen. This number could be 80% or higher of workers who get called back to work immediately. Another variable will be bankruptcy filings. If businesses are filing for bankruptcy at a higher than expected rate then the stock market should react. We do think there is a reasonable probability that the market will see a dip and re-test the market lows in March.
Joe: I’ll just add that consumer spending is also a leading indicator in the stock market, as we look to that monthly reading to help gauge confidence consumers have in their overall financial picture. It goes without saying that there is a direct correlation between what we spend and corporate profits. In April, according to AP News, consumer spending fell 7.5%, the sharpest monthly drop on record. I interpret that to mean, as Dave suggests, there’s a strong chance of revisiting market levels seen toward the end of March.
Do you think there will be negative interest rates? How should investor utilize bonds in a portfolio today?
Dave: Many believe that negative interest rates are not a solution to jump start the economy. With negative interest rates you would pay a financial institution to hold your money. This is good for the banks but not necessarily for the consumer. The theory of negative interest rates is that if you pay a bank to hold your short-term money that you will be motivated to buy riskier assets than may drive returns in stocks and other higher risk assets. This also may help borrowers who should likely see the cost of debt very low. Negative interest rates are somewhat controversial and it is generally the opinion that it has not helped other countries in growing their economy. Whether we have negative interest rates or not we believe that interest rates will likely stay very low for some time as the economy recovers. Bonds should still be a meaningful asset class in all of our asset allocation scenarios. We only recommend bond portfolios that are managed for total return and not tied to a specific type of bond. We think that there will be opportunities in bonds to be that ballast in a portfolio as we should not have all of our money in stocks or cash. Remember in a low interest rate environment it is very important to know what you own and understand the risks if interest rates do rise.
The views and opinions expressed herein are those of the author(s) and date noted and may or may not represent the views of Beacon Financial Advisory or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. Past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss. There is no guarantee that any strategies discussed will result in a positive outcome. You should discuss any legal, tax or financial matters with the appropriate professional.
Asset allocation does not guarantee a profit or protect against a loss.
Advisory services offered through Beacon Financial Advisory LLC or Lincoln Investment, Registered Investment Advisers. Securities offered through Lincoln Investment, Broker Dealer, Member FINRA/SIPC. www.finra.org, www.sipc.org, www.lincolninvestment.com, Tartan Wealth Management, FNA Wealth Management, and the above firms are independent, and non- affiliated.