Market Update: May 29 2020
- Market Drivers
- Debt Management
- Market Breadth
Here is a recap of our live Q&A session held on 5/29/20 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 Thursday, June 4, 2020 at 10 am.
Details for our next event can be found here
What encouraging or discouraging signs should we be looking for?
As we’ve mentioned in these calls the last several weeks, the markets have been acting rather irrationally, at least in our opinion. Investors have been focused on headlines occupied by progress with vaccines and treatments and not on fundamentals like earnings and unemployment. To know whether this rebound will stick, we believe we have to gauge market reaction to:
- Headlines on Coronavirus cases may be influential with the markets. While we believe investors should focus on fundamentals and not simply health related headlines, a spike in reported cases or fatalities as economies continue working toward some semblance of normalcy would likely cause some panic selling just as it has in recent past.
- Watch where consumer spending goes once the additional unemployment expires this summer. It’s not at all unusual for some people today to be receiving the same, or just slightly more or less money with unemployment benefits than they were at work. As a result, spending has not curbed as much as you would expect with 40 million jobs lost. Consumer spending may be a more reliable market indicator once the Federal unemployment stimulus runs out.
- We would also pay attention to the Weekly Economic Index, or WEI. The WEI is an index comprised of data that measures, among other things, same-store retail sales, initial unemployment claims, utility and fuel sales. It is designed to measure real economic activity at a weekly frequency. After a swift downturn in March, the WEI has essentially leveled off. In fact, there was even a slight uptick last week with state economies starting to open. This supports the suggestion that consumer spending has not dissipated after its initial drop when the market got hit hard. We would also look for the recovery rate of this index and any leveling off we see before getting close to pre-pandemic levels.
- Consumer confidence readings are something else to track. According to The Conference Board, Consumer sentiment regarding business conditions and employment both improved in May after plummeting in March and April. This reading supports the continued rally in the market - consumers typically won’t liquidate positions or panic sell if their outlook is improving; no matter how bad it looks right now, they are expecting it to get better. A discouraging sign would be consumer sentiment leveling off or starts to recede before approaching pre-pandemic levels.
- Finally, watch the rate at which Jobs start to come back. Now that economies are opening across the country, there is much debate as to where unemployment numbers will go. I can’t help but believe the market has priced in the expectation that most of these jobs will come back rather quickly as we continue to pursue some semblance of normalcy. I believe there will be a longer-term impact with significantly higher than normal unemployment rates that has not been adequately considered. For example, while some jobs are starting to come back, Boeing announced earlier this week another 13,000 layoffs. Tuesday Morning announced it is filing for bankruptcy protection and will permanently close 230 of its 687 stores, adding to the longer-term unemployment numbers. And so, we will be focused on unemployment numbers week to week to see how quickly some of these jobs come back, how many more are added to the unemployment line, and how many jobs have just been eliminated or consolidated.
With the market having rebounded as much as it has, should I pay off my mortgage / debt? Or, with interest rates so low, should I continue to finance and keep my money invested? I’m also being asked a lot whether it makes sense to refinance, either for lower rates or for shorter terms
First and foremost, we are certainly not proponents of borrowing money to invest. Regardless of interest rates and market conditions, equity markets are always unpredictable and we believe it’s never a good idea to obligate yourself with debt to add to an investment portfolio.
The answer to the question on whether to pull money out of a portfolio to pay off the existing debt, as you would imagine, varies from person to person. Some things to consider though:
- The interest rate you are paying on the debt in question,
- Any tax benefits you might be receiving from the debt, such as mortgage interest deduction,
- The tax implications of liquidating investments to pay off the debt. Rarely a good idea to take large sums from traditional IRAs because of the significant tax consequences,
- Where you are in the term with the debt in question, and how long before it would be paid off with the current structure
The question on refinancing existing debt is also answered differently for different situations. Many of the same questions above need to be asked and answered, and I’d suggest running, or having us run an amortization schedule for you that compares current situation to best alternative. Numbers don’t lie and you’ll likely answer your own question once we see the schedules.
What is market breadth and how does that impact the market?
Market breadth is an indicator how broad stocks are moving together at a given time. One of the issues with the market today from a “breadth” perspective is that only a few stocks have been driving the returns of the market. Year-to-date the 10 largest stocks in the NASDAQ have gained in aggregate almost $900 billion and the other 2,600 or so have lost about $300 billion. The significance of narrow breadth is a lot of businesses are facing headwinds. More breadth typically indicates expected better days ahead for most businesses. The NASDAQ is a cap-weighted index meaning that the biggest stocks account for more of the overall NASDAQ return than smaller ones.
The views and opinions expressed herein are those of the author(s) and date noted and may or may not represent the views of Capital Analysts 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.
The NASDAQ is an index that tracks the cumulative results on a market capitalization basis of all stocks trading in the NASDAQ system.