Market Update: Jun 04 2020
- Buffered Products
- Market Expectations
Here is a recap of our live Q&A session held on 6/4/20 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 11, 2020 at 10 am.
Details for our next event can be found here
What is a buffered product and how do they work?
Over the last couple of years we have seen a number of new products designed to provide downside protection to investors. These products are structured to provide exposure to the S&P 500 and other various indexes. Investors would participate in upside returns of the various indexes over varying periods subject to a cap. These same investments also provide some downside protection based on these index returns which is the “buffer”. Buffered amounts range from 5% to 30%. The higher the buffer the lower the cap on these products.
As will all investments we recommend that you seek professional advice in choosing the one that best suits your personal situation. We believe that many investors can benefit from these products if they fit in your risk/return profile. These are not one-size-fits-all and be sure you understand the details before you invest.
With COVID-19 risks still apparent, US-China relations strained, record unemployment, and now the social unrest in the country why is the market still rallying? What are your expectations over the coming months for the market?
In our opinion, it is very evident that the market is being driven by the re-opening of the economy across the country. The market movements have turned from news on COVID 19 to news on reopening of the economy. The market has mostly discounted the US-China relations and as of now have seemingly ignored the rioting across the country. We are starting to see corporate earnings having some weighting in stock performance. We do expect at some point the market will shift from the re-opening of the economy to corporate and economic performance. Once this occurs, we believe the market may experience a pull back as expectations are reset. A positive sign for the market this week is we are starting to see more breadth as small caps, value, and international stocks have had more participation in moving the market higher. If this trend continues, we believe it would clearly be a positive for the sustainability of this market rally. While it does not assure a profit or protect against a loss, we still think dollar-cost-averaging is a prudent way to invest in this market, if appropriate for your situation
With the Fed flooding the market with liquidity once again, should we expect higher, or even hyper inflation?
A question that has challenged many of us for the last 10+ years as the same question came about in 2008 and 2009 with the Feds Quantitative easing, but inflation has been relatively tame since then. Now, with the Fed rolling out the printing press yet again, we have to ask ourselves if this time it’s different.
Global market strategist for JP Morgan, Alex Dryden, reminded us earlier this week that there is more than one factor to causing higher inflation. An increase in money supply, or excess liquidity in the market place, is only one element to an inflationary environment. Another very important factor is the speed at which money moves through our economic system, or the velocity of money as he refers to it. What we have noticed in the last decade or so is that, while there is ample liquidity, the rate at which money moves through the economy has slowed rather significantly. We can speculate a little on some of these causes:
- Demographically, our country is aging as baby boomers make up over 22% of our population. Theoretically, older individuals save more as they age than in their younger years, so there is an increased rate of money saved versus money spent.
- Income inequality can also be partially to blame for the slowing velocity of money through our economy as higher income earners may tend to save and invest rather than spending their excess cash.
- Aside from demographics and human behavior, we can look to the financial system as part of the cause as well. Certainly, stricter banking regulations since the financial crisis have likely added to a slower speed with which money moves through the economy.
There’s really no way to tell with absolute certainty whether inflation will kick up or remain tame for the next several years, but I believe some of these behaviors certainly strengthen the argument for continued low inflation for the foreseeable future.
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.
S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.
The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. and controls the Federal Funds Rate (aka Fed Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy. Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market. Moderate inflation is a common result of economic growth. Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.