FAS Monthly Market Update May 2020

FAS Monthly Market Update May 2020

Posted By FAS Team


Economic Conditions

GDP in Q1 2020 decreased at an annual rate of 5% according to the second estimate released by the U.S. Department of Commerce.  This was a downward revision to GDP from the advance estimate released in May, given more complete data.  While this was the largest quarterly decline since Q4 2008, economists estimate GDP could fall as much as 40% in Q2 – the largest dating back to 1947.

Despite the constant flow of negative economic headlines we have seen over the last several months, we did catch a glimmer of hope with the May unemployment numbers at the beginning of the month – depending on how you frame it.  The Bureau of Labor Statistics reported the U.S. economy added 2.5 million jobs in May, bringing the unemployment rate down to 13.3% – a far cry from the estimated unemployment of 20% leading up to the release.  The BLS, however, released a notice explaining the classification of a large number of workers who were counted as employed but absent from work due to coronavirus-related business closures.  The BLS assumes the several millions of non-paid furloughed workers will eventually return to their jobs, which led to the decline in unemployment.  While we may not be able to assume all of these furloughed workers will return to their jobs, we also cannot assume that none of them will return to their jobs.  Because of this we can most likely deduce that the true unemployment rate more likely lies somewhere in the middle of 13% and 20%.

Market Conditions

Markets continued their climb throughout the month of May.  The S&P 500 returned 4.53% in May bringing its loss to -5.78% for the year and -10% from its all-time high in late February.  Large cap US continued its trend of out performance of other asset classes led primarily by a few mega-tech company’s out performance.  Five technology companies – Microsoft, Apple, Amazon, Google, and Facebook – account for roughly 20% of the index.

U.S. small caps made their way into headlines last month with its own recovery story.  While the index has actually outperformed major indices since the market bottoms, returning 39% since late March, the Russell 2000 still lags U.S. large cap as it was down over 40% from its late-February peak.

Fixed income markets remained steady as rates remained relatively range bound for the month.  The Barclays US Bond Aggregate and long-term Treasury bonds remain among the best performing asset classes for the year.  We finally saw rates move further off their April lows in early June with the unrelenting stamina we experienced in equities until Fed chair Jerome Powell announced the administration’s plans – or lack thereof – to keep a lid on interest rates for the foreseeable future, causing the 10-year treasury rate to fall back down to its April/May range.

Reassessing Risk

The last 3+ months have been a whirlwind for investors and advisors alike.  No one could have seen the type of market shock we recently witnessed at the start of the year.  We have seen markets and investors go through the full range of “Greed” and “Fear” emotions.  As we often discuss with clients as we prepare and update financial plans, finding the right portfolio that matches your risk profile is a key component of your overall success.  The right portfolio will allow you to weather storms of volatility without selling assets and making paper loses permanent.  It is important to take a long view of the market and economy in general and it is difficult to do so when bombarded by a constant stream of negative information and headlines.  The recent FAS webinar series was meant to provide some semblance of balance and facts to the current situation and encourage clients to keep to the plan.  In most cases, people did and have recovered significantly from March lows.

Losses are never easy pills to swallow, even if we are talking about 7-10% compared to 30% losses.  As we discussed in one of our weekly webinars, even though we are the most advanced species in the history of our world, our brains still revert back to fight or flight mode when put in a stressful situation.  It is quite literally what makes us human and it is very difficult to overcome these natural instincts and emotions and stay the course.

That all being said, while we most certainly did not foresee the declines in the market being that steep or coming on that fast, we similarly did not see the recovery – at least from an asset price standpoint – happening as quickly as it did either.  The Fed and the administration have been a major factor in the comeback we have seen over the last two months.  Both monetary and fiscal stimulus have managed to keep the economy in a sort of suspended animation until officials felt it was safe enough to begin to slowly reopen the economy.

The stock market tends to be a leading indicator, but the economy will need to continue to stabilize and revert back to growth in order to justify current market levels.  Second quarter GDP may very well be one of the worst declines we have seen since the Great Depression, dampened by historic financial and fiscal stimulus.  We as a country are still in the relatively early days of reopening and it could be sometime before things go back to “normal.”  The market seems to be pricing in that normal with the levels it is at today, looking past 2020 earnings and onto 2021, even 2022 earnings.

We do not have a crystal ball and we are not going to pretend to know what the immediate future holds with regard to asset prices or economic growth.  All we can do is make educated assumptions based on historical data and current projections. Historically speaking, the market has never failed to reach previous highs.  Current projections and economic data insinuate we have quite a bit more to go before the economy is operating at full capacity, meaning volatility is almost certainly not going away.

We encourage you to consider your current situations and your current plans for the future, as well as reflect on your emotions and state of mind back in March.  If that was an overly stressful time for you then it may be time to reassess your risk, update your financial plan, and make adjustments to your investment allocation.

Disclosures & Index Definitions

Under style performance boxes, indexes referenced in the equities section for large, mid and small reference the Russell 1000, Russell MidCap and Russell 2000 stock indices, respectively. The Barclays US Government, Barclays Credit and Barclays High Yield fixed income indices refer to Gov’t, Corp, and HY, respectively. Short, Intermediate and Long refer to the time frame of the investments and their positions on the yield curve.

The information and opinions stated in this presentation are not intended to be utilized as an overall guide to investing; nor should they be taken as recommendations to buy, sell or hold any particular investment. This presentation is not an offer to sell or a solicitation of any investment products or other financial product or service, an official confirmation of any transaction, or an official statement of presenter. The opinions and views conveyed are for informational purposes and make no recommendations in regards to how a client’s portfolio should be managed, as that involves inquiring, in depth, of a client’s or prospective client’s risk tolerance, investment objectives, time frame for investing and any other details pertinent to said client’s or prospective client’s financial situation. The presentation may not be suitable to be relied on for accounting, legal or tax advice.

Past performance is not indicative of future returns. Prices and values of investment vehicles will rise and fall as broad market conditions change. Investors’ portfolios may fluctuate, to varying degrees, in tandem with market conditions.  Diversification neither guarantees returns nor does it eliminate the risk of a portfolio decreasing in value. Equity securities tend to be more volatile than bond/fixed income products and carry greater risk factors than that of fixed income products. Smaller capitalization equities (i.e. mid and small caps) typically involve more risk than that of larger capitalization stocks. Political, economic, and currency risk are all risks subsumed under the additional risk factors of investments in international securities, to include  those in both developed and emerging markets. In addition, political conditions in emerging markets can tend to be more volatile than in those of developed markets.

Investments in bonds will be subject to credit risk, market risk and interest rate risk. Interest rates will have an inverse effect on prices of bonds. Bonds of lower credit ratings, also known as High Yield bonds which hold a rating of less than investment grade (BB+ and below), will have greater risks attached than will those of investment grade bonds and will experience greater volatility.

All dates are as of May 29, 2020 unless stated otherwise.

Presentation prepared by Financial Advisory Service, Inc., an SEC Registered Investment Adviser. Securities offered through FAS Corp., an affiliated insurance agency and broker/dealer.

Any dissemination, distribution, copying, or other use of this presentation or any of its content by any person other than the intended recipient is strictly prohibited. FAS only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses to this presentation that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion.

Index Definitions

The S&P 500 Index is based on the market capitalizations of 500 large companies whose stocks are listed on the NYSE and NASDAQ. This is widely regarded as the single best gauge of large cap US Equities.

The Dow Jones Industrial Average  is a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials. It is used as a barometer of how shares if the largest US companies are performing.

The NASDAQ is a market capitalization weighted index of the more than 3000 common equities listed on the NASDAQ Stock Exchange. These securities include American Depository Receipts, common stocks, real estate investment trusts, and tracking stocks.

The MSCI EAFE (Europe, Australasia, Far East) Net Index is recognized as the pre-eminent benchmark in the US to measure international equity performance. It comprises the MSCI country indices that represent developed markets outside of North America, Europe, Australia, and the Far East.

The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 822 countries, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Barclays US Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS, ABS, and CMBS.

All index information has been gathered from public sources who are assumed to be reliable, although we cannot guarantee the accuracy or completeness of those public sources.