“65 Days… Now What?” – Nvest Nsights Q2 Newsletter

As we move into the 2nd half of 2020, we are struck by how much is changed from just 6 months ago.  A global health crisis/pandemic thrust the world into what is arguably the deepest and sharpest economic recession in a generation’s memory.  If that were not enough, the backdrop of acute economic pain combined with several most unfortunate societal tragedies to create a degree of social unrest not felt so acutely in many years.

Despite these dynamics, the 2nd quarter provided strong recovery for global financial markets.  Most attribute this almost unbelievable market rebound to a forceful fiscal and economic policy response by governments globally.  In this quarter’s newsletter (below), you’ll find 3 brief articles.  The first, entitled “65 Days… Now What?”, places the strength of the stock market since the March 23 low in historical context and reviews the actions we pursued early in the 2Q to position portfolios for economic recovery; “Offense Still on the Field” explains how the process of reopening the economy will remain complex amid lingering fallout from the reality of covid-19.  Lastly, “True vs. True? And Truth!” examines the Great Depression era (1930’s) and the series of what are now considered consecutive policy mistakes that likely kept both the economy and financial markets impaired longer than if different actions were pursued.  Studying these is relevant to the path forward.

A printer-friendly version of our quarterly newsletter can be obtained here: Q2 Nvest Nsights


65 DAYS… NOW WHAT?

June 23 marked 65 trading days (3 calendar months) off the March 23 low.  The S&P500 gained +36.3% over that stretch; a recovery that in itself suggests the bear market is over.  Yet, it is challenging to find any bear market associated with a recession that lasted only four weeks.  [From the low on March 23 thru June 30, the S&P logged an advance of +39.3%.]  That gain ranks third best in history, only barely trailing the initial surge off the 2009 financial crisis lows (+38.8%; the start of the now deceased nearly 11-year Bull market), and the 1982 low (+38.7%).  That’s good company.  More important is the encouragement it should provide to investors who maintained discipline to avoid powerful emotions of worry and remain invested.  The S&P500 jumped +20.5% during the 2Q (best in 20 years).  Many market players now expect a pause in the near term – particularly due to usual sideways summer seasonality and also the uncertainties of the upcoming November Presidential election.  History shows weak forward returns are likely in the short-run; but strongly supportive of very attractive forward returns over the next +6 and +12 month intervals.  [Please see “Offense Still on the Field.”]

Following what is arguably the fastest and steepest decline into technical recession ever, we took action to reposition client portfolios early in 2Q for expectations of economic recovery.  Tactical adjustments within stock allocations included boosting exposure to funds concentrating on small- and mid-size companies that emphasize quality financial-managed businesses (Active fund/portfolio management).  This is because smaller- and mid-size companies usually perform faster, rise more than large company stocks in the early innings of economic recovery.  Also, foreign stocks are generally rebounding faster than domestic; likely attributable to their cheaper valuations and earlier “walk-back” strategies from COVID-19.  Additionally, tactical adjustments within bond allocations included use of well-defined bond strategies with emphasis on higher quality balance-sheet businesses.  These tactical adjustments show early strong performance in client portfolios.  We anticipate they will continue to accrue attractive portfolio benefits.

It is critical to maintain a long term investment focus.  It is amazing looking back, that the market always climbs a wall of worry; there are always market risks on the horizon.  Yet history reveals that the market rises longer and more than it falls.  Inevitably, those who too closely watch/listen to the “bad news bears” succumb to wrong investment action and/or disconnect from their time horizon.  Often, such emotion reactions destroy investment capital and slow a portfolio’s ability to recover.  It is critical to pursue an investment process that is disciplined, proven, and repeatable.  In managing client portfolios, we continually pursue these portfolio management traits, and also find them in successful no-load mutual funds and ETF we utilize.  History proves staying invested works well.


OFFENSE STILL ON THE FIELD

It seems like an eternity ago when life seemed normal.  Unexpected levels of uncertainty were our collective experiences during the 1st half of 2020.  The coronavirus wrecking ball was terrible, leaving heartbreak, economic ruin and social disruption in its wake on a scale not recently experienced.  The government-mandated economic lock-downs, to a near-subsistence crawl, created chaotic volatility in the capital markets.  When you add the “merchants of bad” – journalists, politicians, and self-appointed experts – to set the narrative, it’s easy to create and flame outsized risk of fear.  Unfortunately, “bad” news carries more power to influence our attitudes than “good.”

Catch your breath.  It is probably safe to say that the US recession of 2Q is over.  If so, it is also likely the shortest deep recession in history.  The initial trajectory for economic stats should now remain upward from very low, depressed levels.  Recovery is underway; appearing as a “V” at first, yet it is now likely entering a slower phase.  It is reasonable to expect recovery to get fully back to 2019 economic and employment levels in a socially-distanced world will be difficult.  Severe damage to employment will take time to fix; and its lingering effect is unstable economically and politically.  Lockdown is somewhat easy.  But reopen does not mean an easy return to normal.  There will continue to be a “push and pull” between reopen and virus cases.  Until schools are able to reopen (not in part or staggered schedules), economic/employment recovery will be limited.  Unfortunately, a rise in new COVID-19 cases will also slow re-opening plans and the near-term pace of economic recovery.  At some near future point, both medical (treatment and vaccine) along with the math of COVID (when more than half of the population is exposed) will reflect a slowing trend of exposures.  Then, full re-open should be achievable and economic/employment growth will become more stable.

Source: Strategas Research PartnersThe US and other global governments took extraordinary “shock and awe” action (fiscal and monetary) to calm and stabilize turbulent times.  At present, the “offense” (Fed and global monetary & fiscal policy stimulus) is still on the field.  It is reasonable to expect some continued monetary and fiscal stimulus will be utilized to boost economic and employment recovery; fiscal policy (social programs) are more effective than monetary (low interest rates) in providing near-term cushion.

One significant challenge from the Great Lockdown is fallout – supply chains were damaged or altered with some production returning to the USA; unemployment will lag the economy; China/US relations and trade are percolating again; China/Hong Kong tensions are high; and then there is the noise of November elections.  There still remains the unknown of when and how government stimulus will be phased out?  The Great Lockdown is over, but the fallout is likely complex and possibly long-lasting.

Presently, the economy and financial markets appear to be diverging.  There are stark differences between economic GDP and the S&P500.  Economic recovery lags the stock market.  Or said differently, the stock market leads the economy with a forward view.  For this reason, it is normal for multiples (valuation) on stocks to surge near lows in economic growth causing them to look wildly expensive (see chart below).  The result is valuations become somewhat meaningless in the early stages of recovery.  Yet, valuation differences between asset types or styles reveal areas with better (cheaper) prices.  Given the amount of Fed monetary support/stimulus, the only rule appears to be that there are no rules at the moment [other than perhaps the phrase “don’t fight the Fed”].  Still, “caveat emptor” – let the buyer beware – remains an important principle for investors too.  Be careful; do your homework; understand high-leverage, high debt investments.  This market environment, including the approaching November elections, present an inflection point for Active investment management (not passive, own it all).  Quality and marketability are always important components for successful long-term investment success.


TRUE VS. TRUE?  AND TRUTH!

If a blue light is shown at one end of a solid cylinder, a blue circle (with a dark center) is displayed on the surface beyond it.  The observer understands the blue circle is a “true” representation.  At the same time, if a yellow light is projected on the side of the same solid cylinder whose length is equal to its diameter, a yellow square box appears on the surface beyond it; an observer would claim the yellow square box is a “true” representation.  Which perspective is “true”; or is one perspective more “true” than the other?  How something appears is a matter of perspective.  Often, both perspectives are equally “true” depending on the viewing angle.  The real “truth” centers with the character of the solid cylinder – it creates the shadow images when light is shown upon it from one angle or another.

Let’s shift to look at the world of economics, financial markets, and political responses: what historical perspective can be gained from the Great Depression and recent government policy responses relative to COVID-19?  How do they influence current/future market and economic events?  Where to from here?

The Great Lockdown is much different than the Great Depression.  With hindsight, the recession that started in 1929 was marked by incorrect hyperactivity by government.  At various times during the Great Depression, the US made grave policy mistakes – it raised tariffs through the passage of Smoot-Hawley (1930); tightened monetary policy dramatically (1931); instituted price controls (1934); raised marginal income tax rates and introduced a tax on undistributed corporate profits (1935); increased reserve requirements on banks (1936); and introduced a huge array of regulations on businesses.  And while the New Deal introduced protections for labor and oversight of financial markets, and was accompanied by impressive public works initiatives.  Author and columnist Amity Shlaes argues in her “The Forgotten Man” that government policies did more to lengthen economic misery than to relieve it.  All these actions were well-intentioned attempts to help those who were suffering.  Interesting, with hindsight being a perfect 20/20, capital (money) “went on strike” due to not knowing how and/or when the rules on it might change.

After falling 90% from 1929 to 1932, the market rallied 372% from 1933 to 1936.  But the tax increases knocked the market down again in 1937-38 with a fresh -50% decline.  In the end, the Dow Jones index did not surpass its 1929 high until 1954.  Wow; that’s a real travesty for savers!  Government policy actions influenced “life” for years.

Fast-forward to the Great Lockdown of 2020.  Many government policy actions were taken from the 2008 “financial market bubble” playbook to provide aid during this health crisis – revert to zero/no interest rate easy money policy and massive securities purchases to stabilize (backstop) financial markets; and provide huge fiscal policy spending for social program support.  Like it or not, given the ballooning deficits (Federal and state), higher future taxes may be considered to make any recovery in the economy “fair” via social engineering.  In addition, government involvement in personal and corporate lives (because economic/financial support was huge during the virus) is very likely, and could pose a dangerous future mix for savers/investors of any size.  Did we learn from the 1920s?  “Experience is simply the name we give our mistakes” – Oscar Wilde.

Did you know?  Data since 1928 shows the incumbent party winning the Presidential election 87% of the time IF the S&P500 is positive over the 3 months leading up to the election; conversely that party loses when returns are negative.  Another data study indicates that usually an incumbent President does not win re-election when a recession occurs within two years before election (Calvin Coolidge was the exception).  Both of these opposing factoids are presently “true” experiences.  What will be the “truth” in 2020?  Government policy actions (current and future in particular) dealing with COVID-19 and the Great Lockdown could create long-term influence/effects on many aspects of life in America.

Stay alert, but stay invested.  Investing a portfolio for “tomorrow” should involve adapting and evolving with government policies – meaning, some investments will take favor over others.

Author: Bill Henderly, CFA

Looking Through the Right Lens – June 2020

2020 was dubbed “the year for seeing clearly” due to the number being analogous to the description for “perfect” 20/20 vision.  It’s interesting that we often use this term to describe excellent vision, yet don’t necessarily know what it means.  As it turns out, 20/20 vision does not mean “perfect” vision; but according to the American Optometric Society, it simply means “seeing clearly at 20 feet what should normally be seen at that distance.”  20/20 vision means “normal” vision of an object at a distance of 20 feet.  There are other important aspects to vision skills – peripheral awareness, side to side vision, eye coordination, depth perception, focusing ability and color perception – that contribute to overall vision ability.

So, how are you “seeing” your financial world today; what investment and economic outlook do you “see?”

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Keeping it ALL in Perspective – May 2020

Much happened in the month of April, a month that probably felt much longer – “stay-at-home” mandates and related economic shut-down continued, air/water quality improved, oil priced for May delivery traded below zero; yet stocks enjoyed a strong rebound.  “Seeing clearly in 2020” seems impaired now because of too much news.  “Unprecedented” is perhaps the most overused term applied to many topics during this world-wide pandemic event; but so many things truly are “unprecedented.”  As a result, there is no shortage of topics that merit comment.  But the simple thought is overload – too much news.  So let’s pursue a bullet approach to touching on what we see as the important themes.  We hope this format and information is helpful.  Most important – we pray that you, your family, and friends are staying healthy and safe.

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“The Price is Right?” & “Framework for a Path Forward” – Nvest Nsights Q1 Newsletter

Nvest (Bill, Steve and Jordan) wishes for you and your family/friends good health, safety and wellness from this COVID-19 virus and the economic challenges.  We are greatly concerned by the very real human health impact and ongoing crisis; praying for a timely cure for these current health and economic challenges.  Let us know of your worries and if we can be helpful.  While it would be unwise to meet in person due to social-distancing protocol, we can visit virtually via web meeting to review your needs, portfolio reactions, and discuss LIVING LIFE financial planning questions.  Call or email to coordinate a time to visit.

This quarter you will find several timely updates.  First, “The Price is Right?” reviews how swift was the transition from bull market into bear and shares historical perspective; places the size of recent government responses in context; and what we are watching to signal that durable recovery may be near or developing.  “Framework for a Path Forward” examines whether the market low observed on March 23 was “a” low, or “THE” low.  It is important awareness that retests are normal during periods of market stress, but the market will offer clues beneath the surface about where we are and when/what actions are appropriate to position portfolios for recovery.  “Thoughtful Comments for Careful Consideration” is a compilation of notable quotes from highly respected individuals that can be helpful during challenging environments.

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“Hysteria Unmerited” – March Commentary

Does any investor believe the last week of fast-moving negative market action was reasonable?  Continuing our theme relating to seeing clearly with 2020 vision…. from our perspective, and many other research pieces we are receiving, indicates this past 7 days was “hysteria unmerited.”  It is mind boggling how many traders (not investors) display a “shoot first and ask questions later” mentality.  When one is unable to understand or is unable to quantify a concern, natural intuition reaction is “jump, and look later.”

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Seeing Clearly in 2020 Vision: “Red, Blue & You” – February Investment Commentary

We continue our theme relating to seeing clearly with 2020 vision. January started the new year and new decade with positive action – new stock market highs on the first trading day of 2020 and 5 additional dates from there with the most recent occurring on January 17th.  Since then, the market caught the flu.  Volatility jumped toward the end of the month, as China “exported” fears of a contagious and not well understood Coronavirus.  The S&P500 Index forfeited away 3% gains to close marginally negative at month end.  Stocks, both domestic and foreign, showed “flu-like” symptoms, while bonds offered a “safe haven” with yields falling (prices rising).  Client portfolios with more bonds performed better than those with greater stock market exposure during January.

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“Hindsight is 2020”, “2020 Vision” & “Sparks Start Fires – Nvest Nsights Q4 Newsletter

Happy New Year, and new decade!  Time flies – just twelve months ago investors entered 2019 questioning whether the bull-market might be dead following a relentless and jarring 4Q’18 decline coupled with anxiety that the Federal Reserve would continue pursuing step-like rate increases despite rising uncertainty related to trade and tariffs.  At that time, who would guess that the year would provide the most attractive full-year market performance in over 6 years?!

In this quarter’s update, “Hindsight is 2020” provides a quick recap of the recent year, but more significantly why it is so important to battle temptation to invest based upon short-term worries or negative headlines alone.  Continuing, “2020 Vision” [bear with us as we enjoy the easy puns available this calendar year] discusses the key themes we’re focused on this year and how those shape our expectations/forecast for the broad economy and investment markets in the upcoming year.  Among the themes are a Fed that appears on-hold; the Money Supply (M2); international economic fundamentals and investing opportunity; bond markets; and a US Presidential election year.  Lastly, “Sparks Start Fires” offers quick thoughts on escalating middle-east tensions and how these geopolitical uncertainties may cause market jitters in the short term.

The printer-friendly version of these newsletter articles can be obtained here: Nvest Nsights – Q4 ’19 Newsletter.

Also included in the newsletter (and posted separately here), our personal finance topic this quarter overviews the recently passed The SECURE Act and broad implications for both owners and beneficiaries of retirement accounts.

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“Markets Will Always Surprise” – Market Commentary for December

On the eve of Christmas 2019 and the passing of another decade, why was the stock market performance so strong this year when the economic backdrop was so soft?  How can stocks perform well when the economy is so worried about many things, including slow growth?  How many investment forecasters predicted this year’s strength when the 4Q selloff a year-ago almost ended the current Bull market run; or that the Fed would abandon its rate hike cycle and instead cut rates 3 times?  The financial markets always provide surprises which no one can time.

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“Fire Engine Called!” – Market Commentary for November

The US economy is soft and many others around the globe are contracting due to lingering tariff issues between the US and China.  Since the first threat of tariffs announced in January 2018, at which time the markets “shook” lower, each additional threat seemed to escalate anxiety and provoke the stock market to lower values.  Their prolonged threat lowered US and global economic growth prospects because business leaders are stymied to make long term business decisions involving investments into plant and equipment, and/or hiring new employees.  Making things worse, the Fed raised interest rates during 2018, appearing unaware or unconcerned that those actions would also slow economic growth prospects.  That adds to “double trouble” for investors.  “Quick, call the fire department.”

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“September Crazy” & “Big FAT Yields” – Nvest Nsights Q3 Newsletter

Despite persistent and worrisome headlines dominating the news flow all year, US Stocks enter the 4th quarter with their biggest YTD gains in more than two decades.  In this quarter’s update, the article “September Crazy” discusses why the current bull market – which began 127 months ago and is now the longest in US history – could still advance further due to fundamentals and an anything-but-euphoric sentiment.  “Big Fat Yields” (or the lack-thereof) shares several implications of low interest rates, the message from the yield curve, and the Fed’s likelihood to pursue additional cuts.  The above themed titles taken together might also be a reason why the market leadership shifted abruptly in September; will we see the rotation wherein “Losers Win; Winners Lose” continue into the 4Q?

The newsletter also contains two brief Personal Finance themed notes: “Doing Diligence” and “Transitioning from a ‘Saver’ to a ‘Spender’ in Retirement” are related, but speak to the importance of discipline (be it with saving, investing, etc) as well as the emotional hurdles we observe for many individuals either at the doorsteps or in the early innings of retirement.  These articles can be found posted separately.

Click Here to Download the printer-friendly PDF version of our newsletter or continue reading below.

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