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Letter for September: A Recession and a Rally

Letter for September: A Recession and a Rally

October 22, 2020

Imagine yourself at the beginning of the year. You have knowledge that within weeks a novel virus will emerge that will shut down much of the global economy. Businesses will close, sporting events will be canceled, your daily routine will be altered, travel plans will be derailed, and tens of millions of Americans will be thrown out of work.

There is no preventative vaccine, no cure, and the virus can be contracted like the common cold or the flu via airborne contact.

This will turn into a health and economic crisis that no one alive has ever experienced.

It sounds like a script created in a Hollywood studio. Yet, it’s the reality of 2020.

With the foreknowledge that a global pandemic and economic collapse is on the horizon, how might you position your investment portfolio?

Many would have correctly anticipated a swift sell-off in stocks as the virus swept across the globe and the U.S economy went into hibernation. The safety of cash or long-term Treasury bonds would have been alluring.

But consistently picking the peaks and valleys in stocks, or even something close, is a fruitless endeavor. We know that intuitively.

When might the investors who had fled to safety decide to repurchase equities, returning to the proper asset allocation designed to achieve their financial goals?

Would the unending drumbeat of bearish sentiment have kept them out of the market and in the safety of cash or government bonds? For many, it’s difficult to pull the trigger when the news is bleak, and there’s no light at the end of a dark tunnel.

The swift sell-off in stocks may be in the record books. It was violent but short-lived. 

As the economy was on the precipice of its worst quarterly decline on record (St. Louis Federal Reserve GDP data, April – June quarter, quarterly records began 1947 source), the major market indexes approximately touched bottom in late March and began a remarkable rally that few thought possible.

According to a mid-August article by Barrons, the Dow Jones Industrial Average registered its best 100-day advance since 1933 (March 23 bottom – 100 trading days) (source).

While the Dow has yet to eclipse its prior high, the S&P 500 Index is a market- capitalization- weighted index of the 500 largest U.S. publicly traded companies. It set a new record on August 18 and proceeded to set six new closing highs by the end of August (source).

Strength in a few large technology stocks have helped fuel the rise in the S&P 500, while strong technology performance has fueled a spectacular advance this year in the Nasdaq.

Table 1: Key Index Returns

Source: Wall Street Journal,, Morningstar, MarketWatch

MTD return: Jul 31, 2020—Aug 31, 2020

YTD return: Dec 31, 2019 

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not consider the effects of inflation and the fees and expenses associated with investing.

The pandemic changed the rules. There’s no playbook to model outcomes. The Fed, economists, and analysts are all playing by new rules.

Aided by fiscal and monetary stimulus, price action in the market since late March accurately called the bounce in economic activity that began in May and has continued into August. 

However, let’s acknowledge that the recovery did slow in July (based on the broad-based Chicago National Activity Index, which is comprised of 85 monthly economic reports).

And while the economy is in recovery mode, it has been very uneven.

We’re seeing a strong stock market, which has been supported by unprecedented liquidity supplied by the Fed, rock bottom interest rates, and an improvement in the overall economy.

Buoyed by low mortgage rates and pent-up demand, housing activity, a traditional leading economic indicator, has surged (source).

Retail sales, as measured by the U.S. Census, have surpassed pre-Covid levels (source). Thank pent-up demand, generous jobless benefits, and stimulus checks.

The Atlanta Fed’s GDPNow model, which inputs economic growth into a complex GDP model as new economic reports are released, is tracking an annualized growth rate of 28.5% in Q3 (as of September 1) (source).

While we could see moderation in activity prior to the quarter’s end, anything north of 16.7% annualized GDP growth, which occurred in the first quarter of 1950 (source), would set a new record.

Blemishes remain on the economic landscape

It has been an uneven recovery. While companies have been recalling furloughed workers, total employment remains well below the pre-Covid peak. For example, the U.S economy has yet to reclaim even half of the 22.1 million jobs lost in just March and April (source). 

August’s unemployment rate of 10.2% is down from the April peak of 14.7% but remains above the 10.0% peak that occurred in the Great Recession (source). 

First time claims for unemployment benefits have been hovering near one million each week, well above the 665,000 peak registered in the Great Recession (source).

Meanwhile, the economy may need another shot of fiscal stimulus, but lawmakers are at an impasse.

A liquidity crisis was avoided when the Fed flooded the financial system with cash, but economic output remains subpar, and potential solvency issues among homeowners and businesses may create new hurdles down the road.

Final thoughts

I remain incredibly bullish on the long-term prospects for the U.S. economy, but I am monitoring short-term risks.

Outsized gains in a few technology shares leave the market vulnerable to a pullback. When we see stocks priced at lofty levels, any unexpected surprises can create volatility.

The path of the virus remains top of mind. Fortunately, the mid-summer spike in cases has subsided (source). Yet, could we see a second wave in the fall or winter? Might we see a resurgence in the virus amid the reopening of schools? What if the massive effort to develop a vaccine comes up short?

The election is barely two months away, which could create headline risk. Or, might tensions between the U.S. and China generate waves in the market?

While markets don’t always get it right, they attempt to price in the future. Markets are made up of millions of investors that have a financial stake in their decisions. Current price action suggests the economy will continue to improve, though the pace of improvement is uncertain.

As I said last month, the economy may not be the same when the pandemic is behind us, but we are a resilient people, we will persevere, and we will adapt.

If you have any thoughts, questions, or concerns, feel free to reach out. That’s what I’m here for.

Advising a college freshman

First off, we want to begin talking about the college challenge facing many Americans in 2020. We would encourage that if you find the following helpful, to pass it along to anyone else that may benefit from this information. We have other resources on our website, so feel free to share!

For most incoming students, the freshman year begins in late August or early September. You are about to embark on a new journey.

Some of you will be in a classroom setting, while others will be online as the pandemic injects uncertainty into your college experience. Flexibility is paramount.

For the first time, some of you will be away from home for an extended period. You’ll have to adjust to a new schedule, make new friends, share a dorm room with a roommate, and juggle your extracurriculars and newfound freedom with your academic responsibilities. 

Some will thrive in the new environment, and others will struggle. It’s an adjustment every new college student must deal with. I highly encourage you to take advantage of the resources on campus that support new students. When you make mistakes (and you will; I sure did), learn from them.

With that in mind, let’s look at six ideas that will get you started on the right path. Even if you are not going away to college, these principles can be adapted to those starting out in adult life.

1. You’ll need a budget. What is your income? How much money do you have in savings? What might your expenditures be? Outflows shouldn’t exceed inflows. You can guestimate your expenses, but you won’t know how much you spend until you begin tracking your monthly outlays.

Don’t spend all your income. It’s never too soon to start saving money. Over time, you’ll develop good habits, and you’ll graduate with cash in the bank.

2. Speaking of cash in the bank, it may be beneficial to open a savings and checking account. With the guidance of others, one way to learn life’s lessons is by doing. At regular intervals, log into your account and make sure the transactions are yours. In today’s digital world, identity theft is a risk. 

Finally, it almost goes without saying, never give anyone your online passwords. EVER. Some young folks share passwords as a sign of friendship or affection. It’s better to buy someone an inexpensive gift or get them a friendly card rather than giving them the keys to your financial kingdom.

3. Look for a job. The pickings may be slimmer this year due to the virus, but try and get some part-time work if you can.  Having a job that allows you to study is ideal, such as something in your dorm or the library. You’ll not only earn extra cash, but the job will force you to take responsibility, and you’ll learn to better manage your time.

You may also want to explore work-study programs. These are programs that many colleges have, which allow you to do above while also reducing college expenses.

Counterintuitively, the more tasks I had when I was in school, the better my grades and overall outcomes. Too much time can create procrastination, the enemy of the college student.

There are plenty of options for students, but flexibility is the key, as you’ll need to work around your class schedule. Remember, you are in college to get educated.

4. Be leery of that free t-shirt that comes with a credit card. While the Credit CARD Act of 2009, made it more difficult for someone under 21 to obtain a credit card, it’s not impossible.  

Having a credit card comes with responsibility. Use it sparingly, pay if off every month, and pay if off on time. The moment you carry a balance, steep interest charges may kick in.

Know what you are signing up for, know the terms, and avoid cash advances. Quick cash is expensive.

By responsibly using a credit card, you’ll build up a good credit rating, but let me emphasize one more time that credit cards require responsibility on your part.

5. Build a professional online profile. You are already familiar with Instagram and Facebook, and many other social media platforms. But you may want to get on LinkedIn.

When you graduate, you should have hundreds of connections within your field of study, including students and professors. If you intern, “link into” your co-workers and your supervisor. When you meet young professionals at company-sponsored recruiting events, grab business cards, link into them, and include a short note with your invitation.

Highlight any experience and skills that potential companies will want to see. 

It is beneficial to join professional groups within your areas of interest. You’ll not only benefit from the connections in your network, you’ll find it immensely satisfying to assist others who may need support.

Recruiters that review your LinkedIn profile will be impressed with the initiative you took while still in college.

6. Carefully choose your electives and include a class on personal finance. There’s much to learn about budgeting, insurance, debt management, taxes, savings, and housing.

You’ll not only discover many practical tips, but what you learn will stay with you long after you leave college.

I trust you’ve found this review to be helpful and educational. 

We have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.

As always, I’m honored and humbled that you have given us the opportunity to serve as your financial planner.

Any opinions/views expressed within do not necessarily reflect those of Voya Financial Advisors. In addition, they are not intended to provide specific advice or recommendations for any individuals.