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June 10 2020 Market Update

By on Jun 10 in Economics, Finance, Financial advisors, Market Update, Worth sharing

Turmoil on Main Street and Buoyancy on Wall Street

A Note from Our Founder:

We normally cover market and economic news in this monthly report, and you’ll find our report for May below. But as of this writing, Los Angeles and cities around the world are engulfed in protests. Our hearts are heavy with grief for those who have suffered from the recent turmoil.

So much of our work as advisors relies on listening. We listen so we can understand the fears, hopes, and concerns of our clients and help them find a path forward. We listen so we can find a way to relate and help.

I hope we can apply this same thinking to help heal our city and our communities. Especially in times of turmoil, I believe the one thing we can always do for each other is simply to listen in a respectful manner.

As a leader, I’ve spent a great deal of time reflecting on this subject in the past week. I hope you’ll join me in that effort today. I’m here to learn—from my team, our clients, our family and friends, and our community.

With hope,
Jeff Fishman


Market Update

In May, unemployment numbers rose further to rival those seen in the Great Depression,[1] while the S&P 500 Index rallied about 4.5 percent.[2]

It can be confusing to see rising markets in a time that, for many, feels like acute economic collapse. Combined with some of the largest protests in half a century, it can seem as though the markets have completely decoupled from the world that most of us live in.

Economic Impact

Indeed, the costs of the pandemic—not just in economic terms, but in human terms—have been catastrophic.

The US passed a grim milestone in May, with more than 100,000 lives lost to COVID-19.[3] Economically, the Congressional Budget Office expects the pandemic to reduce gross domestic product, a measure of economic output, by $7.9 trillion, or 3 percent, through 2030.[4] Despite about $3.3 trillion in economic stimulus programs, these efforts are expected to only “partially mitigate” the damage.[5]

Factories have continued to lose jobs, though the pace of losses slowed in May. Sentiment among manufacturing purchasing managers remains negative. However, despite continued contraction in that sector, there are signs that things may be bottoming out.[6]

We may see more improvement as non-essential economic activities come back online, though again, the recovery may not be as rapid as economists had initially hoped.

Consumer demand, a significant driver of US economic growth, may take time to come back in the wake of heavy job losses, concerns about the disease, and continued economic pressure. The course of the disease and availability of treatments may impact the ability for companies to come back online with full staff.

Markets and the Economy

So why are markets up so strongly in the wake of all this difficult news?

Markets are not always accurate barometers of the economy. It’s tempting to view them in that way, but the prospects and risks facing public companies can be very different to the prospects and risks facing the millions of smaller, privately held businesses and individual consumers that make up the US economy.

For example, S&P 500 companies are very large and well-capitalized, have readier access to bond markets, and are coming off a period of general profitability for the large-cap space. About 40 percent of their revenues come from international sources. The index represents a very specific subset of the less than 1 percent of US companies that are publicly listed.[7]

Another important point is the role of very large companies within the index. We’ve talked about this before, but the largest companies in the index can tend to pull the index along with them. A Goldman Sachs analysis found that the five largest companies in the S&P 500 represented about 20 percent of the index by market capitalization, the highest level in 30 years.[8]

On average, the top five companies (Microsoft, Apple, Amazon, Alphabet, and Facebook) were up about 10 percent for the year. The other 495 companies in the S&P 500 were down about 13 percent.[9]

In other words, it’s important to remember that the stock market is not necessarily a window into the overall economy—and that’s before we account for the various behavioral factors and industry trends that can affect company valuations.

That said, on Friday, June 5, the markets were surprised to learn that 2.5 million jobs were added in May after some states reopened, dropping the unemployment rate to 13.3 percent.[10] This buoyed expectations for a V shaped recovery.

A Lesson for Investors

This once again underscores the importance of taking a broader view of investing and one’s portfolio. Just as we can’t judge the economy by the stock market, we can’t build a strategy on a single asset class.

Diversification and a prudent investment policy can help shield your wealth from the kind of volatility we saw in March, and they can position your portfolio to share in market growth without relying on it.

We do expect a degree of volatility while going forward through the second half of the year. This is based not only on the current health situation, but also the potential course of the disease both here and abroad, geopolitical issues, and their collective impact on the economy and the largest firms in it.

JSF Financial

 

 


Securities are offered through Mid Atlantic Capital Corporation (“MACC”) a registered broker dealer, Member FINRA/SIPC.

Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.

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The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of Mid Atlantic Capital Corporation (MACC). Neither JSF Financial LLC nor MACC gives tax or legal advice.  All opinions are subject to change without notice.  Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase or sale of any security.  Investing involves risk, including possible loss of principal.  Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results.  The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or MACC as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy.  The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

The MSCI World Index is a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets countries in Europe and covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 emerging markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP is the most commonly used measure of economic activity.

Sources:
[1]: https://www.nytimes.com/2020/05/28/business/economy/coronavirus-unemployment-claims.html

[2]: http://performance.morningstar.com/Performance/index-c/performance-return.action?t=0P00001G7J&region=usa&culture=en-US

[3]: https://www.cdc.gov/media/releases/2020/s0528-coronavirus-death-toll.html

[4]: https://www.cnbc.com/2020/06/01/the-coronavirus-will-cost-the-economy-nearly-8-trillion-congressional-budget-office-says.html

[5]: https://www.wsj.com/articles/decline-in-factory-output-eased-in-may-but-recovery-set-to-be-slow-11591006623

[6]: https://www.wsj.com/articles/decline-in-factory-output-eased-in-may-but-recovery-set-to-be-slow-11591006623

[7]: https://www.nytimes.com/2020/05/10/business/stock-market-economy-coronavirus.html

[8]: https://www.nytimes.com/2020/05/10/business/stock-market-economy-coronavirus.html

[9]: https://www.nytimes.com/2020/05/10/business/stock-market-economy-coronavirus.html and https://markets.businessinsider.com/news/stocks/sp500-concentration-large-cap-bad-sign-future-returns-effect-market-2020-4-1029133505#:~:text=The%20five%20largest%20stocks%20in,(Google)%2C%20and%20Facebook.

[10]: https://www.bls.gov/news.release/pdf/empsit.pdf

Performance table sources:
BBAB: https://performance.morningstar.com/Performance/index-c/performance-return.action?t=XIUSA000MC

S&P 500: http://performance.morningstar.com/Performance/index-c/performance-return.action?t=0P00001G7J&region=usa&culture=en-US

MSCI: https://www.msci.com/end-of-day-data-search

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