Gill Capital Partners Mid-June Update
A dose of reality for the “great disconnect"
Happy Friday to our clients, friends and partners. As we have been doing regularly over the past couple of months. We wanted to send an overview of this week’s happenings in the world of economics and finance before heading into the weekend. But first, a bit of humor…
Funny/Interesting Quote/Joke of the Day
A very important study was recently released on the importance of various items in 2020, and the results are shown below:
Jobs Report & Unemployment – Economists were expecting the jobs report to show that May was yet another terrible month for workers. A survey of economists had predicted another 8 million job losses and an unemployment rate nearing 20%. Instead, unemployment dropped in May as employers added 2.5 million jobs, bringing the unemployment rate down to 13.3%. It was the best month for job growth since the Bureau of Labor Statistics started tracking the data in 1939. While the numbers were better than anticipated, it is important to note that an unemployment rate of 13.3% is still significantly higher than anything we saw during the Great Recession of 2008 & 2009, where unemployment peaked at around 10%. How did economists miss so badly? This was the biggest payroll surprise in economic history, and like everyone else, economists are in uncharted territory. Economists and market pundits are still scratching their heads as other data points, such as weekly jobless claims and ADP payrolls, pointed to further job losses in the month of May. Economists may have underestimated the effectiveness of the Payroll Protection Program (PPP loans), as companies were incented to rehire workers to qualify for the loans. Another theory is that economists underestimated the reopening of the economy as stay at home orders were lifted. Others point to “noisy data,” information that is subject to massive monthly revisions. The bottom line is that unexpected job gains are very welcome. However, the job losses that have occurred are devastating, and the U.S. economy is far from a full recovery. The 13.3% unemployment rate remains near historic highs and employers have a long way to go to add back the 19.6 million jobs lost since February.
More on the “Great Disconnect” – With the Nasdaq recently hitting all-time highs and the S&P 500 only 5% off of its previous high, it almost feels like COVID-19 and the resulting shutdown of the global economy never happened. That said, the recent market rally came to a screeching halt on Thursday with the U.S. stock market suffering significant losses following consistent daily gains for the past several weeks. The market saw its largest losses in nearly three months, with the Dow Jones Industrial Average falling nearly 7%. As we discussed previously, valuations were becoming increasingly unattractive, and markets were rattled by a wakeup call Thursday morning that included a grim economic outlook from the Federal Reserve, concerns around a second wave of COVID-19, rising social unrest, and a general sense that the market has come too far too fast. Given the backdrop, a market correction should not surprise anyone as the market has rallied roughly 40% from the lows in March with very weak fundamentals. We do not know if the market is heading significantly lower or just taking a break here, but the market has priced in a lot of good news, and a sharp economic recovery commensurate with the stock market recovery appears less likely. This “Great Disconnect” won’t last forever; either fundamentals will rapidly improve on the back of massive fiscal and monetary stimulus or equity prices will come back to more reasonable levels. We tend to believe it will be the latter, as many challenges remain before this economy is firing on all cylinders and the election continues to loom large as another potential source of volatility just a few short months away.
On Investor Psychology and Perceptions of Risk - As investment advisors, we have a lot of conversations about risk, and we often look to previous market cycles to assist us. When the stock market is high and expensive, people often feel like they are not taking enough risk. When stocks fall and suddenly become cheaper, many investors feel like they should remove risk. Investors tend to oscillate between a fear of missing out and a fear of losing money. We know that successful investing cannot rely on feelings. Feelings often tell us to take more risk when the market is at its riskiest and to be fearful when buying opportunities are at their best. There are plenty of academic studies that document this. The financial news/entertainment industry is largely to blame as they are constantly telling us which stocks did the best yesterday, which mutual funds performed best last year, and what sectors are in favor. As investors, we need to strive to recognize these emotions for what they are and set them aside in order to make sound investment decisions.
We hope everyone has an excellent weekend and remains healthy and safe.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.