Houston we have… three problems

The three key risks to the economy and markets, outlined in the chart above, still remain the same.

We are continuing to monitor the landscape, but fundamentals have not significantly improved compared to a couple of weeks ago. We still feel the risk of COVID-19 is high and expect a longer period of human impact. The federal government is pushing individual states to take leadership in this fight, however not all governors are on the same page on the approach. At the same time, domestic travel fuels the risk of rapid spread of COVID-19. There is also bound to be some fatigue within families being in their homes for prolonged periods of time. We are certainly feeling it within our family and with our neighbors. Our kids can’t yet understand why we can’t go to the zoo or parks. The mixture of frustration of working parents and the looming economic uncertainty, will lead some people to relax their quarantine measures - potentially prolonging our relationship with the virus.

The good news is the Fed has been quick to respond and is using more firepower than I have ever seen in historical data. Liquidity has come back significantly specifically for business owners. Still, without normal business activity, liquidity will dry up quickly and the risks to the economy will remain. As liquidity is used up, there is risk that businesses will default on debt which will increase credit risk. The government has started to buy bonds via BlackRock which has generated short-term peace of mind.  

Potential new lows coming

Here’s a recipe for what I call “the perfect storm…” which gives you a taste for how emotion driven investment decisions are made:

1. Start with a pandemic that forces people to stay home

2. Add in a lot of uncertainty

3. Don’t allow families or friends to meet

4. Have no sports or live TV

5. Mix in 24/7 news

6. Instant access to one’s investments account

Again, we just don’t know where the market is going. No one does! Being rules based allows us to drastically reduce all decision making, which really means reducing emotion-based decisions on investments. Here is research from various different sources to prove most indicators are sending mixed signals.  

Equity Trade Signals 

• Ned Davis Research CMG U.S. Large Cap Long/Flat Index: Buy Signal – 100% U.S. Large Cap Equity Exposure

• Volume Demand (buyers) vs. Volume Supply (sellers):Sell Signal – Bearish for Equities

• S&P 500 Index 50-day vs. 200-day Moving Average Cross: Sell Signal – Bearish for US Large Cap Equities

• NASDAQ Index 200-day Moving Average Trend: Buy Signal – Bullish for US Large Cap Technology Equities

Investor Sentiment Indicators

• NDR Crowd Sentiment Poll: Extreme Pessimism (S/T Bullish for Equities) 

• NDR Daily Trading Sentiment Composite: Extreme Pessimism (S/T Bullish for Equities) 

Fixed Income Trade Signals

• CMG Managed High Yield Bond Program: Sell Signal – Bearish for High Yield Corporate Bonds

• Zweig Bond Model: Buy Signal – Bullish for High Grade Corporate and Long-Term Treasury Bonds

Economic Indicators

• Global Recession: High Global Recession Risk

• U.S. Recession: High Probability of U.S. Recession Risk (Next Six Months)

Select Recession Watch Indicators

• Global Recession Probability Indicator: High Global Recession Risk

• The Economy Based on the Stock Market Indicator: High U.S. Recession Risk

• Recession Probability Based on Employment Trends: Low U.S. Recession Risk

• Credit Conditions – Recession Indicator: Low U.S. Recession Risk

• U.S. Economy vs. Yield Curve: High U.S. Recession Risk

Gold:

• Trend Indicator – 13-week EMA vs. 34-week EMA: Buy Signal

(source: Stephen Blumenthal)

As you can see, these various indicators and trade signals have conflicting opinions on future economic trends and market performance. We believe we will be retesting new market lows in the next few months driven by higher than anticipated unemployment levels in the near and long term.

We feel the odds of reaching 2,300 for the S&P are high, and for comparison, the 2008 recession of 50% drop will put us near 2,000. With a sharper drop in unemployment, our guess is we will test new lows which are risks to the economy, markets and investments. However, we continue with our rules-based process and if we do hit our set thresholds then we will look to take on more risk. This will increase both downside and upside market exposure. It is important to keep in mind that the markets have sequential risk and therefore price in data are the odds and they are not 50/50.  

How big is your lobbyist?

The government needs to do a better job to help main street people vs large corporations. I did a quick google search and found that 25% of the $2 trillion is going to big business which doesn’t make sense to me. Let me explain: The Airline industry spent $45 billion dollars on share buybacks in the last couple of years. Which mainly enriched executives, hedge funds and shareholders who were able to lock in their gain by reducing the number of shares. However, by leveraging the companies, they took on extra risk of serving their new debt. I get that airlines could not have predicted COVID-19 but they should have had an emergency fund. Just like all of us should have an emergency fund.  But since they don’t, and revenues are down 90% we the taxpayers are now bailing them out by giving them federal support of roughly $58 billion. Which is $13 billion more than what they did with buybacks. If all the airlines went bankrupt and restructured, I feel confident the planes will still be there and travel will continue when we are ready to fly again. 

We have identified 6 key planning opportunities to help clients near or in retirement specifically around investments, taxes and estate planning to help you navigate the risks to the economy and markets. We are working to reach out to our clients over the next 2-3 weeks to update financial plans and run tax analysis and to determine opportunities that can benefit your specific situation.  

All people will be impacted and there are several good planning opportunities.  The cost of not looking at your unique investment profile with a professional can be the difference of thousands of dollars in savings or taxes. If you are not working with someone that is helping you navigate these times or what a second opinion our experienced wealth managers are here to help. Feel free to contact us today!