May 2020 Newsletter
After a Calmer April, the Market is Offering a Gift to Those Who Need It
In this month’s newsletter, I’d like to share some important things to keep in mind as the economy progressively reopens in the weeks ahead—or attempts to.
As you know, the financial markets took a beating in March when the coronavirus crisis really took hold and much of the global economy was forced to shut down. However, as I pointed out in my April newsletter, income-based investors generally saw less negative impact on their portfolios than those still invested primarily in common stocks and mutual funds. More importantly, we implemented loss prevention tools on all positions which did a great job protecting our clients against large losses.
You may have heard some of your friends and colleagues in March say that their loss was only a "paper loss". If that's the case then you should really view the recovery as a paper gain. Yes, it may feel good to see the increase, but it still doesn’t matter because I’m stressing this point, I strongly believe we still have another shoe to drop where the markets are concerned despite April’s partial comeback.
A W-Shaped Comeback
As I’m sure you know, confirmed cases of COVID-19 in the U.S. surpassed the million mark by the end of April, and the death toll was over 60,000. Additionally, at the end of the month, unemployment stood at an estimated 18%, and economic shrinkage for the first quarter was reportedly almost 5%.** That all sounds bad enough, but the picture looks even worse when you consider a few factors. First, unemployment during the Great Recession peaked at around 12%, and even at the height of the Depression it topped out at 25%. In other words, we’re nearing Depression-level unemployment already! As for the GDP, that 5% contraction was a result of the economy being shut down for less than a month. Estimates for shrinkage in the second quarter range as high as 25 to 50%, which are numbers that surpass even what we saw in the Great Depression.***
So why is it that Wall Street rallied in April, with the markets gaining back roughly two-thirds of what they’d lost since the start of the crisis? Who knows, except we can say it was further evidence that Wall Street has been detached from economic realities for some time. Investors seemed to be cheering the progress we made in flattening the infection curve but ignoring the true scope of the economic damage being done. I don’t believe they’ll be able to ignore it for good, which is why I say I’m convinced we still have another big shoe to drop when it comes to the stock market. While some Wall Street cheerleaders are saying the worst is over and talking about a V-shaped recovery or a U-shaped recovery, I think a W-shaped recovery is more likely. When the market dropped by almost 40% in March, that formed the left side of the W. The April-May move is forming the middle part of the W. The next drop and slow recovery will then form the right side, and I believe the next down-wave will likely at the very least test the March 23rd low, but according to long term market history, we still could see a more percipitous drop of 35-50% from here, however I think that is less likely.
The Good News
The good news for our clients is that most of you have very little money in common stocks or mutual funds, which would likely to be hit hardest if that next big down-wave occurs. We think our high dividend, hedged strategies will weather the storm. You may see values drop on some of your investments, but that doesn’t necessarily really matter as much when you’re invested for income with a hedged strategy protecting your principal.
If you have higher-risk investments elsewhere, there’s good news: the April rebound means you have time to lower your risk before the next shoe drops. Give us a call! At least get a second opinion. Many people fail to reallocate when safe sell opportunities like this present themselves. Their fear of missing out is greater than their fear of losing money. Remember, there’s no law that says you can’t buy into the market at another time if you take your money out now. You don’t have to ride it all the way to the bottom in order to ride it back to the top. As I often say, one reason the rich get richer is that they have cash reserves to take advantage of buying opportunities in real estate and the stock market at the appropriate times. You can use that same strategy by taking some cash off the table in your outside investments now while the market is giving you the chance.
When the market first dropped in March, it happened so quickly there wasn’t really a belief that the whole country would effectively "shut down" so most investors failed to take any defensive action. But with the partial rebound and lower volatility we’ve seen more recently, the market is basically giving you a gift. It offered up a similar gift in 2008, and those who didn’t take advantage ended up riding that 56% correction all the way down. Those who did take action and lowered their risk then had money to buy back into the market when it bottomed out. Think about it: when you can buy something at a 30% or even a 50% off sale, that’s a great deal! In looking at all the data—I believe that’s where we may be headed with this market.
So, stay safe and be patient as the economy reopens, and realize that there are likely to be setbacks. Hope for the best but prepare for the worst. Also keep in mind that the current crisis illustrates exactly why you should, if you haven't already, switch your investment focus from growth to more protection and income. If you still have money in stocks and mutual funds elsewhere, now might be a good time to think about the gift the market is giving you, and to accept it!
It's free to have a conversation with us.- Call Today !!
**“Millions of Layoffs Set to Push Unemployment Rate to Highest Level Since Great Depression,” MarketWatch, May 4, 2020
***“Worst Economy in a Decade. What’s Next? Worst in Our Lifetime,’ New York Times, April 29, 2020
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Pacific Financial Planners, LLC is an Independent Registered Investment Advisor. . Securities offered through Pacific Financial Planners. Please check with a Financial Advisor regarding your specific needs before making any investment decisions. The material contained within are the opinions of Jerry Slusiewicz only and are neither an offer or recommendation to buy or sell any securities or strategies mentioned. You should always check with your professional financial advisor and/or tax advisor before taking any action on any of the securities or strategies contained on this site.