QUARTERLY MARKET OUTLOOK
Greg Carr, July 7, 2020
Irrational Exuberance 2.0
Quote for the Day: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?” – Fed Chairman, Alan Greenspan, 1996.
Summary: Irrational Exuberance 2.0
In spite of a tremendous shock to the economy, stocks have rebounded sharply since the market lows on March 23rd. Fiscal and government stimulus and hopes for a containment of the virus have buoyed markets. But economic uncertainties remain, and market valuations are now elevated, reminding us of the “irrational exuberance” of the late ’90s. Investors should remain cautious, especially those in or near retirement.
Review: Market Rebound
The S&P 500 large-cap market index declined by 34.5% to its trough on March 23rd in one of the fastest declines ever seen, only to surge back by 43% as of July 6, in one of the fastest recoveries seen. And this in spite of the worst economic shock in the U.S. since the great depression. The S&P500 is currently down only 1.5% for the year. Small-caps, foreign stocks, and emerging markets, included in diversified portfolios, have all trailed the S&P 500 so far this year but still showed nice gains in the recovery. Growth stocks outpaced value/dividend stocks again this quarter. Real estate investment trusts were hit hard by the pandemic as hotel, shopping, and office leases came under stress. Energy was hit by a double whammy of low consumption due to the pandemic and international price manipulations. Bonds did relatively well as the Federal Reserve lowered rates, causing many bond prices to rise.
The economy that powers the markets is in rough shape after a severe blow from Covid-19. Despite the stock market’s strong recent performance, all major surveys of economists are noting considerable risks to the economy and stock market. The Conference Board’s Leading Economic Index® (LEI) rose this past month after the worst two months in its history, yet noted the “Initial shock to the economy may be behind us, but recovery path remains highly uncertain.” The panel for the National Association for Business Economics’ (NABE) most recent survey, “Expects GDP to Fall 5.6% in 2020, With Risks to the Outlook Still Heavily Skewed to the Downside.” Most economists in the Wall Street Journal’s most recent survey expect the recovery to be a long and slow “swoosh” verses a “W” or “V” shaped recovery. Others have suggested a recovery that may look like a square root sign. Dr. David Kelley of JPMorgan noted in his recent market outlook presentation, “Despite a rebound in markets, the economic, labor market and earnings recoveries will likely be much slower.”
There is hope, of course. The government has committed to doing everything they can to support the economy. And there are promising vaccine trials currently being done. But with markets elevated, the near-term economic outlook uncertain, and an election this fall, markets are likely to be rough through the remainder of the year, potentially retracing the drop we saw earlier in March.
Conclusion: Until markets fall back into more reasonable valuations and the economic outlook is less uncertain, it would be wise for investors to remain cautious, tilted to the conservative side of their target allocations, especially if they are in or near retirement or another financial goal. There is always the potential for markets to continue rising, but for most people, it is better to err on the side of caution than to err in taking on too much risk.
Please call us if you have questions about your investments or would like to discuss this article.
God bless, stay safe, stay positive. We’ll get through this.
Volatility and recessions are part and parcel of long-term investing. If you have a retirement plan and a managed portfolio with us, it has been designed with this in mind. But If you are concerned about market volatility or are in or near retirement and have not met with us in the past year, now is the time to do a thorough review of your plan, risk tolerance, and portfolio strategy. It is better to err on the side of caution and to prepare beforehand rather than to react after.
Gregory A Carr MBA, AAMS®, CKA®
Owner / Financial Advisor
Accredited Asset Management Specialist