May 2020 Economic Update - Whats Next?

As we continue to move through unprecedented times, emotions run high and human nature both the good and not so good come to the surface.  Much like the refiner’s fire separates the beautiful precious metal and the ugly worthless slag.  Choosing to focus on the blessings and the good is what makes precious things come to light in our own worlds.  I hope you are focusing on the beautiful things we are seeing as we continue through this pandemic.
After an unprecedented downward market move in March, we then experienced the fastest upward movement we have ever seen the following month in April.  Much of that move higher was stimulus-related.  As we mentioned in our April update, we are concerned about a double-dip in the markets which for long-term investors should not be of any major consequence.  The reasons for our concern are discussed in more detail below.

  • Unintended Consequences
  • Danger Zones
  • Opportunity Zones
  • Why we remain upbeat for long term investors

Unintended Consequences:
The Federal Reserve has lowered rates and is buying everything from the treasury and mortgaged back securities to high yield bond ETFs effectively pumping money into the overall economic system and pumping up bond prices by creating fake demand.  Rumor has it that they may even be buying some equity securities.  We do not know when this will end but likely not any time soon. 
Additionally, the government has been pumping money into the system to keep things moving through forgivable loans, breaks on paying back SBA loans, sending an extra $600 per week or about $30k annualized to the millions who have filed for unemployment in addition to their normal unemployment checks, and of course the blanket check to nearly every taxpayer in America of varying amounts. 
Most of this action was taken last month, consequently, at the same time, the markets rose so quickly from their earlier fall.  All these actions were and are arguably necessary to keep the damage to a minimum.  A subject we will not debate here. 
The question of the unintended consequences of these actions is a subject that I could write volumes about but suffice to say there will be consequences and they will not all be good news. 
Just a few thoughts on this that barely scratch the surface and do not deal with how the government will eventually pay for this either through the devaluation of the dollar, higher taxes or some combination of those.

  • Many, (two of them are my sons) are making more being unemployed than they did working.  How might that impact the restart of the economy?
  • Businesses optimized for a high volume of people traffic like many restaurants will need to innovate and likely raise prices. 
  • Migrant workers who help us harvest our fields did not make it into the U.S. leaving a potentially disrupted food supply chain.
  • Restarting many businesses requires more than simply turning on the lights.  Machines that have sat idle may or may not restart easily, extensive sanitizing and cleaning must be done before many can start, and the list goes on.

It is a troubling sign that the equity market has rebounded to roughly where it was in October of 2019.  Clearly the economy is not in the same, relatively strong position as it was back in October.  We have soaring unemployment; the local and global economy has nearly shut down entirely with virtually no travel and severely depressed trade.  Oil prices have plummeted and all the respective industries that are dependent on those companies in order to thrive have hit rock bottom.  Meanwhile many users of oil are not using it (airlines are not flying and you and I are not driving our cars, to name a couple of examples). 
Simply put, the fundamentals of this recovery do not support the prices we see.  Based on these observations we expect to see another downward move in the stock market. 

Danger Zones:
Below are some danger zones we see in areas of the market:
Danger zone 1:  The traditional energy space remains under severe pressure, particularly with the largely U.S. based Fracking industry. 
Danger zone 2:  We expect it will be quite some time before people will be comfortable piling onto cruise ships or even airplanes however, we expect government support to continue for airlines. 
Danger zone 3:  Those chasing extremely high yields on some stocks may find themselves disappointed as normally strong dividend payors cut or cancel their dividend.  This has already begun to happen with Royal Dutch Shell being an example. 
Danger zone 4:  Yesterday’s earnings numbers from Amazon and Apple caused a flurry of market activity and news stories.  These companies, in my opinion, tell us little about the broader market direction.  These stocks tend to move more because of their heavy weighting in index funds rather than their fundamentals.  As we have stated several times in the past, too many investors have oversimplified the investing process and piled into the same index funds sending money flow to the largest most heavily weighted names in those indexes.  Danger zone 4 is investing in broad-based traditional index funds.  This is a clear time in the market when those with significant assets should not be holding broad index funds or ETFs.   

Danger zone 5:  Pure quantitative investing is a backward-looking process that takes the emotion out of investing.  It is a powerful tool that we use but do not rely on in its entirety.  This backward-looking process may not provide as much help given the current unprecedented events.  This is also not a time to rely specifically on purely backward-looking quantitative methods.  We suggest looking forward at expected changes and innovation.

Opportunity Zones:
While there are many danger zones there are also many opportunity zones:
Opportunity zone 1:  Our favorite sector remains as it has for a few years now, Healthcare and in that subsector biotechnology.  If anything, the resources and pace of innovation has increased in this area.
Opportunity zone 2:  The internet of things or IOT continues to benefit as parts of social distancing quickly ramped up additional innovation on these fronts. 
Opportunity zone 3:  The technology sector, specifically drone technology and 5G are both areas that we believe will experience increasing innovation and growth.  We caution however that simply investing in the most obvious of the companies benefiting from this new reality may not be the best course of action.  It is best to look deeper into the businesses benefiting directly and indirectly from these technologies.
Opportunity zone 4:  Businesses that are fundamentally sound and may even be growing despite the pandemic that pay dividends unlikely to be cut in the face of the onslaught.  This can be a great time to capitalize on lower stock prices that have resulted in higher yields on these businesses. 
Opportunity zone 5:  Re-balancing and tax strategies.  We often state that taxes are a thing, not the only thing.  We often see bad investment decisions driven strictly from a tax perspective.  Recent volatility has given and continues to give us the opportunity both to re-balance and to implement various tax strategies for client portfolios.
Opportunity zone 6:  Invest while others are not.  As a successful investor from many years ago has famously said – “Buy when there is blood in the streets even when the blood is your own.”

Why we remain upbeat for long term investors:
Change is happening even more rapidly than normal, and we believe this pace of change will continue for some time.  This change will not be without casualties.  However, we have likely not yet imagined the innovation we will see over the next decade and with-it prosperity for those who adapt.  I believe we could end the year on a positive note for the equity market.  If I am wrong on that short-term prediction, I still believe the prudent investor can continue to do well by remaining consistent and managing towards their personal long-term goals.
As always, we love to answer any questions you may have. If you would like to hear more about our Personal Paycheck Protection Program, Advocacy Investing® Socially Responsible and ESG investing programs or would like a copy of our Amazon best selling book Build a Life Not a Portfolio please contact us directly at 312-372-5000 or at or schedule a call at a time convenient to you by clicking here

Phone: (312) 372-5000

John Browning, MBA, CSA®
CEO, Principal
As a certified financial adviser, Mr. Browning serves as the Chief Executive Officer for Guardian Rock LLC. In addition to providing oversight to the activities of the entire firm, Mr. Browning also leads the investment committee and is directly involved in client interaction and portfolio decisions impacting specifically customized portfolios. 
Mr. Browning is a graduate of Cedarville University in Ohio and later obtained his MBA from Northern IL University. John is also a Certified Senior Advisor (CSA®). John holds multiple securities licenses including Series 6, 7, 63, 65, 24 among others. John brings over 30 years of Wall Street experience an analytical, economics and portfolio management background along with many years of leadership and strategy experience. John has served in various executive-level roles in the financial industry at large Wall Street firms including Morgan Stanley, Invesco, Guggenheim, and Nuveen where he obtained extensive experience managing billions in fixed income and equity.

Nothing in this communication should be construed as personal investment advice and past performance is no guarantee of future results.  Investing is not appropriate for everyone. There is a risk of loss associated with investing in the markets.  No representation or implication is being made that using any methodology or system will generate profits or ensure freedom from losses. Please remember that investing carries risk.  Guardian Rock Wealth LLC and its affiliates are fiduciary investment advisors.  Please consult with us or another experienced, qualified investment advisor before making any investment decisions and/or trying to implement any of the strategies and tactics we may discuss in any of our publications.