June 2020 Economic Update

June 2020 Economic Update

I have always enjoyed the ocean.  Whenever and wherever I can I try to be in or next to it.  The rocky east coast in Maine, sandy beaches in North Carolina, warm sunny Florida, the southern or West coasts.  Even the Alaskan coastline I find fascinating.  While each spot has its unique characteristics, in my opinion nothing, beats the ocean around the Hawaiian Islands.  You can find pristine beaches and clear waters just about anywhere you go in the islands.  You can find calmer waters or, if you are up for it some great waves for surfing.  When you are in the bigger waves you must constantly be aware of how those setups are coming in.  If you navigate the first wave successfully you still may need to deal with a second wave right after and you can never forget about the currents under the surface of the water.  

I feel like we are on one of those beaches where the waves are a bit rougher in the markets.  There are many opportunities to catch a great wave, but we would do well to keep our eye out for a second wave of economic distress as well as the undercurrents that are not immediately apparent to those with less experience. 

If nothing else, the past few months should have taught us that trying to time the market is futile.  Those who sold and went to cash in March may have felt better until the past few weeks where markets have rebounded.  Those who simply held the index found themselves holding many poor businesses while those who stuck with right mix of handpicked securities and sectors that were right for their specific situation fared much better. 

We remain confident in the ability of America to recover while acknowledging the reality that some businesses will not come back, and others will be changed forever.  Understanding the difference, being patient and consistently following a well laid out plan remains the key to success moving forward. 

  • Riding the Wave
  • A Second Wave
  • How to Ride It

Riding the Wave:
Riding that big wave, being lifted, and rushing along by the power behind it is exhilarating.  There is some good news powering this current wave higher in the market.  The lower rates have been successful in encouraging buyers to purchase homes despite the challenges.  Home sales fell but exceed estimates for April and that looks to be continuing during May.  Jobless claims continue to dwarf anything we have ever seen yet nearly all states are looking to open activity at least in some way starting in June which is fueling optimism.  The market trades on future expectations so this optimism is another powerful factor.  Fuel for that optimism includes:

  • Some states have already opened and there has not been a major spike for COVID in those areas.
    • People go back to work
    • People get paid
    • People start to shop which leads to our next bullet point
  • Consumer confidence has already started to rise, and consumers still drive the economy making up approximately 2/3rds of economic activity. 
  • We continue to get reports of possible good news on the vaccine front.
  • In other countries that are ahead of the U.S. in opening activity they are seeing increased activity as pent up demand surpasses the fear of getting out and about.
  • There seems to be some agreement on Capital Hill that additional support will be required.

A Second Wave:
The first wave of epic proportions came in March of this year.  Since that time trillions of dollars have been pumped into the economy.  Massive research efforts around the globe have been initiated and the businesses that win any number of those races could be huge winners in the marketplace.  So, what could cause a second wave?  

  • More inconsistent news regarding a vaccine or reality sets in as to how quickly one can be put in place
  • Consumers continue to save even after the market opens (Note: the personal savings rate skyrocketed during the last month to 33%)
  • Missed payments on rent, mortgages, car loans etc. begin to filter through to the banks bottom lines and damage earnings more than anticipated during the next earnings cycle
  • The delayed impact of less migrant workers begins to impact food supplies driving prices higher on an already financially stressed consumer
  • Social distancing rules cause the elimination of economies of scale for some businesses

How to Ride it:
How do prepare? As always follow the plan which should include a plan for adaptation.  Double check to make sure you have cash on hand but keep in mind that cash going forward is likely to be devalued as more of it continues to be pushed into the economy (in effect, printed by the government).  Pay even closer attention to balance sheets and the history of innovation in the businesses that you choose to own.  Avoid indexes to the extent possible and pay close attention to the sustainability of dividend payments.  Be prepared for another good opportunity to purchase quality businesses at cheaper prices and for opportunities to roll regular IRAs into Roth IRAs at advantageous prices.