The coronavirus epidemic has sent shockwaves through the American economy, as many investors already know. Still, with a little economic sense, investors should be able to maintain long term confidence in their portfolios and in the market. The United States economy was due for a recession; since 2009, the economy has rebounded to the tune of 121 consecutive months of GDP growth, a national record. With such large expansion, however, must come an eventual downfall (due to market overvaluation, inflationary output gaps, etc.). It has been nearly 11 years since the last recession in the United States. Recessions, on average, occur every 5 to 6 years. Long story short, a recession was on the horizon. The coronavirus epidemic caused the recession through fear. Consumer expenditures, based on popular economic belief, make up approximately 70% of total economic expenditures. When consumers are faced with outside influences, such as fear imposed by a deadly virus, spending habits change, and the economy is forced to shift accordingly. In the case of the coronavirus, fear decreased consumer expenditures. People are afraid to go out in public to eat, shop, etc. With the decrease in consumer expenditure, the economy was done in. However, the bright side of the economy’s current standing is this: the cause is known. In the 2008 financial crisis, the cause was not so easily identifiable. Some economists blamed it on market overvaluation while others blamed consumer confidence and the housing market. Knowing the problem makes finding a solution infinitely easier. The FED has already moved to halt the onset of a recession; similar action from the FED took much longer in the 2008 financial crisis. Ultimately, there is no system malfunction that is causing the current economic decline. The culprit is an outside invader, a virus that will be beaten by the United States medical system. Once the virus is gone, consumer confidence will return, and the economy will surge once again.
As COVID-19 takes hold of the world, investors need only remember one thing: patience is a virtue. The stock market will rebound; it always does. And portfolios will gain back their value after the recent bear market. Michael Wilson, Morgan Stanley’s chief US equity strategist, believes that the stock market will begin to recoup value in the near future and urges people to jump into the market. With cheap prices and nowhere but up to go, the stock market is primed for a rebound. With an influx of new investors, prices could begin to rise again in the near future. For investors who have lost large percentages of their portfolio value, now is not the time to sell. Remain patient and wait until the market upticks again, and maybe even look into investing more while the COVID-19 has prices so low.
The Bear Market is here. On Wednesday, March 11th, the DOW closed in Bear market territory. The S&P 500 is not far behind. This is defined as a decline of more than 20% from the peak. So, where do we go from here? What will happen to the economy and the market as we deal with the Coronavirus (COVID-19), an upcoming Presidential election, Brexit, and plummeting oil prices?
The quick answer is that nobody knows for sure on any of the above. Here is what we do know. We know that economies around the globe, including the U.S. will slow due to the fears surrounding COVID-19. Fewer people will travel, dine out, attend sporting events, and in general consume. This will inevitably cause consumer spending to slow, which will impact company revenues and earnings. Oil has dropped to nearly $30 per barrel as the demand will contract as fewer people fly and drive. But for how long?
If you cancel your spring break trip, will you not go later in the summer? If you don’t go to Lowe’s this weekend to buy a grill for the season, isn’t it probable that you will eventually buy one? Your demand and desire for traveling, a grill, and the latest tech gadget is still there, but the logistics of attaining those items has become complicated.
The initial drop in consumer demand will impact the economy in the near term. It is possible that we enter a recession in the U.S. over the next few months. It is important to remember that an average recession lasts 9 months and we have not had one for almost 11 years. They typically occur every five years, so we are overdue.
As for the market, equities have pulled back in very quick fashion in anticipation of this economic slowdown and recession in earnings that will inherently arrive. The average contraction for the S&P 500 is around 30% leading up to an economic recession. Therefore, given the already realized 20% pullback, it is possible that a good portion of the correction has already occurred.
If you have been to our office for a meeting in the last 4-6 months, you are aware that we have been warning clients that a pullback in the market was inevitable given valuations. In fact, we spent a lot of time in 2019 trying to reduce risk in the portfolio. We shifted to a more conservative bond allocation and we changed some of our equity allocation. So far, the changes have been effective in minimizing the downside correction that we are experiencing. We are still long-term investors and believe in ignoring the short-term market fluctuations. We don’t know what the next few weeks will bring for the markets, but we know that a diversified portfolio is the best way for clients to stay ahead of inflation, while minimizing risk, over the long-term.
The average investor has earned a 1.9% annualized return over the last 20-years. A 60% Equity 40% Bond portfolio has earned 5.2%. The average investor makes emotional decisions leading them to buy and sell at the wrong time. Keep the focus on making sure that your investment allocation is in line with your financial plan, so that you can achieve your long-term goals.
Liz Ann Sonders (Chief Market Strategist for Schwab) said the following in a letter this week to advisors: “Panic is not an investment strategy.” We agree and encourage remaining steadfast in your long-term strategy with a diversified portfolio.
Galecki Financial Management Investment Committee
The recent wave of fear surrounding the Coronavirus had led to the lowest all time average rate for 30 year fixed mortgages this week (at 3.29%). With the cratering of the mortgage rate, talks of refinancing mortgages have sparked among the masses of homeowners in America. According to data from Black Knight, Americans stood to save an average of $268 monthly if they were to refinance their mortgage with the current mortgage rates. Given the circumstances, many experts encourage homeowners to explore refinancing their mortgages. Still, refinancing at the current mortgage rate is not a full proof plan to save money. Refinancing can cost thousands of dollars in fees, and taking on too steep of a monthly payment could prove to be a disaster when the economy is as unpredictable as it is now. People should make sure to seek professional financial help to ensure their financial betterment and safety. Still, with the right help, refinancing a mortgage can save thousands of dollars for a homeowner.
To the majority of Americans, investment is a familiar term. People see investment as a means to an end, but they might be missing out on the idea of investment and why it is beneficial. Many Americans see investment as a fast track to retire early, or to retire in a sound financial position, but it can be much more than that. For example, investing can be used to achieve other financial goals such as paying off a house or car mortgage; investment is not just used to build up retirement accounts. Also, investing allows people to become part of new ventures in the economy. When new, cutting edge companies are founded, they need capital to invest. This allows people willing to invest the opportunity to become part of a venture that is much larger than themselves. Investment also allows people to set a financial foundation for the next generation. By investing, establishing a portfolio, and building up financial stability, parents can help ensure the financial stability of their children.
Many income-focused investors solely focus on the dividends when considering what to invest in. After all, bigger dividends equals more income. Right? Actually, this may not be the case all of the time. Take Matthew Page and Ian Mortimer, for example. These two mutual-fund managers take a different approach to deciding how to invest and where to place their faith. Instead of solely focusing on dividend yield, these two focus on the characteristics of the company, and how the company has fared in the past and is projected to fare in the future. They start their search by identifying a pool of companies with characteristics that exemplify long-term success. These companies are dividend growers who have a history of smart investment strategy and high returns on capital. Both of these traits indicate companies with the ability to continue hiking their dividends. However, these companies do not necessarily have to have the highest dividend yields in the market. A company with moderate dividend yields may actually be a better option because it has more room to grow, whereas companies with high dividend yields may have hit their ceiling. Ultimately, Page and Mortimer’s strategy may not be for you, but their ability to think innovatively is undeniable. For any investor, following the norm may not always be the best way. In Page and Mortimer’s case, they aren’t following the norm, and they are doing quite well for themselves. Investors everywhere can learn an important lesson from these two mutual-fund managers: always think outside of the box, and if you cannot, get an advisor who will for you.
President Trump recently introduced a minor increase to the United States military budget. Though the bill proposes only a 0.3% increase in the military budget, it places high emphasis on high-tech defense equipment such as cyberwarfare innovations, specialized drones, and artificial intelligence. With the increase in the military budget and the military’s new-age emphasis on high-tech defense equipment, stocks for several military sector corporations have the potential to grow exponentially. These stocks could become coveted pieces for investor portfolios if Trump and Congress can see eye to eye. However, the risk is still there for investors. For investors willing to gamble that a republican led Senate can force another military spending bill through, the military sector could be a goldmine in the near future.
Do you remember the Bitcoin surge in 2017? From January 2017 to November 2017. Bitcoin stock surged from around $885 to nearly $20,000. The 2,100% growth increase was unprecedented in such a short time period, and it left lucky investors with loaded portfolios. A similar growth pattern has occurred in TSLA over the past few days (23.61% growth over last 5 days, 45.92% growth over last month). The growth increase has been borderline parabolic over the last few months, sparking the comparison on Wall Street between Tesla and Bitcoin. However, some experts are skeptical on the comparison, mainly due to the fact that Bitcoin cratered shortly after peaking in November of 2017. They question the longevity of Tesla’s growth, and they use Bitcoin’s cratering in 2017 as their basis. These critics are misinterpreting the situation though. Bitcoin provided a service (e-currency) that had no intrinsic value; the service was merely a figment of the internet. On the other hand, Tesla manufactures a product that has real economic value. Even aside from its market value, a car has value because it is made of tangible resources that cost money.
Americans may be an incredibly unique assortment of people, but the capitalist system surrounding us has created one common desire: wealth. From the celebrities to the impoverished, every American dreams of striking it big. It is the American dream, and no one, besides Jay Gatsby, can deny that. However, the premier way to obtain wealth is debatable. Catey Hill, an editor for Market Watch, believes her way to be the best. She claims that the number 1 way to get a fat savings account is through cutting essential expenses (housing and transportation) instead of cutting discretionary spending. The reason for her claim has merit; it is easier to cut spending on housing and transportation because you only have to make one decision. Once you buy a house or a car, the decision is over, and you have already saved a large chunk of change by buying an older car or a modest house. On the other hand, if you want to save by cutting discretionary spending, you have to make daily decisions that cause decision fatigue. For example, if you eat out three times a week, and you want to save money by only eating out once a week, you have to make two decisions a week, eight decisions a month, one hundred four decisions a year, etc. Making these decisions is tough, and Catey believes that after a while, the person will fatigue and sway from their savings plan. Catey’s claim is intelligent, and it does have data to back it up. However, not every person wants to own a moderate house or an older car. Some people like to splurge their money on big houses and fast cars, so this strategy would not work for them. That is the beauty of America though. If you don’t want to strike it rich by saving, you can do it through investment, high-paying employment, entrepreneurship, hard work, etc. There is no best way to strike it rich; America has limitless ways. For Americans, the message is simple; find out how you want to live your life, and cater your wealth around the way you want to live. If you don’t want to cut expenses, then work harder, work more hours, develop a new product, invest in the stock market, etc. Every success story has a different beginning in America. What’s yours?
And yet, far too many taxpayers aren’t aware of the credit, according to a survey released this week. Some 44% possibly eligible for the credit — by making less than $40,000 a year — were not aware of it, according to a new survey from the tax preparation company Jackson Hewitt. More than half of the same group either said they did not qualify (20%) or didn’t know if they qualified (33%), according to the survey. 01.24.20
The Earned Income Tax Credit is designed to act as a cash infusion to low-income families. In fact, some experts have called it “one of the largest and most studied antipoverty programs in the United States.”