Monthly Outlook: May 2020

What is one to call a market that crashes 34% over four weeks then rallies 30% over the next four weeks? Crazy maybe, confused for sure. But that is what we see in stocks today. By the way, down 34% and up 30% does not equal down 4%. It equals down 14%, due to compounding. Clearly, the coronavirus pandemic and the related global economic shutdown should influence markets. Most businesses remain closed and employees are out of work (and their paycheck). Is a 15% discount to the pre-virus peak of two months ago an appropriate adjustment? We’ll discuss that more later.

Let’s review market performance after the first four months of 2020. Bonds have gained 5.1%. Gold is up 11.2%. Cash is up a scant 0.3%. That is all the good news. On the other hand, U.S. stocks are down 10.4% and international stocks have lost 18.4%. Plus, it’s been a very wild ride in the process. The very good news is that we haven’t been confused by all of this. We’ve followed our iFolios investment strategy with discipline and have fared well. Our iFolios 75 portfolios are only down 1.2% YTD! We’ve crushed the market benchmarks by not losing big. Sometimes that’s a win.

Is it Over?

Most of the U.S. has been shut down for six weeks or more. People are getting fed up with the quarantine. Throw in some springtime weather and you can just feel the fever to get out and move on! The stock market has recently embraced the fever, too, and responded with a V-shaped recovery bounce. But is it over? Does wishing make it so? On the optimistic side, investors are looking past 2020 earnings and counting on stimulus money and easy monetary policy from the Federal Reserve bankers to save the day. On the pessimistic side, we see record spikes in jobless claims and the unemployment rate, an earnings collapse in 2020, a rise in small business bankruptcy, and drying up of stock buyback programs. Many businesses remain closed, at least partially, even though most states are trying desperately to get the economy re-opened safely. So, is it over? The evidence says No, and hoping doesn’t change that. Until there is at least a legitimate treatment for coronavirus that will reduce the chance of death, we are likely to have some negative impact to the economy and, therefore, markets. Even if the economy is partially open, it may not be enough to allow some businesses to survive. Hotels can’t survive on 50% occupancy and restaurants can’t make it with half the tables. What happens when the stimulus checks and unemployment benefits run out if we still don’t have a virus treatment? Those furloughs might turn into layoffs. So, it’s a race to find a treatment quickly versus opening the economy. We’ll just see.

Beyond Fundamentals – What do the Charts Say?

It’s all well and good to have a fundamental view of the economy and markets, but we can also use charts to see what’s really happening. Using charts is like measuring the temperature without having to understand weather. It is what it is. Our primary trend indicator is based upon the 200-day moving average price. When a holding’s price is above its moving average, it’s in an uptrend and should be bought for growth. Conversely, holdings in downtrends should be sold for protection. Today, despite last month’s rebound, most global stock indexes remain in a downtrend. That’s a fact and indisputable. Until that changes, our rules-based strategy keeps us under-invested in stocks and holding tight in protection mode. Bonds and gold, however, remain in uptrends and we remain fully invested in those asset categories. There’s no need to guess or predict; we’ll invest with the trend. If the economy slowly re-opens without dire consequences and/or a virus treatment suddenly is created, we might see a new uptrend develop and a reason to buy stocks. Until then, we’ll stay safe.

What Else Can You Do?

We’ve got our investors covered for portfolio management. But, there are other aspects to your financial well-being that you might address during these reclusive times. Check your insurance needs and coverage, re-visit your will and estate plans, contemplate your career choice, re-think retirement and goals. And above all, remember that your loved ones are what matter the most in life. A little wealth just makes some things easier.