Monthly Outlook: June 2020

Markets continue to yo-yo as the battle between health vs. economy rages on. In March, the coronavirus pandemic was new, unknown, and scary enough to convince the country to essentially shut down. The economy tanked as we stayed home to “flatten the curve” and save lives. Now, three months later, we still have no real treatment or cure and people are still dying. Today, the “economic crisis is killing me” crowd is louder and pushing harder to reopen America, virus and rising death toll be damned. We’ll probably know if the re-opening was prudent in a few weeks as we watch for a possible spike in virus-related deaths. It’s quite the gamble.

Our job is not to deliberate the merits and ethics of the health vs. economy debate. We’ll just focus on the effects it’s having on the markets. Stocks tanked 35% in March on virus fears and retraced 50% to 90% of the losses on opening-up hope. That’s the definition of a yo-yo market. The U.S. stock market is now only down 5.6% YTD after a wild ride. International stocks are down 14.4% YTD and bonds are up 5.7% YTD. Gold is the best asset class of 2020 so far, up 14.0% YTD.

Only 10% Off?

As we move into June, U.S. stocks are only down 10.3% from the all-time peak in February. Not only was February a price peak, it was a valuation peak with levels only seen a few times in the past 90 years including 2007, 2001, and 1929. Are we really supposed to believe that with all the uncertainty surrounding coronavirus and the massive destruction to the economy, that stocks should be trading at only a 10% discount to the peak? Unemployment has already spiked from 3.5% to 14.7% and is likely to be 20% when the monthly report is released on Friday. Corporate earnings have already fallen 25% and bankruptcies are on the rise. GDP was down 5.0% in the first quarter of 2020 and that was with only one month (March) of the shut-down. That’s the worst quarterly GDP since 2008. The Federal Reserve Bank of Atlanta is forecasting second quarter of 2020 GDP to be down 51%. Not 5.1%, 51.2%. So, how can the stock market only be 10.3% below the “priced for perfection” market of February? The only way this makes any sense is if one chooses to believe the current situation is a short-term anomaly that will magically go away, which allows the economy to return to perfection imminently. Wouldn’t that be nice? My personal guess is that the economy will partially “open up” and some industries will do better than others, but overall, we’re in for a multi-quarter recession that is already happening and will bring pain and loss to many. Even if the economy were to operate at 90%, is that enough? Many businesses need that last 10% to be profitable. Anything less is losing.

No Need to Guess

The beauty of our trend-following investment strategy, iFolios, is that we don’t have to guess. We just need to be disciplined enough to invest with the trend of each asset class. Today, U.S. growth stocks (mostly technology and healthcare) are trending higher. But international stocks and U.S. value stocks are down-trending. Bonds are doing well, and gold is doing great. Our iFolios 75 portfolios, therefore, are about 25% Cash, 25% Bonds, 41% Stocks, and 9% Gold. We’re up about 1% YTD after all this yo-yo, easily beating market benchmarks (and with minimal volatility!). Our goal remains: Grow when we can, protect when we must. Over the next month or two, we’re likely to find out whether these past few months have been a temporary anomaly or whether it was the catalyst to a serious and sustained recession. Stocks will either continue the bounce (and we’ll buy more) or the bounce will fail (and we’ll sell more). We’re fighting the urge to guess and trade before the trend develops. But we’re ready, either way.

Can We Do More?

Our iFolios strategy is really designed for markets and conditions like these. This is when we crush a “buy & hold” strategy. Can we do more for you? We’d be happy to review other portfolios you may have that could be at risk. Are your friends complaining about losses while you tell them you’re up 1% YTD? We’d be honored to help them. Right now – before any possible downturn – is when we can help the most. Thanks for your trust.