July 2020 Market View
The Economy and the virus…a tale of our times
Headwind—CORONAVIRUS—when can we normalize?
No one knows what the future holds. The prudent course of action now is to be careful. Scientists agree we are still in the first wave and there is potential for a second wave. A second wave could drop markets to another low point maybe even lower than we saw in March 2020. Remember that low points are buying opportunities.
Current Stock Market pricing is not reflecting:
- 1st and 2nd quarter weak profits
- High Unemployment
- Unprecedented drop in GDP
- Many companies will not make it, bankruptcies are up
If you are wondering with all the social chaos going on why there is no visible impact to stock prices, consider that the markets react to money.
During times of economic stress, active management generally outperforms passive management.
The game we call investing is a contact sport, for good blocking and tackling you need positions that include:
- Offense
- Defense
- Income
Keep Your Eye on the Ball
- Sectors we like and why:
- Technology and healthcare have both been winners during the crisis, and they are expected to perform as the crisis continues to unfold.
- Growth vs Value
- While value investing has its time, right now growth is outperforming.
- Sectors we don’t like and why:
- Consumer Staples: Expensive P/E (price to earnings)
- Energy: Crude oil isn’t expected to go over $50.00 per barrel.
- Real Estate: Rent payments are higher than expected for individuals paying leases and rent. Home sales have been regionally impacted. Commercial Real Estate—what will post COVID-19 bring? Who will use costly office buildings if or when working from home is the new normal?
- There will be winners and losers amid tremendous Real Estate Market changes, while the sector composite remains market neutral.
- Emerging Markets: Manufacturers are moving out of China and moving into India, Vietnam, Mexico and to a lesser extent to the US.
- Don’t invest in these emerging markets—COVID-19 is flourishing in these counties and could cause disruptions.
Balancing the Pros and Cons of Stimulus
The United States has printed mass quantities of money and the deficit has exploded, it is at 3.6 trillion up from 1 trillion and maybe more to come. Deficit concerns are justified—inflation could happen.
- The US deficit is smaller than Japan’s and Japan has been navigating their deficit without hyper-inflation for 15 years.
- US bond markets forecasts no inflation for the next 10 years. As of right now, interest rates should stay where they are, keeping debt refinance as a possibility.
- Inflation in the near future is possible, but unlikely.
A Distant Second Headwind
The market will start to bake-in concerns over the 2020 election in August and September. The Market is not expected to care much who the winner is, Trump or Biden. A Democratic sweep might be worrisome to markets if the Senate Majority changes hands.
Historically, every financial crisis has been followed by a recovery.