3rd Quarter Market Update
Whiteford Wealth Management, Inc.
404 Broadway Street, South Haven, MI 49090
Tel: (269) 637-4400 Fax: (269) 637-4407
October 1, 2020
Hello everyone and welcome to our Fall 2020 Market Update. We are now seven months into the COVID-19 pandemic—assuming a March 1 “start-date”—and we are just over one month away from what is turning out to be one of the strangest election cycles that we have ever seen, as there will be more absentee ballots submitted than ever before to our local municipal clerks’ offices. This week’s first of three Presidential Debates seems to only make things stranger. However, the markets seemed to react quite nicely to the debates so there is a kernel of positivity there. We are going to touch on several key issues that are going on in the markets and try to keep this update short and sweet.
Here are the topics that we would like to discuss:
- Overview: COVID-19;
- Interest Rates & Asset Values;
- 2020 Election Year; &
- Going Forward.
|Name of Index||Jan. 2, 2020 (close)||Oct. 1, 2020 (close)||Percentage Change|
|Dow Jones Ind. Avg.||28,868.80||27,816.90||-3.64%|
|CBOE 10-Yr (^TNX)||1.882%||0.709%||-62.33%|
|U.S. Bond Index (AGG)||112.68||118.02||4.74%|
|Name of Index||Jan. 2, 2019 (close)||Oct. 1, 2020 (close)||Percentage Change|
|Dow Jones Ind. Avg.||23,346.24||27,816.90||19.15%|
|CBOE 10-Yr (^TNX)||2.661%||0.709%||-73.36%|
|U.S. Bond Index (AGG)||106.57||118.02||10.74%|
Please be advised that the percentage change in yields in bonds do not necessarily represent a similar increase in value, it only serves to show you that a substantial change in interest rates has occurred—although it does in fact affect the values of outstanding bonds. Generally speaking, when interest rates rise, bond values fall. Also, many stocks of the DJIA and the S&P 500 have dividends which are not included in the NAV’s percentage change on the associated index. Most NASDAQ companies have historically lower dividends but they are also not quantified here. The U.S. Bond Index has historically been almost entirely driven by dividends of interest payments, so any change in value in the above chart is entirely due to appreciation—or when negative, depreciation—in the value of the underlying bond market.
Let’s compare these figures to our foreign counterparts around the globe. We’ll do so by comparing the major indexes of Germany, China, UK, & Japan.
|Name of Index||Jan. 2, 2020 (close)||Oct. 1, 2020 (close)||Percentage Change|
|SSE Comp. (China)||3,085.20||3,218.05 (Sep 30)||4.31%|
|FTSE 100 (UK)||7,604.30||5,879.45||-22.68%|
|Nikkei 225 (Japan)||23,656.62 (Dec 30)||23,184.93||-1.99%|
|Name of Index||Jan. 2, 2019 (close)||Oct. 1, 2020 (close)||Percentage Change|
|SSE Comp. (China)||2,465.29||3,218.05 (Sep 30)||30.53%|
|FTSE 100 (UK)||6,734.23||5,879.45||-12.69%|
|Nikkei 225 (Japan)||19,561.96 (Jan. 4)||23,184.93||18.52%|
During times like this, we must be diligent in remembering that investing is a long-term game. Doing so compels us to look at where we were just 4.75 years ago, as illustrated in the next chart.
|Name of Index||Dec. 31, 2015 (close)||Oct. 1, 2020 (close)||Percentage Change|
|DAX||10,743.01 (Dec. 30)||12,730.77||18.50%|
|SSE Comp||3,539.18||3,218.05 (Sep 30)||-9.07%|
|Nikkei 225||19,033.71 (Dec. 30)||23,184.93||21.81%|
Source: Google Finance
Please also look to the following website for MCSI data on all countries listed (click the country tab about 1/3-way down). Look at the YTD and the rolling 1, 5, and 10-year periods.
For nearly 5 years the choice has been clear: invest in U.S. companies. We currently see no reason to stop advocating for our clients to do the same within their equity positions.
Brief Overview of COVID-19
- Cases are relatively flat
- Continued supply chain difficulties
- Stimulus packages
The virus that has turned into a pandemic around the world continues to rear its ugly head. China, who was approximately two months “ahead of the rest of the world” seems to be returning to normalcy—or at least that is what is being reported. However, with public schools and other educational institutions attempting to get back to work, there have been very large discrepancies on how each State is handling the return to school which are readily apparent. Some schools have opted to discontinue live instruction in favor of digital, others offer only live instruction, some have elected to have a mix of the two, and still others have made it entirely up to the parents of the child while their school offers both as a viable option. None are arguably the preferred method for all children in the country, so we can appreciate state and local control over the education system. We certainly hope that this methodology continues past the November elections.
With that being said, there are some states that have chosen to take a more top-down approach, especially regarding other areas of life. Michigan and New York are two states that have made many headlines in recent months. As of this writing, the Supreme Court of Michigan will decide on the constitutionality of Gov. Whitmer’s interpretations of law in regard to her own Executive Orders. We greatly anticipate the results now that our family’s business is located here in Michigan. Gov. Cuomo of New York, who was regaled as the bastion of civility and professionalism during the early months of the crisis, has yet to allow many businesses to reopen in the streets of New York City. In fact, he has postured that his office will come down swiftly if cases begin to escalate once more.
While all of this turmoil continues, we cannot help but to look at the strange case of Sweden, commonly misconstrued as some sort of “democratic socialistic republic”. The nation of Sweden has enacted no executive orders even remotely on the scale of their U.S. counterparts. Businesses were rarely closed, if ever, at any point during the pandemic—yet the amount of cases as a percentage of its population hovered right around the U.S.’s. Logically, many blame the small population of Sweden for their outlier status in this regard; however, the vast majority of the population lives within an hour or two from mainland Europe and commonly had unrestricted access as a citizen of a Eurozone member—although many countries restricted Swedish access to them. Not nearly as many people traveled to/from Sweden in the middle of a pandemic, but the same can be said about any country. What matters is that the death rate, while higher than many developed countries early on in the crisis, has plummeted since that time and they look to be back on track towards normalcy quicker than most countries. Hindsight is definitely 20/20; however, we’d love for future decisions to factor in the solutions of every international counterpart—especially those that seem to be managing quite well!
So, where are we at right now in regard to the “flattening of the curve”? After the first onset of the virus, daily cases in the country spiked from 0 to 30,000 by the first week of March. Those daily cases waned to roughly 20,000 two months later which made a great case for reopening. However, by mid-July we were over 70,000 cases per day in the U.S. that number has subsequently dropped back off dramatically to around 35,000 cases per day, again seeming to make the case for reopening should the cold/flu season not bring about anything game-changing.
Now on to the best part: while through the start of May we were seeing over 2,000 deaths per day; we are now seeing roughly 500-1,000 despite having far more cases! This goes to show how much we have already learned about the virus and how great our capacity for its treatment has become. We hope that this is a trend that continues.
Although our treatment of the virus has become far more efficient over recent months, we are unfortunately still seeing many lagging supply chain disruptions throughout the world’s markets. Lumber prices are double what they were in many places around the country. Similar jumps in nearly every construction material have occurred. Steel mills are seeing similar trends. With the devastation of the migrant workforce that aids in harvesting our grocers’ produce sections, we expect many food prices to rise. Those that are imported from other countries will likely go through additional screenings. There is simply too much uncertainty in the U.S. logistics’ systems in order to properly discern the next 6-12 months. The preliminary data seems to be mixed-positive though despite the elongated wait times.
One frequent discussion that we have seen lately is the speculation over what the Federal, State, and local governments will do next in regards to stimulus packages. Thus far, many businesses have seemed to weather the storm relatively well. However, there are certain industries that have been clobbered by the virus thus far and there are a multitude of variables, especially those concerning more prolonged mandated closings from their governments. Those industries are primarily associated with hospitality, travel, and food/bar-type establishments. Should there be additional stimulus, we feel that it will be tailored to specifically target those most affected as it was in the first weeks of the crisis. The PPP and other programs dramatically infused cash into every industry and many of those industries have benefited accordingly—at this point their future looks much more secure. Further, it is our opinion that there will be additional stimulus; however, we simply do not know what that could entail given the fact that we are amidst an election year after all!
As previously stated, three months ago the Federal Reserve committed to keeping interest rates at present, super-low levels until at least 2022-2023. Because the Fed couldn’t make such a dramatic move in the rates themselves as they did in 2008-2009, they took a hybrid approach in both lowering the rates as well as reducing the reserve requirements of member banks which allowed them to lend more to their customers. This leads into several talking points:
- Asset Values;
- Bond Prices/Returns;
- Dividend-Paying Assets;
- Real Estate Assets;
- Governmental Debt.
In general, when large infusions of cash/cash-equivalents enter into a monetary supply, the existing assets within that economy tend to appreciate in value. Much of the monetary inflation, as many tend to call it, was exported overseas after the initial influx in 2009-2012 during our last major financial crisis. Because of this, we saw real estate values, precious metals, and other hard assets appreciate sharply after the first couple years of cash-infusion by the Fed only to be more controlled in years 2013-2020. You can say that we suffered from an initial inflation-shock for 24 months and then went overseas looking for better investments—returns on our money. That infusion to the global economy led global prices higher for a longer period of time. Hardly anyone talks about inflation since their initial concerns in 2009.
In 2020’s current situation, global prices had appreciated since 2008 so it took a much larger dollar amount of infusion from the Fed to make a similar difference. However, we see the chances of a similar outcome unfolding to be relatively high. We have seen gold, silver, real estate, and yes—older, higher-yielding bonds, appreciate quite dramatically in the last six months. Given the fact that the rest of the world will likely recover slower from this current crisis, we see this teetering off at some point. This will happen when domestic investors look abroad for more favorable opportunities. U.S. companies will likely be doing the same as those individual investors.
Bond prices and yields are moving considerably this year. Until March 2020, the global consensus was that yields would continue rising as the global central banks attempted to raise rates to pre-2008 levels. Nobody bet on COVID-19, though. So, there has been a large shock in the industry. Bond prices that were issued in the last few years have skyrocketed in value while yields have plummeted. As stated in previous updates, we feel that the next 2-3 years will be relatively quiet in the industry so long as the Fed doesn’t take the European example to heart: negative interest rates. Those are still on the table in our mind, however unlikely.
Dividend paying assets have had mixed results as a result of the interest movements this year. This is primarily due to the overall uncertainty in many older, dividend-paying companies by the average investor. Will all of the blue chips survive? Probably not. However, their stock prices will likely be buoyed by investors attracted to the dividends that those companies offer in the short-term.
Real estate prices nationally have seen an uptick despite the “new norm” of work-from-home which has led many to move out of the major cities. This is primarily driven by extremely low interest rates and a lack of income-producing alternatives. The materials backlog from COVID-related supply chain difficulties has risen the price of a new build, so even older homes are seeing a noticeable uptick if they are in desirable locations. Major cities are seeing at least a stabilization of real estate values, so long as they are not retail locations, but the real winners here are those properties outside of the major cities. Small towns are seeing the largest real estate boom that they have seen in quite some time, albeit it’s not helping retail real estate locations to the same degree.
The governments of the world are likely the largest beneficiaries of the new, ultra-low interest rates. In the States where we have over $27 Trillion in Federal debt, our interest payments have been cut dramatically. For instance, the 10-year treasury yield was about 1.5% this time last year. Now it is half of that (0.75%) which saves the Federal government a little over $200 Billion each and every year going forward, assuming that they borrow all debt at that rate.
The major takeaway from this topic is this: if you lend money in the form of a certificate of deposit (CD) to a FDIC insured bank, you’ll receive about 0.5% – 1.5% depending on the length of term, possibly even less. Investors apply little to no risk to that or a purchase of a Treasury note. If that is the benchmark on an income-producing asset, the savvy investor naturally seeks out more return for more risk. Should he or she choose to purchase a precious metal or other non-income-producing asset, they do so because they see their implied appreciation as being greater than a no-risk investment. Should he/she choose to purchase debt in a corporation, they want more return than that to outweigh the implied default rate. A dividend-paying company is similar, but implies even more risk, as creditors are always paid before equity investors during bankruptcy proceedings. A purchase of real estate in a desirable location ties in both appreciation and current income, assuming that the investor either saves money, increases quality of life, and/or rents the property to a consumer.
Income is always a balance of weighing all income-producing options available to the investor and it is naturally tied to the interest rates paid by no-risk asset classes.
2020 Election Cycle
This year we have a major election cycle coupled with a global pandemic that facilitated one of the most economically disruptive responses that the world has ever seen. Never before has the world economy voluntarily chosen to shut down to such an extent, regardless of the circumstances.
Enter the first Presidential Debate this past week. Overall, global opinions are discerningly negative in view of the lack of professionalism demonstrated during the debate. Many in the U.S. feel similarly, although depending on the nature of the political party, opinions fluctuate a bit more radically when compared to our international neighbors’. So why have the markets responded favorably?
This is one of the first debates, especially at this level, that we saw very little policy discussed. What happens when neither candidate goes after the throat of the pharmaceutical industry? What about when nothing is said about the financial industry? And the oil and gas industry? The list goes on and on. Sure—there were things said about these industries, but nobody dared go after them vehemently as is typical of so many debates that we have seen during our lifetimes. Instead, we saw numerous personal attacks, unprofessionalism on behalf of the moderator, and constant interruptions. When DC cannot make up its mind and fails to come to regulatory conclusions, businesses win. This has been elaborated upon many times in prior updates. We greatly anticipate seeing the direction of future debates.
DC’s House and Senate are simply too early to call. The Presidency is still too early to call. Will we have a split Federal Gov’t? Nobody has a crystal ball; however, we do know that the markets are reacting to the deadlock quite favorably. This makes a lot of sense to us and it also provides a clearer picture of 2021, whatever the election outcomes bring upon us.
It is rather important to note that many international policies are in flux with this election cycle. Trump has obviously taken a hard line against China, especially when it comes to their intellectual property law issues. Russia and Iran still have many sanctions against them as well. It’s also important to remember that Trump’s first international visit was to Saudi Arabia which really set the stage for his approach on Middle Eastern policy. Biden, on the other hand, wants to raise corporate tax rates from 21% to 28%, which would certainly cause some international companies to rethink headquartering anything in the States. They would instead look overseas. His track record also implies a much more favorable approach to dealing with Chinese aggressions, both physically in the South China Sea and elsewhere as well as the intellectual property disputes.
2021 looks to be a promising year. COVID will likely be even more contained than it is currently. Consumer confidence will likely return to pre-COVID levels. Businesses that benefited from the various stimulus packages will be stronger than ever. Every business received a rude awakening with both the virus and the movement from urban centers of its employees/offices. Every business that survives this cataclysmic time will emerge with lower employment costs, lower rents, lower interest payments on its debts, etc. Every surviving business will emerge with a larger market share due to the bankruptcies of its competitors, both here and abroad. Wages have consistently risen throughout the crisis and they don’t look like they are stopping, so customers will have the capability to purchase more of these business’s goods/services. International competition will likely take another couple of years to catch up.
Not everything looks to be great for everyone—of course. Airlines, cruise ships, international destinations, traditional retailers, etc. Many will not survive the coming 18 months. However, the losses of one company does not eliminate the industry. Consumer spending, especially on certain discretionary spending, will come back. The surviving companies, with their lower costs, higher revenues, and more profits, will be able to branch into the voids that were left by the household names that we have known for decades. Will Amazon utilize its knowledge of air freight to purchase the assets of United Airlines for pennies on the dollar, refit the assets to today’s consumer’s tastes, and begin a commercial airline service better than we have seen in 50 years? We believe this to be more likely than the long-term survival of United Airlines! At least that would probably happen without any governmental intervention—so the jury is still out on this theoretical outcome.
Whatever the case may be in Washington, we do know that whatever companies survive this colossal shift will likely produce appreciation and income for our clients for many years to come regardless of who happens to win in 2020.
So, let’s summarize:
- Prudently watch how COVID-19 affects our communities and our financial markets upon which they function, especially with the oncoming cold/flu season;
- Debt instruments finally look stable enough;
- Continue investing into the companies that look to survive and prosper amid such uncertain times;
- Focus our investment portfolio on U.S. companies, especially large ones and those keen to take over their respective global competitors;
to watch geopolitical tensions and their inevitable outcomes.
- This grows more important by the day—especially during election years.
Should this brief synopsis of our opinions—and these are purely opinions based on our own analysis of the data—facilitate any questions about the markets, about our service, or anything else for that matter, please feel free to reach out to us. It takes a great deal of trust to allow someone to manage your life’s savings. The fiduciary duty that we voluntarily assume because of our relationship is nothing compared to the ethical duty that we have to you and your family. It’s not something that we take lightly; so, until the next time we speak, we will be in the boat with you.
As always, we sincerely thank you for your continued trust and now more than ever, we pray that you and your loved ones remain safe amidst this extraordinarily difficult time.
Kevin S. Whiteford
Kevin S. Whiteford
Whiteford Wealth Management, Inc.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research, Inc., a Registered Investment Advisor. Whiteford Wealth Management, Inc. and Cambridge are not affiliated.
This letter is not meant to solicit the purchasing of any equities, bonds, mutual funds, or any investment of any kind. Any direct mention of any investment is meant purely as a reference point in the analysis of the issues discussed in this letter.
These are the opinions of Kevin S. Whiteford and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results. Diversification and asset allocation strategies do not assure profit or protect against loss.