Blog / Events

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

Market Update

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:

  1. Overview: COVID-19;
  2. Interest Rates & Asset Values;
  3. 2020 Election Year; &
  4. 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%
NASDAQ (IXIC) 9,092.19 11,326.51 24.57%
S&P 500 3,257.85 3,380.80 3.77%
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%
NASDAQ (IXIC) 6,665.94 11,326.51 69.91%
S&P 500 2,510.03 3,380.80 34.69%
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
DAX (Germany) 13,385.93 12,730.77 -4.89%
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
DAX (Germany) 10,580.19 12,730.77 20.33%
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
DJIA 17,405.03 27,816.90 59.82%
NASDAQ 5,007.41 11,326.51 126.19%
S&P 500 2,043.94 3,380.80 65.41%
AGG 108.01 118.02 9.27%
DAX 10,743.01 (Dec. 30) 12,730.77 18.50%
SSE Comp 3,539.18 3,218.05 (Sep 30) -9.07%
FTSE 100 6,242.32 5,879.45 -5.81%
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.

https://www.msci.com/end-of-day-data-search

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

  1. Shutdowns persist
    1. Schools
    1. NY
    1. Sweden
  2. Cases are relatively flat
  3. Continued supply chain difficulties
  4. 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.

https://coronavirus.jhu.edu/map.html

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!

Interest Rates

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:

  1. Asset Values;
  2. Bond Prices/Returns;
  3. Dividend-Paying Assets;
  4. Real Estate Assets;
  5. 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.

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield
https://www.usdebtclock.org/

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.

Conclusion

So, let’s summarize:

  1. Prudently watch how COVID-19 affects our communities and our financial markets upon which they function, especially with the oncoming cold/flu season;
  2. Debt instruments finally look stable enough;
  3. Continue investing into the companies that look to survive and prosper amid such uncertain times;
  4. Focus our investment portfolio on U.S. companies, especially large ones and those keen to take over their respective global competitors;
  5. Continue to watch geopolitical tensions and their inevitable outcomes.
    1. 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
President
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.

Retail Sales Month over Month September 2020

 Retail sales in the US jumped 1.9% month-over-month in September of 2020, following a 0.6% gain in August and beating forecasts of a 0.7% increase. It is the biggest rise in three months, with sales at clothing stores (11%); department stores (9.7%); sporting goods (5.7%); and auto dealers (4% ) recording the highest increases. Sales also went up at food services and drinking places (2.1% ); health and personal care stores (1.7%); gasoline stations (1.5%); miscellaneous store retailers (1.1%); building material and garden equipment (0.6%); nonstore retailers (0.5%); and furniture stores (0.5%). In contrast, sales fell at electronics and appliance stores (-1.6%). Retail sales excluding food services, car dealers, building-materials stores and gasoline stations, the so-called control group sales seen as a more reliable gauge of demand, increased 1.4%. Year-on-year, retail sales went up 5.4%, the strongest annual gain so far in 2020. source: U.S. Census Bureau

https://tradingeconomics.com/united-states/retail-sales
ISM PMI September 2020

The ISM Manufacturing PMI for the United States fell to 55.4 in September of 2020 from 56 in August, below market forecasts of 56.4. The reading pointed to the 4th consecutive month of expansion in factory activity, although the growth rate eased from August’s near 2-year high. A slowdown was seen in new orders (60.2 vs 67.6), production (61 vs 63.3) and supplier deliveries (59 vs 58.2) while employment was nearly stable (49.6 vs 46.4). Inventories contracted at a slower pace (47.1 vs 44.4) and new export orders rose faster (54.3 vs 53.3). Price pressures intensified (62.8 vs 59.5). “After the coronavirus pandemic brought manufacturing activity to historic lows, the sector continued its recovery in September. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories and are becoming more proficient at maintaining output. Panel sentiment was optimistic, an improvement compared to August”, Timothy R. Fiore, Chair of the ISM said. source: Institute for Supply Management

https://tradingeconomics.com/united-states/business-confidence
1st Quarter 2020 Market Update

Whiteford Wealth Management, Inc.

404 Broadway Street, South Haven, MI 49090

Tel: (269) 637-4400 Fax: (269) 637-4407

April 1, 2020

Market Update


Welcome to our first quarterly market update and recap for 2020. We are currently facing a crisis that spans the globe and we continue to see unprecedented actions taken across the differing continents in response to the COVID-19 pandemic. This has impacted all of our personal lives to a great extent. The personal sacrifices that we have endured and will continue to endure for no less than the next month will dictate, in part, how the underlying conditions of the global economy will weather the storm. Businesses have shut down their operations. Manufacturers have retooled their enterprises. Schools have cancelled in-building learning capabilities. But, more on that later. For right now, we sincerely hope and pray that you and all of your loved ones are safe, healthy, and emerge from this calamity together, stronger than ever before.

We have a wealth of topics to discuss so here is an outline of this update:

  1. Brief Overview COVID-19;
  2. United States Economy;
    1. U.S. Response to COVID-19;
      1. Quarantines;
      1. Stimulus Package;
        1. Individuals;
        1. Small Businesses;
        1. Industries;
    1. Election Year;
    1. Interest Rates;
    1. Economic Outlook: 12 Months & Beyond;
  3. Our Short-Term/Long-Term Goals;
    1. Moving to Cash & Return to Markets;
    1. Current Portfolios & Contemplated Changes.
Name of Index Jan. 2, 2020 (close) Apr. 1, 2020 (close) Percentage Change
Dow Jones Ind. Avg. 28,868.80 20,943.51 -27.45%
NASDAQ (IXIC) 9,092.19 7,360.58 -19.05%
S&P 500 3,257.85 2,470.50 -24.17%
CBOE 10-Yr (^TNX) 1.882% 0.635% -66.26%
U.S. Bond Index (AGG) 112.68 114.73 1.82%
Name of Index Jan. 2, 2019 (close) Apr. 1, 2020 (close) Percentage Change
Dow Jones Ind. Avg. 23,346.24 20,943.51 -10.29%
NASDAQ (IXIC) 6,665.94 7,360.58 10.42%
S&P 500 2,510.03 2,470.50 -1.57%
CBOE 10-Yr (^TNX) 2.661% 0.635% -76.14%
U.S. Bond Index (AGG) 106.57 114.73 7.66%

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) Apr. 1, 2020 (close) Percentage Change
DAX (Germany) 13,385.93 9,544.75 -28.70%
SSE Comp. (China) 3,085.20 2,734.52 -11.37%
FTSE 100 (UK) 7,604.30 5,454.57 -28.27%
Nikkei 225 (Japan) 23,656.62 (Dec 30) 18,065.41 -23.63%
Name of Index Jan. 2, 2019 (close) Apr. 1, 2020 (close) Percentage Change
DAX (Germany) 10,580.19 9,544.75 -9.79%
SSE Comp. (China) 2,465.29 2,734.52 10.92%
FTSE 100 (UK) 6,734.23 5,454.57 -19.00%
Nikkei 225 (Japan) 19,561.96 (Jan. 4) 18,065.41 -7.65%

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 4.25 years ago, as illustrated in the next chart.

Name of Index Dec. 31, 2015 (close) Apr. 1, 2020 (close) Percentage Change
DJIA 17,405.03 20,943.51 20.33%
NASDAQ 5,007.41 7,360.58 46.99%
S&P 500 2,043.94 2,470.50 20.87%
AGG 108.01 114.73 6.22%
DAX 10,743.01 (Dec. 30) 9,544.75 -11.15%
SSE Comp 3,539.18 2,734.52 -22.74%
FTSE 100 6,242.32 5,454.57 -12.62%
Nikkei 225 19,033.71 (Dec. 30) 18,065.41 -5.09%

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.

https://www.msci.com/end-of-day-data-search

Clearly, the United States and the companies here continue to have been the best place to “park our money” for the last handful of years. We currently see no reason to stop advocating for our clients to do the same within their equity positions.

Brief Overview of COVID-19

We won’t go into the full medical specifics of this, but COVID-19 is a respiratory illness that attacks certain cells in our lungs. The victim typically suffers from fevers, achiness, and other flu-like symptoms. What makes this particular strain of coronavirus—“virus of the crown/head”—lethal is the fact that it attacks the ability of the body to effectively produce the mucus lining of its host’s lungs. This leads to fluid build-up and pneumonia. While it is not nearly as deadly on an individual basis as many other well-known pathogens, the fact that it has a moderately long incubation period and that it is easily spread via any airborne contact with the ears, nose, eyes, and mouth of unsuspecting victims creates the misfortune that we see before us.

According to sources, roughly 80% of those infected show little to mild symptoms and can usually refrain from hospitalization. The other 20% of victims suffer from more serious issues, but roughly half of those cases can make it through the illness with a simple house-arrest. About 10% of all cases require hospitalization. Of those, half require more extreme measures, such as ventilator treatment to aid in life-assisted breathing. Currently, depending on the healthcare providers and resources available in any given country, the percentage of confirmed cases leading to death ranges from 0.5% to exceeding 11% in countries like Spain and Italy. We still don’t have any sort of reliable data from China, and India is just beginning to confirm cases of the virus. Ultimately, the more concentrated population centers are and the less available resources, one can imagine that confirmed cases represent only a small percentage of the devastation brought on by COVID-19.

Despite it’s horrific toll on human life, from the very beginning nearly all analysts agreed that this virus would be more devastating to the world’s economies, especially to those countries not equipped to handle it.

United States Economy

  1. U.S. Response to COVID-19

The earliest reports on the novel coronavirus began emerging towards the end of 2019. Many noted it as “some new disease originating in the wet-markets of China” and it was far from front-page news. By the time January rolled around, it was beginning to make some headlines but it was still taking a backseat to stories focusing on the tragic loss of Kobe Bryant and his daughter, among other seemingly more important stories of the time. Once February came, we were beginning to see signs of economic disruption emanating from Chinese producers because of the fast crackdown they implemented nationwide which led to tremendous issues in their supply chains. Still, though, the thought of any sort of “Stay at Home Orders” or quarantines were not being seriously contemplated. Instead, the Federal Reserve began lowering the Federal Funds Rate and the stimulus checks that were being considered were thought of as proactive approaches.

Fast forward to March. The markets across the globe had a steep decline and State and Municipal governments, especially those in major cities, began enacting such orders and recommended quarantines. Stimulus checks and further Federal Reserve intervention became not only a reality, but a requirement. Cases were being reported in major US cities and necessary supplies were being ordered. Many manufacturers began retooling their lines to accommodate the production of these necessary supplies in the wake of both their suppliers in China being behind and the prospect of receiving large profits from such supply production.

  • Quarantines and Economic Stimulus Packages (CARES Act)

Now entering April, we have an understanding of at least the first steps that will be taken to handle the economic setbacks that will befall this country. The “Stay at Home” orders, or quasi-quarantines, began with the issuance of California’s. By March 23, there were nine statewide orders; by March 26, there were twenty-one; and by March 30, we are now up to thirty statewide orders. Including the variety of counties and cities that made orders in lieu of statewide intervention, we now see roughly 90% of the population under quasi-quarantine.

References to historical utilizations of such executive orders typically include the now-familiar phrase of “flattening the bell curve”. We tend to agree with these sources and pray that it works as effectively as its champions espouse; however, we eagerly wait to see what sort of legal precedents such actions set for future generations.

With the passage of the CARES Act, $1,200 rebate checks will be issued to roughly 90% of the country’s adults. A further $500 rebate will be issued to each qualifying child’s claimants. Remember: this rebate is an assumption that these individuals’ 2020 Form 1040s (Individual Tax Returns) will mimic those from 2019, or 2018 if 2019 is still yet to be filed, and as of today, it may be deducted from whatever total refund they would otherwise receive from filing their 2020 tax return. It is a non-taxable event and is essentially a no-interest loan from the IRS, as no interest or penalties will be attached to the payment should the net check be more than whatever refund that individual would have received otherwise. Additionally, individuals laid off will temporarily receive an additional $600/week in unemployment pay and their employers will not be penalized for laying them off. That’s a steep increase from the nationwide average maximum payment of roughly $300/week that we had beforehand.

Billions in dollars of grant money will be issued in the form of checks of up to $10,000 to each small business that has been most affected economically—typically those in the restaurant and bar industry. The SBA is guaranteeing loans to small businesses that continue to make payroll, mortgage/rent payments, and other qualifying necessary expenses. Direct funding to industries such as the cruise lines, airlines, and others directly involved in the tourist/travel industries. Payroll and estimated income taxes are deferred. Further stimulus is expected but is still tabled. Further quarantines are expected but still tabled.

https://gop-waysandmeans.house.gov/the-senate-cares-bill-tax/
  • Election Year Volatility

Further complicating the COVID-19 crisis is the fact that this is also an election year. These years are usually more volatile than others. Each debate contains a plethora of statements about what differing candidates for key positions want to do in their official duties. Those statements typically contain preferences about what that candidate would like to do, if they win. It’s the reality that we live in. The government exercises a great degree of control over our lives by stimulating or sanctioning/controlling particular market sectors.

Further, there are underlying political reasons for some of the actions taken by the numerous State and Federal officials. Some want to be seen as “taking a hard stance against the virus”. Others would like to be seen as “letting the free markets do what they do”. Here in Michigan, Governor Whitmer has chosen to refuse signing relief packages procured by her own legislature in lieu of waiting for the Federal Government to foot the bill. We don’t know who’s wrong in this situation, but politics are certainly at play. Taking a step back, the fact remains: election years lead to volatility. The fact that we have a pandemic on our hands concurrently makes it all the more unfortunate.

  • Interest Rates & Fed Monetary Policy

The Federal Reserve, from 2008-2011, injected more than $11 Trillion into our economy. This was discovered in the court case Bloomberg L.P. v. Board of Governors of the Federal Reserve System and subsequent findings/reports by the Federal Reserve. Thus far, they have committed to injecting over $2.2 Trillion with the prospect of doing an additional $4 Trillion immediately thereafter. Additionally, they have lowered reserve requirements for its member banks from 20% to 0% for the time being. Naturally, one must account for inflation between 2010 and 2020. Additionally, one must also account for the much larger market capitalization rates of US companies that have occurred over the last ten years. The largest U.S. companies have done what they thought that they would do just ten years ago in the wake of the financial crises: they’ve taken over much more of the world’s markets with cheap debt and economic devastation overseas. Simply stated: more money is needed now than was needed before as the economy has grown much larger.

Such an injection poses a real problem for the U.S. debt/GDP ratio, but it looks like we are in familiar company with many of the world’s central banks who are doing precisely the same thing relative to their host country’s respective economic might. The U.S. should be able to continue to service this debt with the reduction of the Federal Funds Rate to post-2008 levels: 0.00%-0.25%, as the yield on a 10-year T-Bond is only 0.635%! That’s not a new issue T-Bond, of course, but it gives us great insight into what new issues might hover around in the immediate future.

  • Trade War(s)

Saudi Arabia recently decided to slash the prices of crude oil resulting the rest of the OPEC nations in doing the same. This was an indirect attack on Russian economic interests, as the cost of oil production between the two nations are starkly contrasting. In short, the Saudis breakeven point on a barrel of oil is far lower than that of the Russian model. Luckily for U.S. energy interests, there has been an exceptional amount of research into cost-effective methods for extracting oil and gas from North American deposits. An infrequently discussed aspect of the CARES Act also suspended the implementation of environmental controls on the industry temporarily.

All of this bodes awfully for Russian interests, as much of the overall Russian economy is driven by the sale of natural resources (commodities), all of which are heavily influenced by the price of crude oil, as discussed in a prior Market Update at length (Petrodollar). It also places a thorn into U.S. energy companies’ economic outlooks as well. If prices of oil and gas stay low because of the trade war, then this industry, which makes up approximately 10% of the entire BBB and lower-rated debt market, may have issues making payments on their debts. Coupled with a devastating drop in demand “at the pumps” because of COVID-19, what we feel is the weakest point in the U.S. economy is exposed: the energy sector.

How this all pans out over the course of the coming months and years is yet to be seen. However, it is something that is incredibly important to us and we look forward to keeping a diligent eye on the industry’s prospects. We will also continue to keep a close eye on the U.S./Chinese trade tensions; however, there is not much to report for this prior quarter. Most of mainland China was under quarantine for much of it.

  • Economic Outlook

Let’s now take a step back. What does this all mean for our model portfolios? First, let’s talk about interest rates. The steep reduction in interest rates allows many of us to refinance the purchases that we might have made in the last few years as those rates were beginning to climb back up. Well, that is no different for corporations, save for one caveat. Those mortgages that we initiated/refinanced back between the years of 2009-2016 were issued at all-time lows. We got locked in—and it was pretty great! Corporate debt instruments, however, almost always mature in five years or less. That means that the vast majority of commercial mortgages, corporate paper, etc. were no longer at those incredibly low interest rates—but new loans are again. All we can hope is that the reliance on cheap money doesn’t become an addiction, but for now, this will surely lower the operating costs of our largest institutions just like it does for our personal recent acquisitions. This bodes well for our economic outlook not only domestically, but it especially piques our interest abroad, as we will discuss later.

Second, let’s talk about the fact that 2020 is a major election year. There’s no “ifs ands or buts” about it: the volatility that we are currently experiencing might become more muted in the coming months, but it surely won’t be going anywhere too quickly. We expect a reelection of our current President, but contenders will almost certainly utilize this current crisis as a viable platform to espouse dramatic policy-making changes. Hindsight is always 20/20, but it is objectively fair to state that no mainstream media outlet, politician, or bureaucrat suggested that we implement mandatory quarantines, place large orders for facemasks and ventilators, or even suggest retooling manufacturing lines any time before March. Yet, it seems to be a recurring suggestion that someone, somewhere, should have known that this was coming and that they should have been overly prepared. That’s human nature, but it just isn’t founded in reason. Let’s face it though: increased regulation and the granting of executive powers simply increases profits for the largest companies, so we would still be positioned well for that trend, as discussed in prior Market Updates.

Third, how does the stimulus package affect our portfolios? As we saw last week, investors around the globe were very appreciative of the efforts to stimulate the economy. Individuals are expected to receive their rebate checks either by the end of this week or the following week. Those laid off will immediately reap the benefits of increases in unemployment pay so long as the stress from increased traffic on the unemployment websites is maintained. Also, people now have unpenalized access to their retirement accounts—but remember: they still have to pay income taxes on distributions. These are positives for the economy; however, penalty-free withdrawals certainly don’t increase share prices in the overall markets.

The largest companies will immediately reap the benefits because they have legal and tax teams already in place to maximize every dollar that’s available. They won’t have to pay any payroll taxes—at least right now. Those that have laid off portions of their workforce have no penalties for doing so and no longer have to contribute to their retirement accounts during this period. Those that retooled their manufacturing processes to accommodate face masks, ventilators, etc., were able to keep their employees and are now able to charge incredibly hefty prices for governmentally-demanded essential products. Those profit margins are not slim! This, coupled with the fact that those supplies will likely be shipped the world-over once our own pandemic stabilizes is most likely not going to negatively impact your portfolio.

However, small and medium-sized employers are going to have a rough month ahead of themselves. They employ roughly half of the U.S. workforce, so this is an immense group of people. They are the hardest hit during economic turmoil, especially when their government implements a mandatory quarantine of non-essential activities. They look to have little to no revenues and high continuing fixed costs relative to their size.

These employers have access to some great resources through mortgage forbearance programs through their banks, SBA loans that are forgivable should they use the funds for essential costs (Payment Protection Program), several other SBA loan types, and the simple fact that they are usually individuals with individual rebate cash coming. Those resources do not offer very much assistance until the cash actually hits the applicant’s bank account—that may take some time. The next thirty days will be extraordinarily difficult for the vast majority of small to medium-sized business owners. Therefore individuals and small businesses are in desperate need of cash and that cash must come from somewhere. The plethora of loan programs offered through their banks and the SBA, among others, take time to fill out. After all, nobody is going to help them complete a stack of governmental forms. Once submitted, there’s lengthy processing times, even if the forms are completely perfectly—which is rare when rules are continually changing and small businesses are involved.

Much of the small business assistance programs will take no less than 30 days and could take much longer before any cash actually hits the owners’ bank accounts. In the meantime, they may start taking money from their retirement accounts in order to pay for very important bills that they and their families need to survive. This, coupled with the temporary lack of employer-sponsored retirement contributions, there will be atypical, noneconomic downward pressures on an already incredibly volatile market. This could be a major headwind for portfolios in the short-term.

One relief that tenants and individuals are receiving are rent/mortgage forbearances. This is going to lead to a short-term cash crunch in the banking sector as well. Luckily for that industry, the Federal Reserve typically stands in support of its member banks. Those without the Fed’s support are in some trouble, but most banks that we know today are members of the Fed. We are still not exactly sure what cash flow issues this industry will have, as Fed injections of cash convolute much of the data, but one interesting phone call that we had with a loan officer should paint a rather vivid portrayal: the bank is not issuing any new mortgages for the next six months. Six months! This is a nationally recognizable bank—not some small regional one. We should err on the side of caution in assuming anything related to the banking industry at this time; however, it will be a major field of concern in the coming months.

Lastly, the COVID-19 pandemic, by almost all accounts, is not even close to reaching its peak in the U.S. As of April 1st, we are up to nearly 200,000 confirmed cases and just over 5,000 deaths. We are the third most populated country on the planet and these are only the confirmed cases. Optimistic reports estimate that between 100,000-200,000 people will die in this country. That puts us at roughly 2.50-5.00% of where we will be at the end of this pandemic…optimistically.

Now we are relatively certain that the best source for healthcare treatment in the world will likely have a much better outcome than nearly every population on the planet statistically speaking—but we are the third most populated nonetheless. The only two populations larger than our own are China and India which both have transparency issues so we head into uncharted territory. Either way, it’s obviously a major headwind for portfolios in the short-term.

The good news is that we don’t fly over to Italy to receive medical care. In fact, the wealthiest people around the world come here to experience the best that medical treatment has to offer. We also enacted quarantines much further in advance to Italy, with even Florida enacting one today (Italy is affectionately known by many as Europe’s Florida—you either go there on vacation or you go there to retire.) So, the prognosis looks relatively optimistic in our opinion: we should have a much better containment than our European counterparts. At the same time, we are only 2.5-5% through with this journey.

Addressing supply-chain concerns is an incredibly large headwind associated with the virus. The Chinese government exercises a great deal of control over its constituents and did so with an iron fist. The government was quick to impose mandatory quarantines of large provincial metro areas, construct new hospitals directly related to the care of COVID-19 victims, and most importantly for our clients, it was able to control the flow of information leaving the mainland regarding what industries and populations were affected, as well as to what degree. We simply won’t know the economic impact until later this year. What we do know is this: the typical backlog in which a full shipping container sat in port was approximately 50-60 days before the virus.

That addresses many of the supply-chains associated with goods. But what about services? Many call centers and other associated services were moved overseas to India over the last twenty years—not only from the U.S. but from countless other countries. The government in that country is not nearly as all-powerful as its northern neighbor. The Indian society was only recently able to move away from its age-old caste system with its embrace of capitalism but it still has much room for growth. Because of this, Indian society still has a great divide between “haves and have-nots”, despite its removal of many barriers to class mobility. The virus is expected to wreak havoc on the slums in and around its major metro areas. This is surely going to affect the workforce in a dramatic way.

Supply-chains of both goods and services will be visibly affected, likely through the rest of the year.

Our Short-Term & Long-Term Plan

Because of the thirty-day outlook for the cash positions of small businesses and individuals, the lack of large businesses retirement contributions (many businesses for that matter), banking system revenue shortages, the trade war between the Saudis and the Russians, major supply-chain issues with goods and services, and the simple fact that we are optimistically only 2.5-5% of the way through this pandemic, we are advocating moving 50% of equities from all client accounts into cash for roughly two to eight weeks. The downside pressures are far too great in relation to the upside pressures for this brief period of time. Should the pandemic take a greater toll than expected, then we will have been happy to remove half of our model portfolio’s risk after roughly a 20% decline from January 1st, 2020—usually close to a break-even from this time last year. Should our cutting-edge biotechnology and pharmaceutical firms develop, manufacture, and disseminate an effective treatment within the next thirty days or any of the other major headwinds be subsided, then the remainder of the portfolio will appreciate the fact that we stayed in over that time period.

The reason for a roughly thirty-day “quarantine” of 50% our model portfolios is one that is derived from a simple analysis of the most important financial statement—one that is frequently downplayed—and that is the statement of cashflows. Without a positive outlook for the statement of cashflows, there can be no viable income statement. Without an income statement, there can be no viable balance sheet. Without positive net cashflow, one must always sell assets in order to meet current financial obligations. If everyone is doing it, it will drop the marketability of those underlying assets.

At the end of the day, we estimate the chances of a positive month of April in the markets to be roughly 33%, meaning that the chances of a negative one should be roughly 67%. This is the first time we have held this view since 2008. Should that balance swing by this time next month, we will act accordingly.

Please be reminded: we are not advocating for a total removal of oneself from the equity markets. We feel that the long-term prospects are abundant, especially given what opportunity lie ahead of the U.S. companies that thrive amidst this dramatic uncertainty. We had over ten years of economic prosperity in the U.S. stock markets, but what we face now was not one created by lavish valuations, crooked ratings companies, “subprime” (i.e. bankrupt) mortgages, or any other man-made terror that we can see at this point. This was one that nobody foresaw because it was a natural one. It was one that manifested itself on the other side of the planet and journeyed across every nation amidst the ever-increasing global nature of how human beings interact and collaborate with one another.

This is also not the first time that our species has encountered such a threat. Approximately 35% of Europe perished in the Black Plague, yet the Renaissance that proceeded it was one of the most beautiful histories that we will ever read about. The Spanish Flu preceded the roaring 1920s. The plethora of pandemics that have stricken this planet will not halt mankind’s progress—in fact, just like all adversity, it simply makes us stronger than ever.

Investing is and always has been the act of forward-looking optimism. Without optimism, there would be no need to invest for one’s future. With it, billions of lives are continually improved each and every year. As population and overall demand for goods/services increases, more suppliers race to meet those demands. The global economy will become increasingly more interconnected as time goes on and we feel that U.S. companies are poised to reap the largest benefits from these increasing demands. After all, the profits derived from those enterprises are shipped back home to shareholders. Shareholders are legally entitled to a proportionate share of that business. So, while we and many of our clients are certainly not billionaires whom own large stakes in these companies, we are and will always be entitled to our own little share—thereby increasing our own quality of life moving forward. We think that the next two to five years should be incredibly profitable for these companies given the opportunities that we see ahead of this extremely troubling time. This means that our model portfolios will reap the benefits of 2020’s depressed prices and our own quality of life will be ensured in the long-term.

We just want to play it objectively for roughly the next thirty days and quarantine half of our own investments—so, naturally, we advocate for you to do the same.

Conclusion

So, let’s summarize:

  1. Move approximately 50% of portfolios to cash/money market securities for at least two weeks. We look forward to a promising one to five-year outlook after this craziness has subsided.
    1. Interest rates: good, so long as addiction doesn’t set in.
    1. Election year: volatile.
    1. Stimulus package: good, but there are many reservations regarding timing issues.
      1. Large companies: good, especially once their workforces return and they are able to prosper in a tumultuous overseas environment.
      1. Small-Medium companies: good, if they receive the cash in a timely fashion.
      1. Individuals: rebate checks are okay; unemployment is good if they receive the cash in a timely fashion.
      1. Banks, landlords, misc. lending institutions: bad in the short-term; reliant on Federal Reserve’s hefty bail-outs.
    1. COVID-19: bad, but there’s light at the end of the tunnel.
      1. Supply-chain issues with goods/services: terrible.
  2. Continue to keep a primarily large-cap-dominated allocation in our model portfolios with a focus on technology and other industries which stand to weather the current economic storm.
  3. Continue to watch geopolitical tensions and their inevitable outcomes.

Should this brief synopsis of our opinions—and these are purely opinions based on our own analysis of the data—stir 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 unfortunate time.

Kevin S. Whiteford

Kevin S. Whiteford
President
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.

History of Markets and Viral Outbreaks

Please see an article/chart referencing previous Virus outbreaks and how the market reacted.

https://www.marketwatch.com/story/heres-how-the-stock-market-has-performed-during-past-viral-outbreaks-as-chinas-coronavirus-spreads-2020-01-22

EPIDEMICMONTH END6-MONTH % CHANGE OF S&P12-MONTH % CHANGE OF S&P
HIV/AIDSJune 1981-0.3-16.5
Pneumonic plagueSeptember 19948.226.3
SARSApril 200314.5920.76
Avian fluJune 200611.6618.36
Dengue FeverSeptember 20066.3614.29
Swine fluApril 200918.7235.96
CholeraNovember 201013.955.63
MERSMay 201310.7417.96
EbolaMarch 20145.3410.44
Measles/RubeolaDecember 20140.20-0.73
ZikaJanuary 201612.0317.45
Measles/RubeolaJune 20199.82%N/A
Non Farm Payrolls Feb 2020

The US economy added 273 thousand jobs in February of 2020, the most since May 2018, compared to an upwardly revised 273 thousand in January and market expectations of 175 thousand. In February, biggest job gains occurred in health care and social assistance, food services and drinking places, government, construction, professional and technical services, and financial activities. The change in total nonfarm payroll employment for December was revised up by 37,000 from +147,000 to +184,000, and the change for January was revised up by 48,000 from +225,000 to +273,000. With these revisions, employment gains in December and January combined were 85,000 higher than previously reported.

https://tradingeconomics.com/united-states/non-farm-payrolls
Housing Starts Beat Forecast

Housing starts in the US fell 3.6 percent from a month earlier to an annualized 1.567 million units in January of 2020 but beat market forecasts of 1.425 million. Housing starts for December were revised up to 1.626 million units from 1.608 million, the highest level since December of 2006. In January, single-family housing which is the largest share of the housing market, went down 5.9 percent to 1.010 million units from 1.073 million in December which was the highest since June of 2007. On the other hand, starts for the volatile multi-family segment increased 3 percent to 0.547 million. Starts declined in the South (-5.4 percent to 0.778 million) and the Midwest (-25.9 percent to 0.18 million) but rose in the West (1.2 percent to 0.431 million) and the Northeast (31.9 percent to 0.178 million). Meanwhile, building permits jumped 9.2% to 1.551 million, well above expectations of 1.450 million and the highest level since March 2007.

https://tradingeconomics.com/united-states/housing-starts
Inflation Year over Year January 2020

US core consumer prices, excluding volatile items such as food and energy, increased 2.3 percent from a year earlier in January 2020, the same as in the previous month and above market forecasts of 2.2 percent. United States Core Inflation Rate – data, historical chart, and calendar of releases – was last updated on February of 2020 from its official source.

https://tradingeconomics.com/united-states/core-inflation-rate
Employment Change January 2020

Private businesses in the US hired 291 thousand workers in January 2020, the most since May 2015, easily beating market expectations of a 156 thousand increase. The service-providing sector added 237 thousand jobs, mostly in leisure & hospitality, education & health and professional & business industries. Meanwhile, the goods-producing sector added 54 thousand jobs, boosted by employment in construction. United States ADP Employment Change – data, historical chart, and calendar of releases – was last updated on February of 2020 from its official source.

https://tradingeconomics.com/united-states/adp-employment-change
4th Quarter 2019 Update

Whiteford Wealth Management, Inc.

404 Broadway Street, South Haven, MI 49090

Tel: (269) 637-4400 Fax: (269) 637-4407

January 2, 2020

Market Update


Welcome to our 4th Quarter Update for 2019. Happy New Year! We hope that everyone had a safe and well-cherished holiday season with their family and loved ones. We were particularly blessed this year with two new additions to the Whiteford Wealth Management, Inc. family: Scott’s baby boy, Novak, and Tom’s baby girl, Norah. They are both happy, healthy, and surrounded by love. Life is good! We also lost two of our beloved pets in 2019, Kevin/Mary’s Reggie and Alisa’s Yuri. However, Alisa and Ken both adopted beautiful little puppies named Hugo and Nova, respectively. They can frequently be found assisting us in our office and are more than happy to welcome guests at our door!

Here is an outline of this update:

  1. The US Chinese Trade War Update;
  2. United States Economy;
    1. Biggest Winners and Losers Across Industries;
    1. Impeachment Proceedings and Its Effects on the Markets;
  3. Housekeeping;
    1. Explaining 1% Cash + Two Quarters of Distributions;
    1. RMDs and our plans for 2020;
    1. Monthly Distributions;
  4. Our Short-Term/Long-Term Goals.
Name of Index Jan. 2, 2019 (close) Jan. 2, 2020 (close) Percentage Change
Dow Jones Ind. Avg. 23,346.24 28,868.80 23.66%
NASDAQ (IXIC) 6,665.94 9,092.19 36.40%
S&P 500 2,510.03 3,257.85 29.79%
CBOE 10-Yr (^TNX) 2.661% 1.882% -29.27%
U.S. Bond Index (AGG) 106.57 112.68 5.73%

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, 2019 (close) Jan. 2, 2020 (close) Percentage Change
DAX (Germany) 10,580.19 13,385.93 26.52%
SSE Comp. (China) 2,465.29 3,085.20 25.15%
FTSE 100 (UK) 6,734.23 7,604.30 12.92%
Nikkei 225 (Japan) 19,561.96 (Jan. 4) 23,656.62 (Dec. 30) 20.93%

As illustrated in the next chart, we had a great couple of years when considering where we started just four years ago. It is extraordinarily important to take a step back and look what has happened since the beginning of 2016 and the rocky start that we had that year.

Name of Index Dec. 31, 2015 (close) Jan. 2, 2020 (close) Percentage Change
DJIA 17,405.03 28,868.80 65.86%
NASDAQ 5,007.41 9,092.19 81.57%
S&P 500 2,043.94 3,257.85 59.39%
AGG 108.01 112.68 4.32%
DAX 10,743.01 (Dec. 30) 13,385.93 24.60%
SSE Comp 3,539.18 3,085.20 -12.83%
FTSE 100 6,242.32 7,604.30 21.82%
Nikkei 225 19,033.71 (Dec. 30) 23,656.62 (Dec. 30) 24.29%

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.

https://www.msci.com/end-of-day-data-search

Clearly, the best country to be invested in since the close of 2015 and even earlier continues to be the United States. There have been and always will be short-lived opportunities within specialized markets overseas; however, we will always continue to invest our clients’ savings with a long-term view. The US market at this point still seems to us to be the best place to do so, so no changes are recommended at this time aside from small account changes that we have discussed with many clients recently.

The U.S. – China Trade War Update

US-China Trade War Tariffs: An Up-to-Date Chart' (December 19 version, includes China's announcement of a small tariff decrease in effect December 26, 2019)

The gift that keeps on giving! There is always plenty to discuss when it comes to the trade conflicts between the US and China. The primary focuses have been in the fields of technology, aluminum & steel, and of course, intellectual property rights. Here is a chart to help briefly describe what has occurred since January 2018.

https://www.piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide

As you can see in the chart, China continually had higher tariffs than the US all of the way up until Fall of 2019. That is when the two countries began charging import tariffs at approximately the same rate.

On December 13th, 2019 President Trump called for a halt in increasing tariffs in anticipation of a Phase One deal being signed this mid-January 2020. This deal will hopefully bring about a change in the trendlines for the tariffs that have been imposed over the past 24 months. This goes in line with our acknowledgement that the Chinese government typically wants to settle legislative matters before the start of the Chinese New Year which occurs this year on January 25th. Please see the below fact sheet on what is set to be agreed upon.

https://ustr.gov/sites/default/files/US-China-Agreement-Fact-Sheet.pdf

That being said, we do see continued hope in reaching a conclusion to the trade war between our two countries and those indirectly affected across the globe. Our predictions lead us to believe that 2020 should be a robust year internationally should there be quality resolutions enacted going forward.

United States Economy

The U.S. stock markets, namely the DJIA, the NASDAQ, and the S&P 500, have rounded out the year in 20%+ territory. That being said, it’s important to remember that December 2018 was not fun for investors. However, we are pleased with the ultimate results for our clients. Despite the news reporting on foreign affairs, 2019 ended up being a relatively quiet year as far as geopolitics goes. There were a couple of big events that were covered quite extensively, such as the Brexit vote that occurred just recently. But overall, we were relatively satisfied with that result and apparently so were the typical investors overseas, outside of Britain, of course. Germany and the Eurozone seemed to appreciate the end to many uncertainties that surrounded this pivotal vote.

Interest rates were brought up in the last update and they seemed to affect much of the world in a positive light. The Federal Reserve opted to not lower them a fourth time this year, but the positive affects had already taken root from the previous three.

The 2020 holiday season numbers were relatively robust coming from retail sales when compared to last year. The 3-3.5% increase from last year leads us into the most successful holiday season on record. This was, of course, bolstered by yet another boon in online sales with more and more retailers rushing into the space that has been dominated by only a few during the past several holiday seasons.

The tariffs threatened against France seemed to slow the French pursuit of heavy-handed legislative threats against US technology companies operating in the country. We are pleased by that result. Many companies operating between the US, Canada, and Mexico are apparently getting used to the new reality: there will be tariffs, but they will be moderately predictable. While we don’t typically endorse any sort of tariff, we will always favor predictability. So does the global investor.

The impeachment proceedings were also brought up during our last update. The House, as predicted, did vote to impeach the President. However, the House is now stalling and not sending their decision to the Senate, as many believe that it will die on the Senate floor in its current condition. Despite these well-televised proceedings, we encourage recognition of the fact that the US economy tends to do better during times of legislative gridlock, as made apparent during every shutdown in our country’s history. These impeachment proceedings seem to be no different: if legislators are busy trying to impeach a President, poorly thought-out legislation gets held up as well and the economy is allowed to operate unimpeded.

Historically-speaking, President Nixon’s impeachment proceedings did not alter the market much at that time. Runaway inflation and the overall bear market that was going on didn’t seem to be affected by Nixon’s ultimate resignation. President Clinton, on the other hand, was impeached during a relative market boom with the internet bubble chugging along. This was a time that is comparable to the market in which we find ourselves today. Investors continued to clamor into the stock market and this is what we feel will be the inevitable outcome of President Trump’s impeachment proceedings.

What industries did well and which ones did not during 2019?

Remember:

  1. These figures always lag by about 1.5 quarters, meaning the data utilized here is as of October 29, 2019
  2. The US Gross Domestic Product (GDP) is $21.340 Trillion, up 3.7% from 2018
    1. Private Industry: $18.725 Trillion, up 3.8% from 2018
    1. Government: $2.616 Trillion, up 2.8% from 2018
  3. Agriculture, Forestry, Fishing, and Hunting: $165.7 Billion, down 0.5%
  4. Mining: $331.7 Billion, down 4.3%
  5. Utilities: $332.7 Billion, up 2.1%
  6. Construction: $883.9 Billion, up 5.3%
  7. Manufacturing: $2.355 Trillion, up 1.5% with durable goods leading the way vs. nondurable goods
  8. Wholesale Trade: $1.269 Trillion, up 4.7%
  9. Retail Trade: $1.1636 Trillion, up 3.3%
  10. Transportation/Warehousing: $682.3 Billion, up 3.7%
  11. Information: $1.1176 Trillion, up 4.7%
  12. Finance, Insurance, Real Estate, Rental, and Leasing: $4.4856 Trillion, up 4.3% with Finance & Insurance leading the way vs. R.E., Rental, and Leasing marginally
  13. Professional/Business Services: $2.7279 Trillion, up 5.8%, with Professional, Scientific, and Technical Services leading the pack healthily
  14. Educational Services, Healthcare, and Social Assistance: $1.8647 Trillion, up 4%, with Healthcare and Social Assistance leading the way
  15. Arts, Entertainment, Recreation, Accommodation, and Food Services: $891.8 Billion, up 3.6%
  16. Other Services EX: Gov’t: $453.2 Billion, up 3.7%
  17. Federal GDP: $808.3 Billion, up 2.2%
  18. State and Local GDP: $1.8073 Trillion, up 3.1%
  19. Total Goods Producing Industries: $3.7364 Trillion, up 1.7%
  20. Total Service Producing Industries: $14.9883 Trillion, up 4.4%
https://www.bea.gov/data/gdp/gdp-industry

Clearly, the US economy continues its trend towards dominating the service needs of both itself and the rest of the world in lieu of developing its manufacturing bases, although Construction is a clear outsider to that rule of thumb, as the only industry that had more momentum that Construction was Professional, Scientific, and Technical Services. That subcategory was up 6.2% and already accounted for approximately twice the GDP as Construction did.

These findings are clearly depicted in the market returns that we have seen in key industries such as technology services based out of Silicon Valley and payment processors such as Visa, Mastercard, Paypal, and the like.

Mining was the biggest loser of 2019: down 4.3% as an industry. This is evident in many companies associated with that industry, although there are clear winners: those that have continued toward the trend of monopolizing their specific niche industry. We have simply stayed away from this industry in the vast majority of cases.

Healthcare was on many people’s minds, as every month most of us write a fat check to our insurance provider. That industry has seen explosive growth over the last several years and now we are seeing a return to relative normalcy in regard to stock market returns when compared to other industries.

This is part of the reason that we saw the stock market returns that we did in 2019: Private Industry GDP is up 3.8% in only 6 months’ time! Because our model portfolios focus primarily on companies that operate in the service sector, we were able to see very healthy portfolio growth for our clients this year.

Overall, when we compare the U.S. economy to its overseas counterparts, it is fair to conclude that the U.S. is still the best place to invest one’s life savings. We are beginning to see things normalize overseas so, it’s important to remember: if the global economy does well, so does the U.S. economy! This continues to bode well for investors and our clients, so we will stay the course.

Housekeeping Items

With a new year ahead of us, we would first like to reiterate the fact that 2019 went quite well for our clients. With the upcoming election cycle in 2020, we have decided to alter our model portfolios slightly, generally speaking, in the following ways:

  1. Increase allocations of select client portfolios into very short-term bond allocations to hedge their risk;
  2. Verify that RMDs are considered more so than they have in recent years—many of more conservative clients will be seeing their RMDs taken earlier in the year than it is normally done;
  3. Verify that the cash positions of our client portfolios consider several months of upcoming cash distributions instead of just one or two;
  4. Increase cash holdings past the 1% as-is typical allocation in the above situations.

Our Short-Term & Long-Term Outlook—Conclusion

So, what’s next for our clients? Many of these points come straight from the last Market Update, as our long-term goals have not changed.

  1. Continue to realize that the near-term is going to continue to be driven by impulsive behavior as investors all around the world get used to the idea of average returns paired with larger volatility.
  2. Continue to keep a primarily large-cap and international mega-cap focused allocation in our model portfolios.
  3. Continue moving toward a more traditional model of investing. This will offset the expected increases in volatility.
    1. This should account for 10-20% of the model portfolio.
    1. If you have already been moved, we will likely stay put at this time or have a slight increase.
  4. Continue to watch geopolitical tensions and their inevitable outcomes.
  5. Increase everyone’s awareness that 2020 is an election year—these are typically more volatile and the media typically distorts economic data in order to further their political agendas.

Should this brief synopsis of our opinions—and these are purely opinions based on our own analysis of the data—stir 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—have a wonderful 2020!

Thank you for your continued trust.

Kevin S. Whiteford

Kevin S. Whiteford
President
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.

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