Broker Check

Stocks Fall as Infections Rise

June 29, 2020
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Monday Morning QB - Market Observations:

  • The Major Stock Market Averages Ended the Week in Negative Territory
  • Daily Coronavirus Cases are Rising Rapidly
  • Covid-19 Cases Rise in 16 States
  • Market Volatility Causes More Investors to Move to Cash
  • Quarter End Activity Helping to Propel the Risk to the Downside as Institutional Money Locks in Profits by Rebalancing Their Portfolio’s – Selling Stocks to Buy Bonds
  • Number of Americans Claiming First-Time Unemployment Benefits Fell Again Last Week -the 12th Decline in a Row
  • New Home Sales Jumped 16.6% in May
  • Consumer Spending Surged last month…Commerce Department reported Personal Consumption Expenditures (PCE) Index Rebounded a Record 8.2% in May
  • Consumers Remain the Key to Further Gains- As Personal Income Rises, Will Spending Continue Rising as Well?

Monday Morning QB - Market Performance:

Worries over the resurgence of the coronavirus tipped the scale versus enthusiasm over some positive U.S. economic reports, pushing the markets into negative territory for the week.

The Dow Jones Industrial Average fell 859 points finishing the week at 25,016—a decline of -3.3%. The technology-heavy Nasdaq Composite gave up half of last week’s gain declining -1.9%.

By market cap, the large cap S&P 500 retreated -2.9%, while the mid cap S&P 400 fell -3.7%, and the small cap Russell 2000 ended down -2.8%.

Covid-19 Surge Adds Doubts about “V” Shaped Recovery Prognostications

Substantial advances in the stock market for April, May, and June caused most investors to assume the stock market recovery would look like a V” – a sharp decline followed by a sharp increase.

This rapid ascent will go down as one of the best market quarters in recent history. It is crucial not to lose sight of this fact as we go through the quarterly portfolio adjustments.

These adjustments, in this case, selling stocks that have performed remarkably well to buy bonds, is to return one’s asset allocation to its preferred stock to bond mix. That is, if you believe in this sort of thing, which I do not.

Asset Allocation, an academic study, was created to explain the distribution of returns around the mean (the expected average). It was not intended to be used as a portfolio management tool.

This type of math is used to explain the accuracy of distribution data around the mean, should the mean be predictable. For example, look at the height of American women from the age of 19 to 35. In each year, the average height will not change all that much.

Unfortunately, this logic does not apply to stock market returns, which are often outside the statistically possible outcomes. The mean returns are all over the place, making conclusions forged around the data less reliable.

All right- Enough about theory and back to the issue at hand!

Pension managers, target-date funds (found in most 401(k) programs), balanced funds, and money managed by the largest brokerage firms are going through this quarterly rebalance as we speak.

This, along with the spike in new virus cases, helped push the stock market lower last week. Let us see if, once this quarter-end rebalancing is complete, the stock market gets a pop this week or next.

Increase in Covid-19 Cases Increases Risk of Infection but Remember - You Cannot Control Returns (Getting Infected) but You Can Control Risk (Actions to Limit Exposure)

I can not speak for everybody, but I do think most people (that I have talked to anyway) did not believe the number of infected would simply dissipate, ushering in a new state of rainbows and butterflies.

We have all been warned by the health experts that spikes or even a second wave of infections is likely. Knowing that, most of the people I talk with are doing their part. Yes, they are going out again, and yes, they are practicing social distancing and many are still wearing masks in enclosed public settings.

Keeping the virus in check is the best thing we can do for each other, for the economy and for our investment portfolios. No, we can not stop infections, but we can control our risk of being exposed to the virus.

Like investing in the stock market, you cannot completely control if you will get the virus any more than you can make the stock market go up on Monday. However, just like the stock market, you can control the risks you take.

Here are three factors you can use to evaluate the risk of any given situation – the stock market, a virus, or otherwise.

  1. Assess where you are. Does the activity or place the event is being held pose a small or significant risk of being around possibly infected individuals.
  2. Who are you, and who are you with? The company we keep, along with our actions and health status, must be considered in terms of the probability of encountering Covid-19.
  3. What activity are you thinking about doing? Going for a walk with the dog certainly has significantly less risk than participating in a rally/protest or going to an indoor sporting event. Situational awareness is vital. Try to avoid high-risk events.

Using these three basic questions as your risk assessment will help you find a balance between sheltering in place at home and going out to do whatever you want with whomever you want.

A look at your portfolio and asking these questions will also help you protect your investments long-term.

A little common sense will go a long way to keeping the virus in check, the stock market rising, and you safe until this nightmare is over.

Discipline is the Key – For Both Investing and For Avoiding Infection

If you want a good chuckle, Google books on how to invest your money. There are endless ways to invest. Some are better than others, but most of them have created wealth for someone over time.

Like most things in life, nothing works all the time, so sticking with your discipline is shown to have better results than chasing the latest greatest system.

After all, the latest and "new" greatest has performed well in the most recent environment, which typically means it will likely not perform as well in the next market cycle. (Think about how many diets you have tried over the years.)

The discipline we can all follow to help increase the value of the stock market right now is based on helping to keep the virus in check until we have a vaccine. Our four simple steps:

  1. Be Respectful – Wear a Mask (for others' sake)
  2. Be Responsible – Practice Social Distancing (for your sake)
  3. Be Safe – Wash your Hands (often and long)
  4. Be Proactive – Get Tested (if there is any doubt)

The portfolio you save might be your own!

As a reminder, we will not publish a Monday Morning QB next week as we take the weekend to enjoy a socially responsible 4th of July celebration.

Here’s hoping we can all agree that, even though our union is not perfect, we can all be glad and proud to be an American – a basis for hope and restoration and reconciliation.

We wish you all a wonderful holiday weekend.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
Hayden Royal is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.
The opinions expressed herein are those of Hayden Royal and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Although taken from reliable sources, Hayden Royal cannot guarantee the accuracy of the information received from third parties.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.