Joel’s Weekly Talking Points – 9/14/20
Earnings releases of note this week: Dell Technologies, Lennar, Adobe, FedEx, WageWorks (not a recommendation to buy/sell/hold any of these securities)
- Market recap: Last week, US Large Growth pulled back again with the Russell 1000 Growth down 3.49%. Value stocks did slightly better, down 1.48%. Since the current bout of volatility started on 9/2/2020, the Russell 1000 Growth is down 7.95%. International stocks offered some relief from domestic markets with the MSCI EAFE up 1.45% and MSCI Emerging Markets only down 0.68%.
- Data: The big news last week in my opinion was inflation data. CPI rose 0.4% in August but is only up 1.3% from one year ago. However, consumer prices are now up 6.3% annualized over the past three months which according to First Trust, represents the fastest three-month pace of inflation since 1992. PPI, the producer’s version of CPI, also rose in August, beating expectations at 0.3% versus the expected 0.2%. Finally, the M2 money supply is now up 23.3% over the last 12 months. While it’s too early to be thinking “high” inflation is coming in my opinion, the writing appears to be on the wall. My current thought is that once we get through COVID-19 in a year or so and the economy starts to fully heal we may see inflation north of 2%. While that may sound benign to those who lived through the 1970’s context is important. The FED has been trying to get to 2% inflation essentially since 2008 and has failed. Most investors today have never had to deal with an inflationary environment before and while it’s early, we have started to prepare many of our portfolios for some mild inflation in the coming years.
- Tracking the recovery: After some very encouraging data in June and July the US economic recovery from the self-imposed lockdowns in the Spring is showing signs of moderation. This was to be expected – while the “V” shaped recovery was a possibility it was always had a small chance in my opinion. Initial jobless claims seem stuck at an elevated (albeit improving) level, total new job “postings” are slowing and even declining indicating that there may not be a lot of hiring happening right now, and new COVID cases are still elevated in the US. Instead of a “V”, it looks like, for now at least, we are in for a long, hard slog ahead.
- US Election: While we will not be making significant portfolio adjustments (i.e. moving to cash) based on who we think will win the US Presidential election in November, we still need to address it and the potential affects in may have on a portfolio. As of 9/10 it appears as if Joe Biden is maintaining a comfortable 10-point lead in the national polls. Of course, this doesn’t mean a whole lot given our Electoral College system as we all witnessed in 2000 and 2016. We are in the process of analyzing the different policy proposals on both sides and will have an investment plan for any eventuality. We believe that there will be investment opportunities regardless of who wins.
- Fun Fact of the Week: TWO TRILLION – As of 3/31/20, the size of the US economy was estimated to be $21.54 trillion. As of 6/30/20, the size of the US economy has been estimated to be $19.49 trillion (source: Department of Commerce).
Bottom line: We are still constructive on risk assets; however we also acknowledge there could be a pullback or correction at any time – this risk is ever-present. The big difference from say 4-5 months ago is that we would actually see a pullback now as a buying opportunity. With the amount of stimulus already passed, and the potential for significantly more, we believe the globe will successfully navigate the COVID crisis and the economy will continue to grow once the pandemic is over. This recession looks like it will leave some scars similar to the 2008 crisis, but policy measures by the FED and other Central Banks have evolved and while that may cause some inflation in the longer-run, the short to intermediate terms prospects look better than they did in March and April.