Quarterly Review – July 2020
We hope that you and your families are staying healthy as the coronavirus continues to spread across our country.
Bouncing back from the lows of March, the stock market posted the best quarterly return since 1998.1 Though the stock market seems to be projecting an economic rebound, we remain cautious and focused on how the coronavirus will impact our ability to restart the economy. With uncertainty ahead, our advice remains that you should have an asset allocation with which you are comfortable. If you have any questions or want to discuss how you are invested, please give us a call. We can also help you with accounts held outside of Lucas Capital to make sure that your overall portfolio is appropriate for your financial needs.
The Economy is propped up by Government Stimulus
The US Economy is in a recession. This happened very quickly as the country shut down in March to stem the spread of COVID 19. We have never seen this level of national emergency where schools and businesses were forced to close. With the shut-down came job losses. Some of us were lucky enough to be able to perform their jobs from home, while others held jobs deemed “essential” and were retained. Unfortunately, 1 out of every 8 people lost their jobs in April, resulting in 20.8 million people becoming jobless as US payrolls declined to 130 million.2 There has been some rehiring in the past two months, yet unemployment remains at 11.1%, improving from 14.7% in April. These are the highest unemployment rates since the Depression.3
In many respects the federal and state governments acted decisively to slow down the spread of the disease and support the economy. As shocking as it was to experience the rapid shut down of schools and businesses, it was equally surprising how fast the government could act in the time of crisis. The economic response was swift and large with over $4 trillion being released into the economy in these primary programs:
- CARES Act: $1.8 trillion, which included the Payroll Protection Program(PPP), $1,200 relief checks to most residents and enhanced Unemployment Benefits
- Families First Coronavirus Response Act: $200 Billion to help employers with costs
- Federal Reserve $2.3 trillion loan program including the Main Street Lending Program and the Municipal Liquidity Facility to help state and local governments
Though we are comforted by unemployment payments and stimulus checks putting money in the hands of consumers to keep the economy moving forward, we need to recognize that this is an economic experiment. We are in uncharted territory because of the scale of government payments. The bills granting unprecedented amounts of money were passed by Congress and signed into law with little time for research or debate. For perspective, the $4 trillion of stimulus exceeds the entire $3.5 trillion total of revenues collected by the Federal Government in 2019 and rivals the Federal spending which was $4.4 trillion.
More money was spent on the economic stimulus in the past 4 months than expenditures on Social Security, Medicare, Medicaid, Defense and Federal Interest combined for the entire year of 2019.4 There is no precedent for this level of stimulus and the deficits that will result.
So far the experiment seems to have stabilized the economy, yet we don’t know how the next weeks and months will unfold. The $600/week supplemental unemployment benefits end on July 31 and the PPP, which funded businesses to keep people on the payroll, will not protect employees from losing their jobs in the 3rd quarter. There’s discussion on another round of stimulus which may include continued unemployment support, another round of stimulus checks, and support to state and local governments. Total amounts for the package under discussion are $1.5-$2.0 trillion. At some point the Federal Government may lose the ability to continue funding the economy unless we can restart businesses and get people back to work.
Stock Market continues to be driven by the coronavirus
As we outlined in the Lucas Capital Management April Review, the first step in predicting the future of the economy and the stock market is understanding how the coronavirus will spread or be contained. Stay-at-home orders, business closings, and restrictions on the size of gatherings, limit the spread of the virus, yet they also hinder economic growth. The chart below shows daily reported cases of Coronavirus in the U.S. The outlook was promising in mid-June with reported cases on the decline and early “hot spots” of NY/NJ under control.
Source: Johns Hopkins University & Medicine, Coronavirus Resource Center, July 17, 2020
Since then we have seen rapid increases in the number of cases in California, Texas and Florida driving up the nation-wide daily reported cases to the highest levels to date. With the rising number of cases, re-openings have been curtailed and new shut down orders have been imposed. From an economic standpoint, this is worrisome because these three states combined represent 29% of the US GDP.5
Based on what we have learned as a country over the past four months, the health care response will be more effective and the economic impact less severe than in the first set of states facing the pandemic. It is clear to us that the virus is not under control in our country and more action is required with regards to health care to slow the spread of the disease and to the economy to restart growth. With this backdrop, it is difficult to see the stock market continuing to advance over the short run.
How to Invest in times like this
We all need to remain cautious but not to give up on the long-term benefits of owning stocks. Though we are in a recession right now, the economy will return to growth at some point in the future. As humans we are swayed by the current situation, while the stock market often looks to the future to set value. Our instincts tell us to be cautious based on current data while the stock market responds to signs of recovery long-before we are ready to call the “all clear” signal. It is important to maintain your allocation to equity because no one will be able to accurately predict the day that the stock market starts to progress toward recovery and you don’t want to miss it sitting on the sidelines. The second quarter was a good example of a stock market recovery while the immediate data on the virus and company earnings was discomforting.
Interest rates are likely to remain low for an extended period. As part of the stimulus program, the FED lowered interest rates to near zero. It has also told the markets that short term rates will remain close to zero for at least two years. Low interest rates help the economy by making it inexpensive for businesses and individuals to borrow money to finance investments like factories or new homes. However, low rates which help the economy hinder investors like us because they reduce the amount of income we can expect when we own bonds. There remains a place for bonds in our portfolios as they dampen the volatility of our overall portfolio and provided a consistent stream of income, albeit lower than we would prefer.
The bottom line is to keep your allocation to stocks, bonds and cash at a level which matches your longer-term objectives. Erring on the side of caution by reducing the equity percentage to a modest degree is not unreasonable given the uncertainty. Yet we do not believe that you should completely eliminate stocks from your portfolio. The stock market will go through periods of volatility as the coronavirus advances and recedes in our country. Additional volatility will be added as we progress to a presidential election in November. Once we have an effective vaccine or manage to contain the virus as other countries have, the stock market will recover and continue its history of growth.
Your Lucas Capital Team is available when you need us
In turbulent times as we are experiencing, it’s often helpful to have a trusted advisor help you work through your questions and concerns. We are available to you every business day, so feel free to give us a call or send an email if you want to have a discussion. We enjoy working with all our current clients and would very much appreciate any referrals that you offered. If you have friends or relatives who need financial help, please let them know about us.
All the best for an enjoyable and healthy summer,
The Lucas Capital Team
Ralf, Rob, Brett, Bruce and Kathleen