Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only, and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research, Incorporated, a broker-dealer member of FINRA, SIPC, investment advisor representative Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Amy Cavanaugh:
Good morning, and welcome to Financial Focus here on KROS. This is Amy Cavanaugh. I’ll be your host for the program this morning on this Wednesday, the last Wednesday of June, June 24th. It’s been a quick month. We’re moving into the rest of the summer rather quickly, so get out there and enjoy it while you still can. Today, I want to talk about, give you a market update with regard to the coronavirus, and to do that I want to use an analogy. I want you to imagine this. You’re on the highway, drumming your fingers along the steering wheel, and humming or singing to the music on the radio when suddenly you look at the speedometer and you’re driving 83 miles per hour while the speed limit is 63. Hoping the highway patrol isn’t around to see you, you immediately press the brakes. Has that ever happened to you? Probably.
Amy Cavanaugh:
On Thursday, June 11th, just about two weeks ago, that’s exactly what happened to the markets. The Dow Jones Industrial Average plunged over 1,800 points that day, and the S&P 500 fell almost 6%. It’s the largest selloff since April. It’s also a sign that investors have realized the markets may have climbed too fast. Well beyond the speed limit the economy has set. Here’s what I mean. Remember the brief but brutal bear market back in March? Thanks to the coronavirus, the S&P fell from 3,386 points on February 19th to 2,237 just over a month later. So in about a month’s time, we went from 3,386 points to 2,237 points. What had started as anxiety over disrupted supply lines turned into a full-blown terror over the prospect of skyrocketing infections from the coronavirus, as well as bankruptcies and unemployment. It was one of the fastest bear markets in history, but in its wake came one of the fastest bull markets in history.
Amy Cavanaugh:
So is this is turnaround real? That’s the question my clients have all been asking me, because as the markets climbed, the economy fell. As you know, we’re in a historic recession right now. Since March, over 44 million people have filed unemployment claims. 44 million. The job rate currently sits at about 13.3% although the Department of Labor has admitted that the real numbers are even worse than that. Thanks to a misclassification error the previous months rates should have been several points higher. So what we see right now is 13.3%, and yet the market surged ahead. So what gives? What gives is that the rally was largely driven by two things, hope and fear. If that seems contradictory, bear with me, it will make sense in a moment. The hope part of the equation is simple.
Amy Cavanaugh:
After weeks of scary headlines, investors began to get used to the coronavirus. When that happened, hope took over. Hope that the government stimulus would work. Hope that jobs would return. Hopes that the curve would flatten and the pandemic would be brought under control. Hope that a vaccine would be discovered in record time. Hope that the economy would recover in a classic V-shape, meaning it would rebound out of a recession as quickly as it fell into one. Imagine the letter V straight down, hit a point, straight back up. Once hope established itself, fear quickly followed. The fear of missing out, or FOMO as it’s popularly known. It’s a completely normal emotion. It’s also the bane of many a rational investor. The more the markets climbed, the more investors feared missing out on a historic rally, and all the on-paper profits that came with such a rally.
Amy Cavanaugh:
Even some companies that recently declared bankruptcy have seen their stock prices rise. Some as much as nearly 50%. To be clear, a market rally was not really a surprise. History tells us that the stock market usually recovers quickly following a pandemic. Furthermore, because the markets move largely on what investors expect will happen in the future, as opposed to what’s only happening right now, the bad economic data we saw in April and May was already priced in. If investors know we are in a recession, but expect the recession to end quickly, a market rally is a natural result. But now let’s go back to my speeding analogy from the beginning. A rally is all well and good, but the higher stock prices go, the further they get away from their underlying fundamentals.
Amy Cavanaugh:
We hear a lot about fundamentals in the investing world. Fundamentals are what you use to value a company or a security. You look at the company’s earnings. How much do they earn, their revenue, their assets, their liabilities. The stronger these are, the more highly a company is likely to be valued. Well, the economy has its own fundamentals as well. Think about unemployment, which we just talked about, GDP growth rate, inflation, things like that. And right now our economy fundamentals are not particularly strong, and by extension many companies fundamentals aren’t particularly strong right now either. So we at NelsonCorp, while we don’t rely on fundamental analysis to choose investments, we use technical analysis instead, when the markets go far ahead of their fundamentals, it’s like a driver who suddenly realized he’s speeding way beyond the limit.
Amy Cavanaugh:
So what prompted the investors to look at their speedometers back on June 11th? Well, several things. First, the simple realization that despite the warmer weather, and the easing of quarantine restrictions, COVID-19 is not going away any time soon. The fact remains that several states are seeing a dramatic increase in their cases. In fact, 14 states have recorded their worst week yet for new coronavirus infections. Hospitalizations are also on the rise. What else made investors look at their speedometer on June 11th was a sobering report from the Federal Reserve. Ever since the financial crisis, our nation’s central bank has taken an important role in propping up the economy, so when the Federal Reserve speaks, people listen.
Amy Cavanaugh:
On Wednesday, prior to that June 11th, Chairman Jerome Powell warned that interest rates would probably be kept near zero for years to come, and that by the end of the year the unemployment rate would still be around 10%. If you recall, it’s currently around 13%. On the heels of this statement came the news that while the May job report was better than expected, and that jobless claims had dropped 10 weeks in a row, 1.5 million more people filed claims in that week alone. So essentially the markets woke up Thursday to a healthy dose of reality. The V-shaped recovery is not guaranteed. The story is not over. Investors looked at their dashboard and realized they were speeding. So what does this mean for us? Is another market correction due or will the markets simply take a breather and then keep climbing? Well, you can probably guess my answer. There’s no way to know for sure.
Amy Cavanaugh:
You see, trying to predict what the market will do means we have to predict what the virus will do, and no one, not even the most experienced epidemiologists like Dr. Fauci can do that. So as investors, it doesn’t make any sense to try. It just doesn’t work. That’s why we don’t invest using economic predictions, or company fundamentals, or just holding onto everything we own and hoping our portfolios will eventually go up. The fact of the matter is that the markets are going to leap ahead and fall behind like they always do, and we don’t want you to participate in that kind of a roller coaster ride. Roller coasters always end where they started. Buy and hold investing tends to leave you where you started too. That’s why we’re not going to invest based on hope for a vaccine and hope for a swift recovery. Instead, we continue to use indicators like relative strength, supply and demand, and trend lines.
Amy Cavanaugh:
We continue to follow the rules we put in place, getting in the markets when they trend above a certain point, and getting out when they trend below a certain point. It helped us avoid the worst of March’s market crash, and it will help us in the future too. We have a team in place at NelsonCorp who are constantly monitoring the market and trying to find the best route for your financial decisions. On the road of life you don’t have to travel alone. So if you have questions for me, again, my name is Amy Cavanaugh with NelsonCorp Wealth Management. Our number is 242-9042. You can find us on the web at nelsoncorp.com. There’s an email address there on our website if you want to email us, and we’re also on Facebook. So please reach out if you have questions or comments, and have a great Wednesday, and a great rest of the week. Thank you for joining us.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only, and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker-dealer member of FINRA, SIPC, investment advisor representative Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information visit our website at www.nelsoncorp.com.