Q4 2020 Investment Commentary

Contributed by: Center Investment Department

Closing the books on an eventful 2020

I think we can all agree that 2020 has been unlike anything we have experienced before! If 2020 had a spokesperson, it would be Mayhem from the Allstate commercials. From disturbing scenes of social unrest and racism to a major pandemic, crazy devastating wildfires and an ongoing trade war, not to mention, murder hornets and a very eventful election there have been many reasons why this year has been astounding!

The pandemic has been truly heartbreaking for the average American and the economy, despite this, the S&P 500 ended 2020 with fantastic returns of nearly 18.5%. Again, we are experiencing a large disparity in returns between technology companies and “value” stocks as represented by the Russell 1000 value index, up only 2.8% for the year in stark contrast. Check out the below chart showing the returns of the various S&P 500 sectors for 2020.

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During the last quarter of the year, Emerging Markets and Small company stocks staged a large comeback as investors’ risk appetite increased.

However, whatever party equity markets were having, the economy was not invited!

Economic Update

Efforts to resume business amid the pandemic were rewarded during the latter half of 2020. Reeling back from a historical low of -31.4% during the second quarter, real GDP was 33.4% in the third quarter of 2020. That is a substantial comeback, but still around 3.5% shy of where it was during the fourth quarter of 2019. In other words, GDP is headed in the right direction, but we still have some catch-up work to do for full economic recovery. October readings support positive momentum for 4Q20 numbers. However, the surging cases of coronavirus infections over the holiday season may reflect slower growth at the end of the quarter and into 1Q21.

While it's easy to confuse positive stock market returns with economic growth, they are quite different. We can see this in the context of employment. Thirty-four percent of the S&P 500’s growth in 2020 can be attributed to technology, yet the technology sector only represents 2% of the US labor market. On the other hand, government, agriculture and other services, which is almost 40% of the labor market, is not even represented in the S&P 500. Concisely put, US stock strength doesn’t necessarily represent strength in the economy.

Digging into unemployment numbers, the unemployment rate decreased slightly to 6.7% in November. Nonfarm payrolls increased by 245,000 during the same month. Note, this is the weakest pace of payroll increases since the start of the recovery, which reflects a larger challenge. While 56% of the jobs lost between February and April have come back, only about 7% of that comeback has happened since September. We’re witnessing how hard it has been to have business and job growth while maintaining measures created to prevent the spread of covid-19. Both are important, so future job growth is dependent on how we negotiate the two moving forward.

Finally, let’s talk about inflation. Headline CPI and core CPI rose 0.2% month on month in November. Year on year, headline CPI was 1.2% and core CPI was 1.6%. Headline and core personal consumption expenditures (PCE) were generally flat, at 1.1% and 1.4% year on year, respectively. Due to low energy prices and economic slack, inflation ended lower in 2020 than in 2019. However, 2021 may be a different story. With a vaccine-facilitated boost to economic activity, prices hit hardest by the pandemic (think sporting events, dining, concerts, hotel rates, airfare, rent) could strengthen. We’ll likely see depressed prices start to go up. Many suspect the Federal Reserve will recognize this inflation is based on temporary factors, and will not raise interest rates to compress it. We are keeping an eye on how things play out. Overall, 2021 could foster a low and rising inflation environment.

Other investment headlines: Tesla & Bitcoin

You may have noticed two headlines gaining a lot of attention in the 4th quarter from two of the most volatile investments seen in 2020: Tesla and Bitcoin. Tesla finally recorded its fourth consecutive profitable quarter in a row which prompted its entry into the S&P 500. This means that if you own any fund that tracks the index, you now own a piece of TSLA! Albeit a small piece, as it makes up about 1.5% of the index.

Bitcoin was also back making headlines as it broke past its previous high from late 2017 and rose above $28k per BTC by the end of the year. Is the digital currency a speculative asset with no value or the world currency of the future? That is yet to be decided, but as it currently stood at year-end its market cap was ~540B – about the same market cap as Berkshire Hathaway.

COVID-19

The COVID-19 pandemic took a turn for the worse during the 4th quarter of 2020. Cases, hospitalizations, and deaths all continued to climb, but December brought us a glimmer of hope as the FDA expedited the approval process for two vaccines to be distributed across the country. Governor Whitmer gave guidance for the prioritization in Michigan, and the first phase began in December with health care workers who have direct exposure to the virus receiving round 1 of the 2-round vaccine. All essential frontline workers will follow, starting first with those aged 75 and older, then ages 65-74 and adults ages 16-64 with underlying medical conditions, finishing up with the rest of adults aged 16 and over. Click here for more details. We hope that these vaccines are a light at the end of the tunnel, and wish you all health and happiness going into the New Year.

Government Update

The $900 billion fiscal stimulus act continued to face headwinds in the final hour as President Trump changed his stance on the support to families. He called for an increase to the prior negotiated $600 stimulus payments to $2,000. The House narrowly voted in favor of this package and the change, only to be met by resistance in the Republican-led Senate. Voting on this was delayed resulting in $600 stimulus payments getting issued.

The package includes new funding for:

• Small businesses with an expansion to the PPP program highlights including:

  • Guaranteed funding for first-time applications

  • Second loans with more expansive forgivable uses

  • Easier forgiveness process for loans under $150,000

  • Clarification that businesses can still deduct the (otherwise deductible) expenses of funds paid with this loan

  • Excludes publically traded companies and a business must demonstrate a 25% drop in revenue or more from 2019

• The second round of individual checks for individuals and families with phase-out starting at $75,000 of income. $600 per adult and child

• Extension of federal unemployment benefits including an additional $300 per week benefit to unemployed workers until March 14, 2021

• Moratorium on evictions through January 2021

• Various funding for state/local programs highlights including

  • $82 Billion to schools and colleges

  • $27 Billion to state highway, transit, rail and airports

  • $22 Billion to state healthcare funding

Restrictions placed on the Federal Reserve

The Federal Reserve (Fed) found itself amid the political battle of the stimulus package. It looks like the Fed may have to discontinue at the end of 2020 and potentially not be able to restart programs under the same terms that were backed by CARES Act funding, including:

• Primary Market Corporate Credit Facility – loans to investment grade businesses experiencing dislocation due to the pandemic

• Secondary Market Corporate Credit Facility – the ability for the Fed to purchase investment-grade corporate debt to facilities liquidity in the credit markets

• Municipal Liquidity Facility – allows the Fed to purchase short term bonds from certain states, counties and cities to ensure access to funds throughout the pandemic

• Main Street Lending Program – support for small and medium-sized business loans

• Term Asset-Backed Securities Loan Facility- support for AAA bonds backed by assets such as student/auto/credit card loans backed by the Small Business Administration (SBA)

Fed Chair Powell stated that these lending programs can still be restarted using Treasury’s Exchange Stabilization Fund but the effort to restrict this particular aspect of the Fed’s lending authority can be viewed as Congress stepping in and exerting oversight powers to limit how far the Fed can go in support of critical market functions. We will be watching the evolution of this debate and if the Fed’s communications become more restrained as a result. In the future, we may not be able to expect the Federal Reserve to step in and start buying secondary market issues to support prices.

The new Biden Administration

The run-off election held on January 5th in Georgia determined who holds the Senate. Democrats needed to win both of the Senate seats in Georgia to split the Senate 50-50. This meant that the democrat Vice President would be the tie-breaking vote giving a slight edge to the Democrats. This was the last major hurdle in understanding the makeup of the government for the next couple of years. This democratic advantage paves the way for a more ambitious President Biden legislative agenda. See our post-election update webinar for a summary of potential agenda items for the Biden administration. A shortlist includes President-Elect Biden’s proposed tax increases on corporations, income for those in the highest tax bracket, capital gains and estate taxes, aggressive health care changes, and the Green New Deal. While markets and the economy may favor party splits between the Presidency and Congress, an all-Democratic situation has still yielded positive outcomes for markets. The below chart shows that 27% of the time the Democrats have been in control and GDP growth has been at its best during these times and returns have been good as well.

In the short term, we could see some near-term weakness in market reaction but President Biden has announced that we can expect a third wave of stimulus payments of $2,000 (or at least the additional $1,400 they were hoping for in the second round) so this could outweigh the risks of market downside in the near term. This still requires a 60 vote in the Senate to pass and may take until March to do so.

There could be some potential impacts to investors that we will be watching closely. Most notable are:

• Corporate tax rate increases and a minimum tax for corporations seems to be the biggest potential impact to markets under a Democratic sweep

• Changes to capital gains tax rates and the preferential tax rate on qualified dividends (although could be limited to those with incomes over $1 Million) could affect individual investor behavior

It’s important to remember that many factors impact markets with politics making up a small portion of those factors!

Hopefully in 2021 Mayhem sticks with the commercials but regardless of what happens, we are here as your partners to get you through whatever is thrown our way and help you achieve your financial goals. Thank you for the trust you place in us.

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Sector Returns: Sectors are based on the GICX methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestment of dividends. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Post-Election Market Update

11/11/2020 - Watch for market commentary from our Director of Investments, Angela Palacios, CFP®, AIF®. Let's take a close look at how the presidential election impacted the stock market.

Tune in for market commentary from our Director of Investments, Angela Palacios, CFP®, AIF®. Let's take a close look at how the presidential election is impa...

The Center's Complete Third Quarter 2020 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The year 2020, unlike 20/20 eyesight, has brought investors everything but clarity when it comes to stock markets and the economy.

Watch the video below or read the complete summary for a recap of our thoughts and reflections on the year and what we are paying attention to in the near future.

As if normal volatility of an election year wasn’t enough, the Covid-19 pandemic continues to linger and cases are back on the rise since early September. There is massive uncertainty over the spread of the virus, vaccine trials, business solvency, Americans’ jobs, and government stimulus that will continue to weigh on stock prices.

Despite the volatility and uncertainty surrounding investors through the first three quarters of the year, the performance of some major asset classes remain positive. Large U.S. stocks have ridden the backs of technology and consumer discretionary stocks (or should I say Apple (AAPL) and Amazon (AMZN)?) bringing the S&P 500 to +5.57% through quarter-end (since 12/31/2019). U.S. bonds represented by the Barclays U.S. Aggregate Index are up almost +6.8%, and gold is having a banner year up over +24%.  Not everything is rising though. International developed, emerging markets, and small-cap stocks remain in negative territory with three months of trading to go.

Apples are in season…

Our favorite Apple IOS14 update is the new home screen widgets. It is likely tempting to add the large widget to watch updates on the S&P 500, Dow, and NASDAQ performance with every phone notification throughout the day. We understand you watch these numbers too, particularly during the volatility of 2020. Simply watching index returns doesn’t tell the entire story though. In previous years, the largest 5 to 10 companies’ performance contributed to the S&P’s annual return much less than they have this year. As of September 30th, the top five most heavily weighted stocks within the S&P 500 year-to-date (YTD) performance was 35%, with the overall YTD S&P 500 (price return) at 4%. The 495 other companies included in the S&P 500 returned -3% collectively.

The domination in returns has come from household names such as Facebook, Amazon, Apple. Alphabet(Google) and Microsoft.  While many fear this rhymes with the technology bubble of 1999, these companies are in very different positions than they were at that time.  Heavy cash on the balance sheets and lower Price to Earnings ratios (P/E ratios) now versus then speak to some of these differences.

Politics and Pandemics too intertwined for comfort…

The headlines to watch during these final months of 2020 will be centered on two topics: the November election, and the Covid-19 pandemic. We’ll be watching both closely and constantly reviewing new information as it pertains (or doesn’t) to your financial plans.

One major source of uncertainty following the elections will be any potential new tax code, but there may be less to worry about than you’d think when it comes to potential changes. We are assuming a tight election, and, while we are not in the business of predicting elections, we can gain insight from the past when it comes to potential tax changes. If President Trump remains in office, we’d be looking at 4 more years of the same, but even if the Democratic Party sweeps the executive and legislative branches of government – it may be a tough sell to raise taxes amid a pandemic/recession. Despite a historically low tax environment, there are a lot of businesses that are already struggling and unemployment remains high. While unemployment is off of its record high near 15%, it is still sitting near a historically high measure of 7.9%. This does not favor tax increases. Looking back to when President Obama took office in ’09, we were coming out of the Great Financial Crisis and it took years before there were any significant tax hikes.

More political uncertainty: the Supreme Court justice nomination following the passing of Supreme Court Justice, Ruth Bader Ginsburg. The Senate is currently controlled by Republicans, and they are pushing to get President Trump’s nomination, Amy Coney Barrett, sworn in before the election. The only problem is, Covid-19 may get in the way of a Senate vote as well, with several key members testing positive for Covid-19. With President and First Lady Trump testing positive for the virus, Washington D.C. is on high-alert to protect the health and safety of our government officials. Uncertainty about when the Senate will be able to meet and continue the nomination process may cause some market volatility.

As always, we urge you to check out our blog where we have wrote on many of these topics repeatedly over the years. History doesn’t repeat itself, but it often rhymes, and it has told us that staying the course despite ever-looming market uncertainty has paid off time and time again. This may feel even harder during an election year, but remember that history has shown political parties have no bearing on long-term stock performance. Now stay healthy, stay invested, and go vote!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Any opinions are those of Angela Palacios, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Individual investor’s results will vary. Past performance does not guarantee future results. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

How Are Fearless Billionaires On The Campaign Trail?

Contributed by: Jaclyn Jackson, CAP®

If you thought this blog was about Donald Trump, your leg was just pulled. This candidate’s name starts with a “J.B.”, that’s right – Jeff Bezos (pulled again). On August 26th, the Amazon Founder and CEO became the first person ever worth an unprecedented $200 billion. This happened just before 2020 required the best August returns since 1984 and US markets recovered from deep pandemic-facilitated lows by exceeding mid-February pre-pandemic highs. All the while in true Tale of Two Cities form, a global pandemic has millions of Americans reconciling above-average unemployment rates and highlighted a variety of social disparities through seemingly targeted infection rates. Amazon, specifically, has received unfavorable headlines during the pandemic as essential workers strike against the alleged lack of virus-related safety precautions taken by the company and unsatisfactory compensation.

Democratizing Capitalism

Although wealth inequality isn’t new, the pandemic amplified its implications. (As of writing this) Presidential elections are approaching. Like most elections, economics lead the ballot. Observing recent history’s populist-leaning politics, Pershing Square Capital founder and billionaire hedge fund manager, Bill Ackman suggests democratizing capitalism in his latest letter to investors. In the letter, he touted capitalism as the best system for maximizing the size of the economic pie. Yet, warns the lack of wage growth for most Americans facilitates Black Swan-like risks for investors as lower/middle-income Americans advocate radical change that overhauls modern capitalism. Essentially, social unrest poses a threat to investors. Ackman’s solution was creating programs that widen market participation (and subsequent gain participation) to individuals who can’t traditionally invest thereby restoring faith in capitalism. 

Aligning Interests

Which brings it back to Jeff Bezos. Many anticipate the CEO will follow Tesla and Apple’s lead, by splitting Amazon stock. On the surface, stock splits are superficial. Technically, they don’t equate to any value change for a company. However, stock splits have historically been used to signal a company’s strength or hint that something good might be on the horizon for the company. As illustrated by the latest Tesla and Apple stock splits, many investors take note and likely load up on company stock consequently boosting the company’s value.

So, what does Jeff Bezos splitting Amazon stock have to do with Bill Ackman’s thoughts on saving capitalism? Amazon is one of the few businesses to profit during the pandemic directly contrasting the experience of small business owners and the general public alike. It becomes more challenging for the average person to praise Jeff Bezos’ extraordinary wealth when their experience mirrors Amazon employees who are frustrated by the inability to work safely or receive adequate compensation. At the current stock price, many cannot join in on Amazon’s success. By lowering the individual stock price, a stock split increases access to a wider range of investors. More participants in Amazon’s meteoric rise could increase their customer base, increase customer loyalty, and even discourage (at least in public opinion) attempts to break up the company as it moves into a monopolistic stratosphere. Perhaps designing a way for Amazon’s essential workers to more easily invest in the company could solve compensation distress. Jeff Bezos wins the day by making Amazon stocks more accessible; he sets his business and himself up to potentially gain more wealth and with a wider range of investor participants, he gets buy-in from the average individual. Bezos’ success becomes the average person’s success and their interests align in capitalism; Ackman’s resolution in practice. 

No matter the political view, most Americans would agree that democracy is the blood and bone of our nation. Whether we are practicing democracy through voting or considering new ways to exercise democracy (as Bill Ackman explored), we are uplifting the country’s greatest strength.

Jaclyn Jackson, CAP® is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

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The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor's results will vary. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.

2 Reasons Why Your Investment Portfolio Needs Adjusting

Contributed by: Abigail Fischer

It’s historically proven, the age-old advice urging you to stick with your investment plan through thick and thin. The Center preaches this, especially during market volatility. But maybe your financial advisor has recently suggested making a change in your investment plan. How could this be? Well, there are two possible reasons: either your circumstances changed or new information emerged about the market.

1. Your circumstances changed

• Retiring in 2020 or the near future? Wow, what a way to end your career, and congratulations! There may be a case to make your portfolio more conservative so that when volatility hits, you see less downturn than you might in a more aggressive model. Read this if you’re concerned about your 401k balance fluctuation. 

• Big purchase ahead? Sticking with your investment plan is a long-term view. When you’ve set your sights on a making a big purchase soon, consider taking a portion of your portfolio to cash or a short-term fixed income fund.

• Your paycheck comes from your portfolio? Consider taking the next six months of expenses in cash or a short-term fixed-income fund so that when you hear market news, you can sleep soundly knowing your next portfolio paycheck will not be affected.

None of these apply but you’re unsure about your portfolio allocation? Read this.

2. New information about the market

• As interest rates fell in March, we saw a short-term opportunity to tactically overweight the Strategic Income portion of the Fixed Income category in some portfolio models. Generally, Strategic Income funds invest in high-yield bonds, emerging market debt, international bonds, asset, and mortgage-backed securities. This short term strategy was sought out by our Investment Committee as we aim to add value to our clients’ portfolios during market volatility. We closely tracked the Bank of America US High Yield Index Option-Adjusted Spread and set a point where we would tactically switch the allocation back to short and long term fixed income funds. Here’s one of the charts we watched:

Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2, August 28, 2020.

• The Investment Committee saw an opportunity in the gold market. Gold is primarily seen as a hedge against inflation risk within the US Market. As the Federal Reserve printed cash at a rapid pace in April 2020, the value of the US Dollar slipped and many investors flocked to gold as a hedging measure. Gold can also be seen as a consistent store of value during a choppy period of high unemployment and low business activity; its long-term value has steadily increased.

The fiduciary standard of seeking return while managing risk is our priority. A strong investment portfolio compliments a clear financial plan. As your circumstances change and the market gives us more information, we are committed to your personal financial goals within the financial planning process. As always, please contact your Center Financial Planner for advice on your specific situation.

Abigail Fischer is an Investment Research Associate and Investment Representative at Center for Financial Planning, Inc.® She gained invaluable knowledge as a Client Service Associate, giving her an edge as she transitions into her new role in the Investment Department.

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This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

Were You In The Right Portfolio?

Contributed by: Nicholas Boguth

Talk about volatility…within 6 months, the S&P 500 hit an all-time high, fell over 33%, then climbed over 38%! As I write this*, we are almost back to an all-time high in the stock market.

I recently wrote about asset allocation as the single biggest decision you will make in your investing lifetime. There are many QUANTITATIVE factors that should go into your asset allocation such as your financial goals, time horizon, savings rate, liquidity needs, and return expectations (just to name a few), but there is a QUALITATIVE factor that stands out among the rest: how you feel about your portfolio.

Market crashes such as the one we experienced in March offer unique opportunities to reevaluate our portfolios; specifically the aforementioned “feeling”.  When the stock market fell 10%, then 20%, then 30%...how did you feel? Were you frantically watching the news worried about your financial future or comfortable in your recliner watching your favorite Netflix series? Were you checking your statements daily with rising blood pressure or confident in your advisor and financial plan?

Which asset allocation are you in? Mostly stocks, mostly bonds, or somewhere in between? Back in March, that single decision would have altered your stock market experience more than anything else, and it will continue to drive your experience going forward. If you are not confident in (or unsure of) your asset allocation, we’d love to help.

*Indexes above represented by: Bond – BbgBarc US Agg Bond TR, and Stock – S&P 500 TR. Return data as of 7/20/2020.

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

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You cannot invest directly in any index. Pass performance doesn’t guarantee future results. Investing involves risk regardless of the strategy selected, including asset allocation and diversification. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US-dollar denominated, fixed-rate taxable bond market.

Second Quarter Investment Commentary 2020

Contributed by: Angela Palacios, CFP®, AIF®

As the economy slowly opened and our grocery store shelves were restocked, the second quarter became one of the best in decades.  Tailwinds such as government stimulus, positive trends in “flatting the curve”, economic reopening, good news on virus treatment, and hope of a vaccine gave investors the confidence they needed to flock back into stocks.  This comes in stark contrast to the first quarter with a dizzying correction for the S&P 500 down 34% in about one month.

Many are left wondering if this is too good to be true and there are several different and all very valid view points on this matter. 

How can equities be back to near-peak levels when we are still in a pandemic?

As indexes recovered much of what they lost in the first quarter, some investors are left scratching their heads wondering how this could be when businesses lost out on so much during the shutdown of the economy.  At first glance, this does seem to be strange.  There are several possible reasons this has occurred.

1. The hardest hit companies were small businesses not reflected in large indexes like the S&P 500.  When people couldn’t frequent their local small businesses for the goods they needed during the shutdown they turned to online shopping from big box places in droves.  So, what small businesses have lost, large businesses have gained (at least in the short term).

2. Government provided assistance in the form of forgivable debt to small businesses and issuing checks directly to individuals.  So, not only, were people stuck at home with nowhere to spend their income (other than fixed bills), but they were also given stimulus checks.  For many, this provided a much needed back stop to pay important bills like a mortgage or car payment.  However, the data also shows that much of this has been put away for a rainy day.  Check out the historical chart below of the M1 Money Stock (the amount of money held by individuals that is ready to spend. ie. currency and checking account deposits in the US).  We have never seen a spike of this magnitude.

As businesses have reopened, many goods and services are in high demand like automobiles and home improvement.  People are now spending the money they couldn’t spend while stuck at home and the market is pricing this into results that should be reflected in the next quarter’s earnings reports.

3. Lower interest rates mean home owners can refinance debt at lower interest rates, putting more money in their pockets and less in the bank’s pockets.  People can also buy new cars with 0% financing.  Lower interest rates also leave those seeking income on investments with very few places to turn other than equities to replace the loss in income.

What could cause the markets to head right back down?

I have this feeling that the economy is balancing on the edge of a knife right now.  The momentum is forward toward recovery but several risks could slow or undermine that momentum:

• A resurgence of the virus – COVID-19 alone isn’t the cause of a potential market pull back, but this does increase the probabilities of parts of the economy having to close for periods.  A good case in point is the recent closure of indoor bar service in parts of Michigan after several bar gatherings have been identified as sources of local spikes in cases.  I don’t think we will see widespread shut down of economies again but there will be pockets of this occurring.

• Expiration of supplemental unemployment benefits – If people are unable to go back to their jobs, or find new ones, the loss of the extra unemployment income at the end of July could be a significant hit to consumer confidence.  This means that the e-spending habits that are currently boosting the economy, could go away very quickly.  I view this as the largest risk to the recovery right now because unemployment is at 11.1% nationally with Michigan being one of the hardest-hit states for job loss.  As shown by the chart below, we have not experienced such widespread job loss in a recession in recent history.  The jobs data from the Bureau of Labor Statistics for June shows that we are adding a large number of jobs back so, for right now, we appear to be improving on this front.

• Governments failing to provide more stimulus if needed – How politics play out is always an unknown that cannot be predicted but if shutdowns become more widespread again, people will look to the government for more assistance.  If this isn’t provided we could see a swift correction.  I believe, if needed, we will see more stimulus in the future as the government has proven with it’s actions that it does stand ready to support the economy.

• How many small business will survive?  This is a question that only time will tell but the risk is high that many will not.  They represent a large employer in the economy so major closures will have a highly negative impact on employment numbers.

What are we doing in response?

The Investment Committee is discussing topics like “How to invest through periods of low to negative interest rates?” and “How do we best help clients achieve their financial goals when deficits and current valuations could be a long term anchor to portfolio returns?”  Our Jaclyn Jackson, CAP® recently wrote the blog How To Invest In Turbulent Markets where she articulates what we can control, representing a great summary of what we do behind the scenes for our clients. 

Not long ago the markets and the economy seemed to be in freefall, but we just had one of the best quarters ever for market returns.  It is important to remember that investors look at whether things are getting better or worse; this is a large driver of markets.  At the end of the first quarter, things were getting worse and investors had no idea where a bottom could be or how long we would be shut down.  Since then, much has improved, we have more knowledge on this virus and the economy continues to improve which explains why the markets are up (even though the magnitude may not make intuitive sense).  These vast swings in sentiment have created many opportunities for changes in portfolios.  If you ever have questions regarding the addressed topics and how it relates to your portfolio, please don’t hesitate to reach out to discuss.  We are here for you and thank you for your continued trust.

Angela Palacios, CFP®, AIF®

Partner & Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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Opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. You cannot invest directly in any index.

How To Invest Your Money In Turbulent Markets

Contributed by: Jaclyn Jackson, CAP®

Navigating daily market fluctuations through COVID-19 has been challenging. With every newsfeed from Washington or new economic data numbers, markets react. So what do we make of this as investors? Well, it truly depends on your circumstance. For individuals who have a long investment horizon and stable finances, there may be an opportunity to take advantage of market inefficiencies.

For individuals who have experienced (or anticipate) financial changes, it may be time to reevaluate your investment approach. Here are a few ideas to discuss with your advisor when considering investment strategies during the coronavirus pandemic.

Strategies for Long-Term Investors

For long-term investors, volatile markets should not discourage commitment to your investment plan. Staying invested, reestablishing your asset allocation, gradually investing, and generating tax opportunities are still valuable to progressing your investment aims. Think about the following strategies:

1. Rebalance - Rebalancing is a systematic way of adapting the commonly suggested investment advice, “buy low and sell high”. It disciplines investors to trim well-performing investments and buy investments that have the potential to gain profits. In our current environment, that looks like trimming from bond positions and investing in equities for many people. Importantly, rebalancing helps investors maintain their established asset allocation; someone’s predetermined investment allocation suited to meet their investment objectives. In other words, rebalancing helps investors maintain the risk/return profile meant to enhance their probability of meeting long-term goals.

2. Dollar-Cost Average - A gingerly alternative to rebalancing is dollar-cost averaging. Investors who use this strategy identify underexposed asset classes and invest a set amount of money into those assets at a set time (i.e. monthly) over a set period (i.e. 1 year). This method helps investors buy more shares of something when it is inexpensive and fewer shares of something when it is expensive. Buying at a premium when the market is up is stabilized by taking advantage of prices when the market is down. Therefore, the average cost paid per share of your investment is cheaper than just paying the premium prices. Having a dollar-cost averaging strategy in place now, while markets have dipped, helps you buy more shares of investments while they cost less.

3. Tax Loss Harvest - Selling all or part of a position in your taxable account when it is worth less than what you initially paid for it creates a realized capital loss. Losses can offset capital gains and other income in the year you realize it. If realized losses exceed realized gains during that year, realized losses can be carried forward (into future years). Harvesting losses could help investors replace legacy positions, diversify away from concentrated positions, or stow away losses for more profitable times.

4. Do Nothing - The key here is to stay invested. The challenge with fleeing investment markets when they are down is that it is incredibly hard to time reinvesting when they will go back up. Missing upside days may inhibit full recovery of losses. According to research developed by Calamos Investments, missing the 20 best days of the S&P 500 over 20 years (1/1/99 – 12/31/19) reduced investment returns by two-thirds. Time, not market timing, supports you in meeting your investment goals.

Strategies Amid Financial Hardships

Many people’s employment and financial situations have changed. Understandably, some have to review their ability to invest. If you are concerned about losing your job or potential health issues, it is time to revisit your savings. Could your rainy day resources cover 6-8 months of financial needs? If not, you will likely need to build up savings. For those who are experiencing financial challenges, consider the following strategies:

1. Add to emergency funds by lowering or pausing retirement account contributions. Luckily, you do not have to liquidate part of your retirement account with this strategy. Staying invested gives your portfolio a chance to benefit from long-term performance. If your employer matches retirement account contributions, continue to invest up to that amount, then add to savings with the balance of your normal participation amount. Once savings needs are met, resume full investment participation.

2. Rebalance your portfolio to provide liquidity. As noted above, rebalancing takes earnings off the table from investments that have performed well. However, instead of reallocating to other investments, use proceeds to increase your rainy day savings. This method prevents you from selling off positions that are at a loss.

Jaclyn Jackson, CAP® is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

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Please note, the options noted above are not for everyone. Consult your advisor to determine which options are appropriate for you. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

When Stock Markets Fall 20%

Contributed by: Nicholas Boguth

We are supposed to know that stocks are risky, but that doesn’t make holding onto them any easier during turbulent times like these. Hopefully this post provides some optimism for anyone invested in stocks, both domestic and international.  

What happened if you invested $1 in a stock market after it crashed 20% or more?

I took 15 stock indexes representing the largest economies in the world and found the date when they fell 20% from an “all-time high” like the U.S. markets did this past March. I counted 68 of these drawdowns in Morningstar’s database. Below is the performance of $1 over the 10 years following each drawdown.

This is a hypothetical example for illustration purposes only. Investors cannot invest directly in an index.

In this example, blue lines ended positive. Red lines ended negative. $1 invested after a 20% drawdown turned positive 64 out of the 68 times. There were only 4 negative time periods (Hong Kong & Italy in ’73, Brazil & Italy in ’08). In the worst 10 year period, the index was down 28% and ended at $0.72. The best instances returned over 600%, and even all the way up to 1,100%!

The economy is tanking, should I get out of the market?

Every investor has thought about this question at least once, probably multiple times, during his or her lifetime. I’m not going to answer it for you here, because there is no universal answer. Investing is not one-size-fits-all. Time horizon, spending goals, cash flows, risk tolerance, and your entire financial plan will affect the decision. We work with our clients to ensure that they have a plan in place before it is too late. If you are unsure of your plan, or need to create one, feel free to reach out to us by phone, email, or on our social media.   

Source: Morningstar Direct. Indexes and dates shown below. Total return, monthly data.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Holding investments for the long term does not insure a profitable outcome.

International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

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A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. With Net Dividends (Total Return Index): Net total return indices reinvest dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the United States & Canada. As of June 2007 the MSCI EAFE Index consisted of the following 21 developed market countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. (Total Return Index) - With Net Dividends: Approximates the minimum possible dividend reinvestment. The dividend is reinvested after deduction of withholding tax, applying the rate to non-resident individuals who do not benefit from double taxation treaties. MSCI Barra uses withholding tax rates applicable to Luxembourg holding companies, as Luxembourg applies the highest rates. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI Hong Kong Index is designed to measure the performance of the large and mid-cap segments of the Hong Kong market. With 43 constituents, the index covers approximately 85% of the free float-adjusted market capitalization of the Hong Kong equity universe. The MSCI Japan Index is designed to measure the performance of the large and mid-cap segments of the Japanese market. With 323 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. The MSCI Germany Index is designed to measure the performance of the large and mid-cap segments of the German market. With 59 constituents, the index covers about 85% of the equity universe in Germany. The MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market. With 96 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK. The MSCI France Index is designed to measure the performance of the large and mid-cap segments of the French market. With 77 constituents, the index covers about 85% of the equity universe in France. The MSCI Italy Index is designed to measure the performance of the large and mid-cap segments of the Italian market. With 24 constituents, the index covers about 85% of the equity universe in Italy. The MSCI Canada Index is designed to measure the performance of the large and mid-cap segments of the Canada market. With 89 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Canada. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.

How To Invest In A Bear Market

Contributed by: Center Investment Department

In a Q+A, our Director of Investments Angela Palacios, CFP®, AIF® provides valuable advice on the dos and don’ts of investing in a bear market. A “bear market” is when assets fall at least 20% or more from their high. We are currently facing a bear market.

What is a bear market and what triggers them? 

A variety of situations can cause a bear market. They can be event-driven, which explains the current bear market. A black swan event like COVID-19 or a shock in commodity prices like the price war on oil can cause bear markets that lead to recessions. In the case of late 2018, that brief bear market was driven by the trade-war escalation. This example did not lead to a recession. Financial imbalances like high inflation, increasing interest rates from the Federal Reserve, or banks being too leveraged (like in 2008) are all issues that can trigger a bear market and lead to an eventual recession.   

What's good/bad about investing in a bear market? 

Data from historical bear markets indicate that they are excellent investment opportunities, however, it is the most difficult time to invest. Bear markets allow us to tax-loss harvest to offset future capital gains, ultimately reducing our tax bills. We can rebalance out of positions that may not be our highest conviction investing ideas that we have had to hold on to due to high capital gains embedded in those positions.

What investments are best for a bear market and why?

We believe “Core Fixed Income” is often the best strategy to offset the downside risk from equities. These include positions like U.S. Treasuries and High-Quality Corporate debt. Generally, when equities are going down, investors are buying these types of investments. Cash is also a good insulator during times like this. Even though interest rates are low, there is no substitute for its safety. It is very important to always have your next 6-18 months of cash needs set aside so you don’t have to liquidate during times of market turmoil.

What should a brand new investor know about building a portfolio in a bear market? Is it a good time for newbies to enter the market while prices are down? 

Start building a portfolio regardless of whether we are in a bull market or a bear market. The old saying goes, “Time in the market is more important than timing the market”. Most investors save systematically throughout their lives rather than investing in one lump sum. We save every month through our 401(k) deferrals or every year when we get that bonus from work. Dollars go farther in bear markets because the shares of the mutual fund you are buying are now on sale. Investing is the only time in life when buying something on sale doesn’t feel good, but it should if you have a long time horizon to save.

What advice do you have for managing a portfolio in a bear market and when it begins to turn bullish again? For example, how do you manage risk and asset allocation to stay on target with your goals? 

The investing strategy and financial planning goals should be developed during quieter times. Thinking ahead to how you should react during times like this is crucial because in the moment our emotions are very difficult to overcome. A rebalancing strategy also needs to be developed at the same time you are developing your investment strategy. It is a concept that sounds simple but can be very easy to neglect. When markets are doing great and there is very low volatility (like January of this year), you may be tempted to let your best-performing investments run just a little bit longer before rebalancing…meaning you hold your stock positions rather than rebalancing into bonds. In other years that may have been fine, but this year it was not. So, having thresholds around how much stock and bonds you have in your portfolio can take the guesswork out of when to rebalance. That is extremely important at the depths of a bear market because one of the best ways to help your returns coming out of a bear market is simply to rebalance back to your target allocation of stocks and bonds. When markets are down, this means selling bonds and buying stocks.

We hope you found this informative. If you have additional questions, please contact your advisor!

This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.