Where theory and practice meet: Sustaining and impactful, and especially for governance fiduciaries.
https://www.retireguide.com/guides/covid-19-retirement/
The COVID-19 pandemic and accompanying financial crisis leaves uncertainty for the 18 million Americans expected to retire in the next five years. At the same time, research suggests that millions of U.S. workers are retiring early — a move that could jeopardize their long-term retirement goals.
| Asked last month about when fatalities and hospitalizations would meet state thresholds for reopening, Mr. Cuomo responded: “All the early national experts, ‘Here’s my projection model.’ . . . They were all wrong. They were all wrong. . . . There are a lot of variables. I understand that. We didn’t know what the social distancing would actually amount to. I get it, but we were all wrong.” The Wall Street Journal, “What Covid Models Get Wrong” June 18, 2020 The U.S. policy emphasis for the pandemic appears to be shifting from economic shut-down to crisis management. On Monday, Mr. Gavin Newsome, the governor of California, said “We have to recognize you can’t be in a permanent state where people are locked away—for months and months and months and months on end—to see lives and livelihoods completely destroyed, without considering the health impact of those decisions as well.” And while the University of Washington’s Institute for Health Metrics and Evaluation[1] has issued a new forecast that Covid fatalities could increase over the summer and see a resurgence in the fall, Stanford epidemiologist, John Ioannidis explains in a new paper that most models have overshot by making incorrect assumptions on virus reproduction rates and equal susceptibility across populations.[2] For example, a Massachusetts General Hospital model predicted 23,000 deaths in Georgia, the first state to reopen, but Georgia has had only 896. Forecasting errors like this have tended to be in the 10 to 20 times multiple range. For example, early estimates in the U.S. were for 2 million deaths, as compared to current projections, which have ranged recently from 140,000 to 200,000. Even in the face of rising infection rates, policymakers may now shift their attention to hospital utilization and mortality rates. We noted last week, in states where there have been rising rates, lower utilization and mortality rates suggest that the crisis can continue to be managed without another lockdown (see below chart). Hospital utilization has remained relatively flat, even with the uptrend in cases, in states such as California. Continued development in therapies is supporting this trend in declining mortality rates with this week’s announcement of an application of a readily available steroidal drug, dexamethasone, as only the most recent example. In the meantime, a wash of new studies is finding that in addition to the models not accurately forecasting the impacts of the pandemic, the shutdown itself was only marginally beneficial. A recent paper by the University of California at Berkeley found that, while social distancing reduced person-to-person contact by 50%, more stringent shelter-in-place rules only further reduced contact by another 5%.[4] A USAToday analysis found that over 40% of the mortalities have come from nursing homes, suggesting that despite whatever shelter-in-place directives may have accomplished, it failed to protect some of the disease’s most vulnerable populations.[5] Markets Why do we continue to focus on the pandemic each week in our analysis? Because market performance will be driven by the pandemic and how it impacts corporate earnings, at least for the near term. As we await second quarter earnings over the next couple of weeks, we have been encouraged by leading indicators, which in large part have exceeded earlier estimates. One chart from yesterday morning’s update from Baird-Strategas provides additional support to a V-shaped recovery, with the Citi Economic Surprise Index resting at an all-time high. This week’s retail sales number of 17% vastly exceeded the 8% expected by economists and, while yesterday’s first time unemployment claims number was somewhat above estimate, other indicators like airline traffic and restaurant reservations provide a sign that the economy continues to rebound. Both the corporate and municipal bond markets continue to see strong demand backed by Fed support. For example, a recent JFK airport bond backed by American Airlines/British Airways was 10 times oversubscribed, allowing them to increase the size of the deal. We have also seen universities and New York bonds come to market and receive strong interest. While we would not invest in these higher risk issues, it does demonstrate significant support to the overall market. The downside of this positive stabilization in credit is that yields have dropped to all-time lows, and it appears will stay there for quite some time. In light of this low-yield environment, our research team is diligently working to develop investment options for supplementary income in dividend-oriented investments, and we will be reporting on this more in the days to come. |
KEY POINTS
| On Thursday, the market sold off nearly 6 percent in one day, after rallying for several weeks. The sudden drop seemed to follow investors expressing concerns around two issues: 1) What’s the risk of a second wave of the virus? and 2) What about the slow path to recovery? Let’s take each in turn: The Path of the VirusThe news is reporting this week that coronavirus infection rates have been rising in 12 states despite the overall numbers continuing to fall. States like Arizona, Florida and Texas have received a fair amount of attention. Arizona’s daily case rates have increased 125% since reopening on May 6. However, a deeper dive into the numbers being reported by the Arizona Department of Health reveals a mixed picture. What has not been a point of focus in reporting on the case rates in Arizona is that hospitalization and death rates have plummeted from one month ago, down 64% and 73% respectively.[1] Accordingly, these increases have not disrupted hospitalization utilization rates, which have remained relatively stable over the last few weeks in the 73-78% range. Texas, the second most populous state in the U.S. with nearly 30 million people, has seen the level of hospitalizations since the reopening on May 11 increase by 280 cases. These numbers are consistent with Florida’s recent increases. There are other states that were among the first to reopen, like Georgia, which have not seen any real pick up in new rates of infection. Absolute numbers could, of course, increase if the topline infection rates further accelerate, so we will continue to carefully monitor this trend. In the meantime, the overall picture continues to improve for the nation, with both declining daily new infections and deaths since the states began reopening in late April:[2] The Path of the Recovery Last Friday’s positive surprise on the 2.5 million jobs in the month of May capped the market’s recent achievement of the fastest market recovery on record, but volatility re-entered the market this week following Fed Chairman Jerome Powell’s comments from the Federal Open Market Committee (FOMC) meeting on Wednesday. The FOMC announced holding the target rate low in the range of 0% to 0.25% with a unanimous 10 to 0 vote. Overall the statement was fairly uneventful, but there are interesting takeaways from some of the projections and commentary. Almost all of the policy members expect the Fed funds rate to remain near 0% through the end of 2022. Only two members out of the 17 are in favor of raising rates even in 2022. Regarding the timing and size of future adjustments to rates, the Fed reiterated that it will take into account labor market conditions, inflation pressures (which continue to be muted) as well as financial and international developments. For bond investments this means that our emphasis on quality will continue to serve as an important source of liquidity and stability in the portfolio. As rates eventually begin to normalize we will be able to buy into issues at higher rate levels, just as we did following the 2008 crisis. The Fed plans to keep rates low, adjust as needed and continue to support the economy as necessary. Powell cited an “unbalanced nature” of the recession and reiterated a few times that they want the markets to be working. The Fed-provided liquidity has been a powerful mix for stocks, but Powell did make it clear that once the crisis has passed, the Fed “will put these emergency tools back in the tool box.” The Fed’s projection of 9.3% unemployment by year-end was also very much in line with our earlier estimate of 8-10%. Yesterday’s new claims for unemployment (1.54 million) were approximately 23% below the consensus estimate, providing further evidence of an improving labor market. This bodes well for stocks over the long run. The pullback on Thursday was a reminder of the volatile nature of stock investing, but on balance we view the pull back as invoking important discipline in the market. Consolidation at this stage allows for a more stable and consistent pace of growth as corporate earnings recover and eventually catch up to valuations. [1] Comparison of COVID daily statistics from opening (May 6) to most recent (June 4).While these looked at single day comparisons, it’s important to note that the three and seven day moving averages were similar. Arizona Department of Health COVID-19 Dashboard https://azdhs.gov/preparedness/epidemiology-disease-control/infectious-disease-epidemiology/covid-19/dashboards/index.php [2] https://www.worldometers.info/coronavirus/country/us/ |
| In almost a tale of two cities, protests and looting have emerged in over 100 cities across America over the past week for George Floyd, a man who tragically died in Minneapolis police custody, on May 21. And yet despite the widespread civil unrest, this morning’s job market surprise of 2.5 million jobs created in May has capped a week with markets ticking higher throughout. This 50-day rally on the S&P 500 has outpaced any such prior period for the last 50 years. We are no doubt witnessing strong resilience of the U.S. economy. While this is proving to be a very painful period of adjustment in American history, and may yet drive an extended period of policy reform, Barron’s provided a succinct analysis this week as to why civil unrest has not been a detractor to market performance.[1] That lack of reaction isn’t surprising in one regard: Wall Street filters most news through the lens of share prices. It’s a voting machine on the future of corporate profits…The first thing Wall Street does when something new and unexpected happens is look to history for precedents. In this instance, that exercise sends analysts back to painful periods including President John F. Kennedy’s 1963 assassination, the 1965 civil rights march in Selma, Ala., the large 1967 Vietnam War protests in Washington, D.C., the 1968 assassination of Dr. King and the 1992 L.A. riots which broke out in the aftermath of the acquittal of several police officers put on trial for beating Rodney King. What does the reaction to these events show? Historically, the market looks past most civil unrest. Stocks aren’t significantly more volatile in the months following any of the events listed. What’s more, the S&P rose in each year under study. Annual gains, excluding dividends, ranged from about 4% to 20%. At the same time what started as a rally concentrated in a few technology and health care names, more recently has achieved broad-based participation, with 96.8% of S&P 500 companies now outperforming their 50-day moving average; and the equal weight S&P 500 index, which significantly lagged early on, is now since the beginning of the quarter in-line with the more widely-recognized, market cap weighted S&P 500 index. In addition, we are seeing small cap stocks outperform large cap stocks, with the Russell 2000 index up 26.2% versus the S&P 500, up 21.3% through the quarter. Finally, we are seeing a shift in leadership from growth to value companies, with the large cap value index (Russell 1000 Value) outperforming the large cap growth index (Russell 1000 Growth) nearly 2 to 1 for the month, led by the financial sector. As we noted last week, an earlier shift to small cap companies in client portfolios has added value. Maintaining a neutral weight between value and growth is similarly starting to add value within the portfolio. Fixed Income ReviewThe short end of the yield curve continues to remain fairly range bound set by the Fed Funds rate of about 5 basis points (0.05%), but further out on the curve you are starting to see steepening. There are a few factors that play into this. The curve is steepening as optimism builds as states reopen and public health concerns continue at a rate the health care system can handle. As the yield curve continues to build in future economic growth, it is also building in some additional inflation. Although inflation expectations continue to remain muted, the long end of the curve is starting to price in some drift upwards. Long-dated treasury bonds have also become slightly less desirable as the U.S. continues to borrow to fund the massive economic stimulus. The Federal Reserve recently began to openly discuss the concept of yield curve control, which it last used during World War II. This policy calls for the Fed to set targets for the treasury yields and buy as many bonds as necessary to maintain those levels. From initial Fed comments, it appears they will target the shorter end of the curve but leave the long end to float freely. The Fed has been pulling back as an active buyer of treasuries reducing their net purchases, which is also putting additional pressure on long treasuries. In the end, we believe a steeper yield curve is a healthy sign, if done in a gradual manner. If rates on the long end rise too quickly, it will tighten financial conditions, and we would expect the Fed to step back in. The Fed has various tools and has shown they are not afraid to adjust policy when market conditions warrant. In the meantime, we remain duration neutral to the benchmark, and continue to emphasize quality in the portfolio. |