Can We Trust May’s Market Recovery?

By Dean Barber

May 29, 2020

Can We Trust May’s Market Recovery?

There are a lot of questions out there today. Can we trust May’s market recovery? Is the worst behind us, or is there a second wave of a market down? Will we see the volatility come back? What about Coronavirus? Where’s that headed? What’s our economy going to do? Join me along with CERTIFIED FINANCIAL PLANNER® Jason Newcomer for this month’s economic update.

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May Market Recovery

DEAN: Jason Newcomer, CERTIFIED FINANCIAL PLANNER® with Modern Wealth Management, thanks for taking the time to share some of your insights on what’s going on. 

May was an amazing month for the stock market by all accounts, not just domestically but globally. We saw most markets lift.

JASON: Yeah. 

DEAN: Why do you think that is? 

JASON: I think we’re starting to see a lot of the Coronavirus cases begin to level off. Flattening the curve has been working, at least domestically in the US. We’re starting to see deaths per day decline, which is good news. There’s also a lot of optimism and hope surrounding some vaccine makers in the progress they’ve shown in trials.

DEAN: Alright, let’s go through some of the numbers on what we’ve seen in different sectors because it hasn’t been like every sector has done amazingly well. Some sectors have done better than others. In fact, some virtual companies like Zoom, that were doing really well during all the stay-at-home orders, are now falling. And I think a lot of people were piling money into those and maybe at the wrong time. 

JASON: Yeah, there’s a podcast I was listening to earlier today that Zoom’s market cap is now equal, maybe just slightly larger than the five major airlines combined. 

DEAN: And that’s because these airlines have gotten killed. Right? Stock prices are way down, but Zoom’s prices are way up. Which one do you think is worth more? I mean, as far as the reality?

JASON: Good question!

DEAN: A lot of that will relate to what the appetite for travel will be after COVID-19. 

JASON: It’s starting to pick back up, but it’s still well below where we were a year ago. 

May Market Recovery – Sector Performance

Can we trust mays market recovery - Sector Performance May 2020

Figure 1 | Source: YCharts

DEAN: All right, let’s take a look at the different sectors in the US in Figure 1. Jason, walk us through this chart. What are we looking at? 

JASON: Yeah, so this is for May through today, May 27, 2020. The energy sector is leading the US stock market, driven in large part by the rebound in oil prices. Which we’ll talk about later. 

Some of the more typical defensive sectors like utilities and real estate are lagging as we’re starting to see the economy reopen and the market rebound. So, some of the more aggressive names that have been hit harder in this pandemic are leading the way back up. 

DEAN: So consumer discretionary, things that people might do, not their normal staples. You can see consumer staples at the very bottom of the list. I think that’s because the consumer staples, basically held up better than most during the market decline in February and March. 

JASON: Right. 

May Market Recovery – Global Markets

Can we trust mays market recovery - Country Performance May 2020

Figure 2 | Source: YCharts

Let’s look at what’s happened around the globe in Figure 2

JASON: We can see the markets rebound, really around the world. The US is right here, kind of in the middle of the pack, for May up about 6.41%. 

DEAN: Who’s the pink one down at the bottom? Is that Hong Kong?

JASON: Yeah, that’s Hong Kong, and there are certainly some geopolitical issues still at play over in over in Asia. Those countries like China, Hong Kong, are down at the bottom. 

DEAN: Even though, everybody has had a nice rise. Obviously, all the markets around the globe got hit pretty hard. In fact, I think some of the international is down far more on a year to date basis than what many of the domestics are.

JASON: Absolutely. The US large-cap stocks are still by far the best-performing stocks around the world. 

DEAN: And as of today, we’re off on the large-cap, that being the S&P 500, somewhere around 10%. The Dow Jones is down maybe 14-15% today. 

JASON: Yeah, that’s off of the highs from back in February.

DEAN: The technology sector has done pretty well. The technology sector might be a little bit positive on a year to date basis. 

JASON: Yeah, some of those stocks are. 

DEAN: Yeah. So it’s been kind of all over the place. At least, it hasn’t been like a 2008 type of crisis, where every single sector and everything just got killed for an extended period.

Could Federal Stimulus Have Impacted May’s Market Recovery?

Can we trust mays market recovery - Federal Reserve Balance Sheet vs SPX

Figure 3 | Source: YCharts

Let’s take a look at what’s happening with the federal stimulus in Figure 3. You’re looking at the total assets held by all Federal Reserve Banks going through the roof, right? All of the stimulus packages the government has passed, and now they’re talking about another $3 trillion package. 

I don’t know if we’re going to need that or not. I think we need more time, maybe another three months before we pass another stimulus bill. We’re getting some good things happening in the market. It’s interesting that as soon as the stimulus began, we can see the turnaround in the market. 

So that begs the question, is the stimulus the reason for the market rebounding? Is it the market rebounding because it knows it has the support of the federal government? 

I don’t know if that’s the answer. Jason, what do you think? 

JASON: I think that there are several factors at play. I don’t think you can point your finger at one thing and say, “That’s the cause of the rally that we’ve seen from the March lows.” However, certainly, the Federal Reserve was quick to act. 

They stepped in, in a big way. And that’s had a positive impact on the market. 

DEAN: Yeah. Right, and we wouldn’t see global stock prices rising just because of stimulus here in the United States. 

JASON: In the crisis that we find ourselves in, indeed, a health crisis more than a financial crisis. Now, it is becoming a financial crisis when people lose their jobs and can’t pay their mortgages can’t pay their rent. But you can’t just say that the financial stimulus is going to be the sole reason that we see a turnaround in the markets.

How has Oil Done During the May Market Recovery?

Can we trust mays market recovery - Brent Crude Oil Spot Price May 2020

Figure 4 | Source: YCharts

DEAN: What do we have next with Figure 4? Oil!

JASON: Yeah, so oil has had a nice rebound off of the April lows.

DEAN: What’d we get down to about $15 a barrel?! 

JASON: Yep. So we’re about double that right now, as we sit here at the end of May. 

DEAN: Okay. Often when you see that you think, “Well, is that a precursor of summer demand increasing?” Do we believe the travels come on back in the airline industry and the cruise industry? Are people going to get out and start doing things? Are they going to feel comfortable? Or does this have more to do with the Saudis and the Russians? 

JASON: Again, I think it’s probably both of those things, but perhaps more so for the Saudis and the Russians. At the beginning of the year, we didn’t know there would be an economic shutdown, and demand for oil would drop off a cliff. We saw the price decline as the Russians and the Saudis had a price war on supply.

COVID-19 Cases Per Day During May Market Recovery

Can we trust mays market recovery - US Coronavirus Cases Per Day May 2020

Figure 5 | Source: YCharts

Now we’re looking at United States COVID-19 cases per day in Figure 5. Since about April 25, 2020, we can see a pretty steady decline. 

JASON: Yeah, I think the stay at home orders and social distancing, not making a political statement, but they have had a positive impact in terms of the number of cases per day. We also see that in terms of the number of deaths per day below in Figure 6

COVID-19 Deaths Per Day During May Market Recovery

Figure 6 | Source: YCharts

This is really what flattening the curve was all about. It wasn’t to stay home until we find a cure, right? We don’t know if there is going to be one or how long it will take to develop. So, as long as the deaths per day and hospitalizations, stay low, hopefully, we see hospitals continue to be able to meet the number of new patients. 

DEAN: I think the vast majority of hospitals are struggling on the other side of that too, Jason. Some have so few COVID-19 patients, and yet they’re not allowed to do elective surgeries and all the other things that make hospitals money. And so you’re seeing furloughs of doctors and nurses. I have a brother who is the CEO of a hospital in Hastings, Nebraska. I interviewed him on America’s Wealth Management Show a couple of weeks ago, and he has some great insights on that subject. The orders have done a good job of flattening the curve, but maybe it’s a little overboard, and it’s time to get people back out and start doing things? I think that’s what we’re starting to see also.

Unemployment and May’s Market Recovery

Figure 7 | Source: YCharts

Next up here is Figure 7, continuing jobless claims and the unemployment rate. I mean…

JASON: Staggering! 

DEAN: It’s, I mean…these numbers are off the charts. We’re sitting at a 14.7% unemployment rate. I don’t think we’ve seen that since the Great Depression. 

JASON: Nope, these are numbers that we’ve not seen in any of our lifetimes! 

DEAN: 47% of people who work in the United States work for small businesses. All right? The best thing that passed in the CARES Act was the Paycheck Protection Program. The government gave small businesses loans that can become grants if, by June 30, 2020, they can show that they still have the same number of employees as they had when COVID-19 began. 

There was an application process businesses could go through. Many of these small businesses are going to be hiring people back in rapid fashion. When we come back at the end of June, we should see a significant drop in that unemployment rate. That’s my thoughts. What do you think?

JASON: Yeah, that’s certainly the hope. 

DEAN: I think that’ll help a lot of these small businesses stay in business, and it will allow them to keep the same employees and get those people back to work. 

JASON: One of the things that’s interesting, though, when we look at unemployment, and we look at these numbers, and you think, “How in the world can we have numbers like this come out month after month, week after week with the initial jobless claims, and have a market that’s rallied more than 30% since the March lows?”

Comparing 2008 Unemployment to Today

Figure 8 | Source: YCharts

DEAN: Right! Figure 8 is showing you the 2008 financial crisis. Walk us through this chart, Jason.

JASON: When you talk about the unemployment rate and jobless claims, they are lagging versus leading economic indicators. So they’re looking at things that took place either last week or over the last month.

So when we go back to the 2008 financial crisis, looking at the orange line, the market bottomed in March of 2009. But during that timeframe, unemployment continued to rise over the next several months. From March 2009 through the summer of 2009, another million people lost their jobs. But over that same timeframe, the market rallied about 50%. 

We saw something similar happened, but we’re on two totally different scales, right. In 2009 we were talking about a million people over the course of three months. Now we’re getting almost two to four million people every week filing for unemployment. 

Can Companies Forecast Earnings for the Rest of 2020?

DEAN: The interesting thing is that the stock market does tend to look ahead, right? I think it was easier for the market to look ahead in 2009 than it is today due to the uncertainty that we have over COVID-19. The most significant uncertainty is: How quickly are people going to get out and resume that normal activity? 

70% of our total gross domestic product is consumer spending. And so unless that consumer is comfortable to get out and do things, I don’t think we’re going to see the GDP numbers get back to where we need them to be. In fact, I think it’s gonna be almost impossible for companies to forecast their earnings. And the stock market usually is moving based on the forward-looking projections for these companies. 

What did you tell me before we did this? Something like 30% of companies aren’t going to forecast. 

Some Companies Aren’t Even Going to Try

JASON: Yeah, that’s been the guidance. Yeah. FactSet had a report where they looked at quarterly earnings calls. Of the 474 companies in the S&P 500 that had calls, about a third said they were suspending guidance for 2020. So they don’t even know what’s going to happen. 

DEAN: No, they have no idea because they don’t know because again, the big 10,000-pound elephant in the room is: What is the consumer going to do?

We’ll start to be able to see that over the next couple of quarters to have a good idea of how comfortable people are getting back to normal life. The market seems to be indicating that people are just going to get right back out there and do it. 

JASON: But to your point, I don’t think that we’re in the clear yet. Whether it’s due to people relaxing on their social distancing over the summer, or maybe it’s more seasonal in the fall and winter, if we see that second wave, we’re probably going to see some more volatility in the markets. 

DEAN: Yeah, I don’t think the volatility has left us yet. We’ll have some surprises, and those surprises are going to continue to come at us on a weekly, monthly basis, at the very least. 

May’s Market Recovery, What Shape Can We Expect?

If we could somehow do a poll and ask: Over the last 12 months is the S&P 500 higher or lower? Is it in positive territory or negative territory? It’s actually up about 6% over the last 12 months.

– Jason Newcomer

Figure 9 | Source: YCharts

Figure 9 shows us the market year to date, you know 3200 to begin the year and 3000 now. It’s still a negative year so far, but far off the lows. Many people would say that this is setting up to be a V-shaped recovery in the markets. And if it’s a V-shaped recovery in the markets, that’s telling us that it should be a V-shaped recovery in the economy. 

JASON: Yeah. You almost have to have two separate discussions when you’re talking about the markets and the economy today because those two things aren’t on the same page today. 

DEAN: No, they’re not, but the markets are the leading indicator. Or could we be in a W-shaped recovery? That’s where we have a wave up, and then another wave down to retest those lows, and then finally, come out of that, which is more traditional. 

I think the most distinct V-shaped recovery that we’ve ever had in the market was October 19, 1987. 23% loss in a single day, right?

JASON: Yep! We had a V-shaped recovery back at the end of 2018, right? We saw the markets decline by about 20%, and within three months, we were back to where we were. 

Over the Last 12 Months is the S&P 500 Higher or Lower?

If we could somehow do a poll of the viewers of this video, and ask: Over the last 12 months is the S&P 500 higher or lower? Is it in positive territory or negative territory? It’s actually up about 6% over the last 12 months. And the level that we’re at today as of the shooting of this video on May 27, 2020, the market hasn’t been at this point since mid-October last year.

DEAN: Right. Now that’s the S&P 500, though, right? The Dow is in negative territory, and the small caps are in negative territory big time. 

JASON: Absolutely!

DEAN: International is also in negative territory big time. So, when people have a diversified portfolio, doing it the way they’re supposed to do it, they don’t see their performance match the S&P 500. They’re probably outperforming the Dow, they’re exceeding the small caps, but they’re underperforming the S&P 500. That’s sometimes is the nature of the diversified portfolio.

JASON: Absolutely. When your portfolio is diversified, you could always have something to complain about. In terms of the return, there is always something dragging on the performance. 

DEAN: But that’s the smartest way to do. 

JASON: Absolutely. 

DEAN: It’s proven time and time again that that’s the smartest way to do it – don’t get too concentrated in one area. 

JASON: Yep. 

Comparing GDP Growth and May Market Recovery

Figure 10 | Source: YCharts

DEAN: Let’s talk about GDP with Figure 10. It’s falling off a cliff. We’ve never seen GDP drop that fast. But again, it was the stay at orders. Everything got shut down.

JASON: Right, the economy shut on a dime.

DEAN: Yep. So it’ll be interesting to see what second-quarter GDP comes in overall. We should have some preliminary numbers on that at the end of July. It’s going to be ugly. I think it’s going to be far worse than what we see here at -4.8%. 

But again, the market would be telling us that those GDP numbers are going to turn around. When the stay at home orders go away, and people get out and start spending again that that GDP should start going up.

JASON: Right.

May Bond Market

Figure 11 | Source: YCharts

DEAN: Let’s talk a little bit about bonds in Figure 11. The 10-year treasuries are down at 0.66%. We had a timeframe where the one and three-month treasuries actually went negative. I think the Federal Reserve commented here a few weeks ago that they’re going to keep interest rates at zero until we get back to full employment. 

Full employment is 4% to 4.5% to 5% unemployment. Right? So I think we’re going to see continued low interest rates. The debt is a problem for people trying to get interest or yield on their investment, right? 

JASON: Yep. Yeah, the big problem here is people who need that yield, need that income on their portfolio, but you can’t get it in safe instruments like US Treasuries. So they’ll expand out to riskier assets in search of that yield. 

DEAN: Yeah. And sometimes those can be rewarding and sometimes they can be kind of ugly. 

JASON: Yeah. If you were overexposed to those assets in the first quarter, you certainly felt that in your portfolio.

DEAN: No doubt about it. 

Huge Demand for Homes

Figure 12 | Source: YCharts

One positive thing about the low interest rates is we see a massive demand for homebuyers. Take a look at Figure 12.

JASON: Yeah, it’s a good time to be refinancing.

DEAN: Yeah, but even the first time purchasers are up substantially. We’ve seen a huge rebound in the housing demand. So I think there are some bright spots out there. I would caution people not to get too optimistic and say, “Hey, the worst is definitely behind us and smooth sailing.” because I do think there’s going to be some volatility out there. 

So, Can We Trust May’s Market Recovery? Should We Remain Cautious?

The critical thing, Jason, as we always tell our clients is this, make sure that your portfolio fits in with your overall financial plan, right? If you’re not comfortable with the level of risk in your portfolio, discuss that with your advisor.

Keep that line of communication open and try to understand what’s going on? Absolutely. 

JASON: Now is an excellent time to reassess how much risk your portfolio has if you haven’t made any changes since we have rebounded from March lows. 

What was the experience like for you in February and March? How has it been since then? Have a meaningful discussion about risk in your portfolio and tie it into your financial plan.

DEAN: All right. Well, thanks for joining us here. Jason, thank you for being part of this month’s economic update. And as always, we encourage you to keep the lines of communication going. Stay in touch with us, call us with any questions, we’re here for you, and we wish you the best and stay healthy. Give us a call at 913-393-1000 or schedule a complimentary consultation below if you’d like to talk.

Dean Barber
Founder & CEO

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