FOR THE MONTH ENDING JUNE - 2020
June Market Commentary: FOMO Rules The Day
All major asset classes were up in June as investor optimism increased.
The S&P 500 rose 1.8% in the month but is down 4.0% year-to-date. Although the truly large market swings lessened, there were still eleven days where the S&P 500 moved more than 1%, of which eight were negative and three positive. Note: the market declined 5.9% on June 11th as fears over increasing COVID cases intensified.
Fixed income markets were positive in June, with all bonds up except for mortgage bonds, which were down slightly. Fed commentary during the month assured investors that they intend to continue to support markets for as long as it takes.
Gold was up nearly 3% in the month, and is up over 17% year-to-date, as it continues to benefit from investors looking for a safe haven.
Oil continued its recovery, climbing nearly 12% in June but is still down over 27% year-to-date. Expectations are that OPEC will continue to maintain its production cuts into August, providing some support to oil markets.
The S&P 500 is almost flat for the year. That is astonishing performance given that June saw a massive uptick in COVID cases in the South and West, parts of the country that until recently, had not been seriously affected by the virus. Let’s take a look and see if we can figure out why.
The market’s performance would seem to indicate that the COVID pandemic is almost over. We are nearly back to the stock market highs seen earlier in the year, pre-pandemic, when it appeared that the economy was continuing to build on past gains. And yet, the pandemic appears to be getting worse daily. Why are investors so optimistic?
The initial euphoria seems to be due to moves by the Fed to stabilize markets. The unprecedented liquidity injections harken back to the 2008 financial crisis when Fed Chief Bernanke used the Fed’s balance sheet to stabilize panicking markets. Powell’s moves this time around dwarf that of Bernanke’s and on June 10th, he indicated that there will be no interest rate increases in 2021 and perhaps even 2022. Investors are fond of saying: “You can’t fight the Fed.” So, they aren’t.
The Fed’s efforts have clearly been successful. The yield curve has flattened in most locations. Low interest rates encourage investors to take whatever yield and returns they can get, wherever they can get them. Investors use the Fed Funds rate as a guidepost for the discount rate they use to value investments. A low Fed Funds rate equals a low discount rate, which increases the present value of future cash flows. The result is that asset prices get bid up.
Another factor that seems to have played a role here is that in May and early June, the signs were pointing to the worst being past with the COVID pandemic. Testing capacity had rapidly expanded, there were promising developments in the race to create an effective vaccine and the rates of infection in the worst hit parts of the country were declining. Given these developments, the focus quickly shifted to the steps to open back up, even in those places where the pandemic had yet to be brought fully under control.
Here, investors seemed to look past the near-term economic challenges to a time 1-2 years in the future when the economy may have more fully recovered to pre-pandemic levels. While the market is a forward looking, discounting machine, this outlook appears to be a tad optimistic. Usually, the market is said to “climb a wall of worry.” In the past two months, it has scaled the wall in a full-blown sprint and worry seems to be an afterthought, if it is thought of at all.
It has also come to light that retail investors may have played an outside role in stock market increases as the number of day traders has increased. Evidence of this influence can be seen with Hertz, the troubled car rental company, which declared bankruptcy on May 22. Despite the bankruptcy – which should have made the shares essentially worthless – the stock rose from $0.56 to $5.53 in early June as investors bet that the company could recover, which prompted the company to seek approval to raise $1 billion in new equity financing before suspending its plans when the SEC said it would review the deal. This is evidence of a frothy market, not a sustainable one.
At this point, the generally accepted principal that seems to be driving the market is FOMO: Fear of Missing Out. Unfortunately, FOMO is not a wise or acceptable investment strategy.
Or Is It?
In the face of such seemingly overwhelming positive sentiment, it may seem to be overly pessimistic or even foolhardy to resist, but resist, you must. Keep these key facts in mind:
COVID cases are on the rise. Recent days have seen repeated new single day highs in reported cases. Strength in economic data has tracked the infection rates in various states and as cases rise, economic data will likely weaken
There is the risk that the second wave of the pandemic, if it materializes, will be worse than the first. And remember: we are still in the midst of the first wave
The longer the pandemic lasts, the worse shape individuals, companies and government finances will be in
Even if/when the number of cases declines, it will be a gradual process for normal economic activity to resume and it will take a long while to return to pre-pandemic levels, if that is even possible
A vaccine may not be ready for months yet
Despite adding 4.8 million jobs in June, 14.7 million jobs have been lost since February
Unemployment is still 11.1%, the highest level since the Great Depression, and many of the jobs that were wiped out may never come back
Recent Continued jobless claims numbered 19.3 million, a slight increase from the previous week
Expanded unemployment benefits are scheduled to expire at the end of July
The list above is not exhaustive but suffice it to say that the market strength exhibits a decidedly optimistic outlook given the very real challenges we still face. Investors would be wise to consider these challenges when they find themselves getting caught up in FOMO. Some things are better to miss out on.