INSIDE THIS EDITION:
What a Mixed Bag of Data Means for Investor Positioning
Weekly Global Asset Class Performance
Coronavirus / COVID-19 Resource Center
We continue to observe data that provides a very mixed picture of where the economy and markets may be headed. With very compelling bullish and bearish arguments to be made and the unknown effect that central bank stimulus might have in the long-term, we must acknowledge that this is as challenging an investment environment as we have seen in years.
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What makes it even more difficult is that there appear to be a fair number of market distortions that have undefined drivers with uncertain glide paths. In other words, we simply do not know at what point the distortions will give way to more normalized market outcomes or investor behaviors.
Case in point is a study that Man Institute did where they constructed an equal weight portfolio of “garbage” companies that had credit default swaps trading at more than 1,000 basis points as of April 1st. In other words, companies likely under considerable stress. Surprisingly, that portfolio has handily beaten the MSCI World Index since then, in what merely highlights how disconnected the returns have been from reality in some asset classes this year.
Another example is the move higher in the equities of companies that have filed for bankruptcy. In these cases, equity is often worthless, yet investors are bidding these stocks higher. Whether these instances are being driven by speculation on the part of investors looking for something to do while at home on quarantine, or simply a side-effect of Fed-supplied liquidity, we do not see this as healthy nor sustainable.
Possible distortions like this aside, there is a fair amount of data pointing to green shoots as COVID-19 runs its course.
Because so much of the US economy is built on the strength of the consumer, we can start there. What we see is consumer spending picking up after sharp declines, especially in certain categories like miscellaneous general merchandise and department stores. We infer this from the year-to-year change in credit card spending collected by Facteus which shows year-over-year gains in these retail spending categories. Although the data show that card spending at restaurants and lodging is lagging, even those categories are seeing spending trends moving in the right direction.
This has been corroborated in retail sales numbers for May which shows that US retail sales may be in the middle of a V-shaped rebound, although the next retail sales update will be helpful in confirming that view.
Manufacturing has similarly seen a V-shaped recovery off the lows. The Empire Manufacturing Survey, which provides a measure of general manufacturing conditions, saw a massive 48.3% increase driven by stable new orders, increased shipments, and dramatically improved future expectations.
For investors, the combination of these improvements and growing cash balances in money market assets could certainly bode well for risk assets as further stimulus and economic improvement could give way to more money being taken off the sidelines in favor of risk assets.
Of course, we must balance “green shoots” with the myriad of bearish data we are seeing.
For starters, the NY Fed’s Weekly Economic Index (WEI) which we have been closely tracking has taken another dip recently. This is a bit of a surprise because we have frankly expected it to continue improving, albeit at a slower pace than we saw immediately off the bottom. More concerning is that the dip is not factoring in a reintroduction of restrictions to combat a potential second wave of COVID-19. While we do not expect these restrictions to be as wide sweeping as the first round, they are certainly possible in select regions. Should that happen, we would expect economic activity to slow considerably from today’s levels and set the stage for more of a W-shaped recovery. While not our base case, investors would be wise to include it in their range of potential recovery scenarios.
As some investors know, US Restaurant bookings are a component of the WEI measured above, and there we are seeing a bit of a pull back. All of this after showing a respectable rebound when the economy started to re-open. In our view this reflects mounting COVID-19 cases across the country and rising caution among restaurant patrons.
Another case for bearishness which we have mentioned before are rising bankruptcy filings in consumer and energy sectors. If the incidence of distress increases from here, we could see a negative effect on sentiment, which could unnerve investors and lead to more volatility, especially as equities are thought by many institutional investors to be overvalued.
A compelling short-term headwind we also see supporting a bear thesis is the number of MACD sell signals across S&P 500 constituents. Where we stand today, 56% of S&P 500 stocks have seen a MACD sell signal over the last 10 days. This is the highest percentage going back to 1990 and certainly indicates some technical deterioration in domestic equities.
So what does all this mean for investors?
Our view is that despite the presence of positive data points there are certainly risks that support taking a very measured approach to risk. More specifically, it means investors should pay close attention to three things.
First, it means being well-diversified across asset classes and geographies. While there are times where correlations may converge, over the long-term, it has been shown that diversification is the only free lunch in investing, and we advocate a fair amount of it at this time. Second, it means adding selective tactical exposure where investors have a conviction that a favorable risk/reward exists. Lastly, and perhaps most importantly, is following discipline to both raise and deploy cash. This should let the emotions that often plague investors from clouding judgment.
Weekly Global Asset Class Performance
Over the last several weeks, the team at Avidian Wealth has attempted to keep our clients apprised of updates related to the markets, economy, government, tax, retirement, and other changes impacting us during this difficult time. As the Coronavirus (COVID-19) pandemic continues to spread, its impact on businesses and individuals has been significant. Stay up-to-date on the latest news with this Coronavirus Resource Center as your go-to resource for commentary, news, and other resources. Bookmark this article to check back regularly for updates.
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