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The first half of 2020 has had the market responding to so many fickle variations.  Don't leave at half time folks, there is surely more to come.

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     Historically, June is a bit of a bore.  Year over year it tends to not do a lot over the long term regarding average returns. June, as a rule, has a tendency to depict a marginal loss of -.3%. So while June of 2020 was positive, it was by less than 1.5%.  Interestingly, historically during the average election year, June has an average return of 1.4% so June of 2020 was on the money in that regard. 

     But June this year was also definitely erratic. In just the first 9 trading days, the S&P 500 rose almost 6%, then turned and lost it all plus losing another 1.5%, again all within the first nine business days! In one specific trading day, the S&P index lost 6%. We then saw the S&P work it's way back to the 2.5% mark only to turn around and drop back down into negative territory. Then the rebound and that was enough to grant the market overall it's gain for the month.
     

    This chart shows the performance of the S&P index vs the Long-Term U.S Government Bonds for June. Bonds and stocks were virtually inverse of each other all month long and both basically gave positive returns so very close to one another. 

 

 

    The chart below shows the performance of the S&P index vs the Long Term U.S Government Bonds on a Year-To-Date basis. While stocks have rallied the last 70 days or so, bonds have definitely lead the way up in price all year long and so they don't have any catching up to do. This has lowered bond interest rates so we do want their prices to stay strong. One benefit of lower interest rates-lower mortgage rates and so you may be thinking,  it may be time to refinance.


"Despite the fact that casinos make hundreds of millions of dollars a year, I have never met a gambler who claimed to have been a loser." -Ned Davis

 

 

LOSSES
     No one likes losses in their investments.  This is one of the reasons we started building portfolios back in 1994.  There was just this burning idea that we didn't have to ride the big rollercoaster down into those large losses and create sleepless nights for us and our clients.  Everyone worried, wondering, watching, waiting,  and hoping things would get better. (By the way, "hope" is not a process and certainly not a good one to invest with.)

     While understanding no one likes losses, here is a number for you, -$165 Billion! The world's largest pension fund, The Japan Government Pension Fund, lost -$165 billion dollars as the pandemic set in.  Amazing that this happened in the country that has the oldest average age of citizens of any country in the world.  Japan also has the fastest aging population of any country in the world!


WHICH IS BETTER?

     Stocks versus bonds? First, you really have to look at your needs and your goals.  That is the most important part. But people wonder which is better quite often and tend to ask those of us in the industry our thoughts on the subject.  Most people tend to side with stocks, even before they ask, but that could be a very costly mistake sometimes, but certainly not always.  So, which is it? It depends on who you talk to and when you talk to them.

     Stocks did quite well in the 2nd quarter of 2020 and outperformed bonds by a wide margin. Bonds basically held their own, not really rising or falling overall in the quarter.  But here is the reality of one versus the other.  Stocks did outperform bonds in the 2nd quarter but year-to-date, stocks STILL trail bonds by 24%!

     When we look at stocks, some of the worst-performing stocks in the 1st quarter of 2020 were also some of the best performers in the 2nd quarter. The problem with stocks is they were overall such poor performers in the 1st quarter, they have had to rise about 50% to just get back to break even (which they have not done yet).  On the other hand, high-quality government bonds did so extremely well in the 1st quarter. Therefore the fact that they were flat in the 2nd quarter has not really hurt their outperformance.  In fact, during the 1st quarter, there was almost a 50% better performance of government bonds versus stocks. 


+48%!

     Everyone is aware of the tough times many businesses are facing today. No secrets here.  But, do you realize that last month we saw business bankruptcies jump for 48% over the same month last year? 744 businesses filed for Chapter 11 bankruptcies last month. 

NOT SPENDING

     Consumers are not spending. Last month, credit card usage dropped by just under 20% when measured by the total dollars spent! This is an eerily beneficial change. When we entered 2020, consumer credit card debt had just crossed over the $1 Trillion mark.  Then suddenly consumers made some massive payments on CC debt and the total dipped below $1 Trillion. Then consumers dropped their spending habits in April and economists expected April credit card spending to drop $14 billion.  Instead, it dropped by $64 billion.  Not to worry though, American consumers have a habit of NOT curbing their spending for long.

HOUSING     

     The number of housing starts fell last month versus one year ago. Permitting activity for newly-built homes fell 8.8% to a seasonally adjusted annual rate of 1.22 million homes. Housing starts fell short of the consensus forecast of economists polled. Approximately 23% of the home construction labor has been laid off.

Still down 78%

    A 78% drop! Global air travel is steadily rising but it is still down 78% from a year ago. U.S. airlines are currently operating at 20% with and that is where they wanted to be for July/August - the distance between what IS reality for the airlines and what they planned is getting smaller!
 

 

JOBS

    June added 4.8 million + jobs.  With all the millions of layoffs since late February, jobs being added back into the economy is a welcomed relief to so very many.  While we still have a long way to go, the 4.8 million + in June is a great leap forward and much larger of a jump than forecasters had called for.  We add the plus in there since the DOL did come out and say that the original number did not include 75,000 education jobs which were added in June. (Some wonder why so many education jobs were added if children will still be homeschooled in the fall).  We feel sure these are likely in the technology area to help with online education.  One educator I spoke to said the biggest push back to learning online has been the staff struggling with all the technology interlaces needed to do a great job at online teaching. 


     However, Florida has now mandated that all brick and mortar schools receiving state and federal funds must be open and providing face to face instruction five days a week beginning in August.  This mandate is only in place for the first semester of the school year. Are there other states that will take similar actions?)
   
     Please let us know if you would prefer an online appointment with us rather than face-to-face. We have been doing them for years and can do any reviews or meetings online if you would like us to.


We remain watchful. 


Ken Graves, Chief Investment Officer

Capital Research Advisors, LLC
 
 

 

CaptialResearchAdvisors.com 

Capital Research Advisors, LLC, 
4185 B Silver Peak Parkway, 
Suwanee, GA 30024 
770-925-1000 
800 -767- 5364 
All rights reserved

 

Mortgages - We said the rates would start declining.  They declined some, leveled off for a bit here but will start lower again soon.
Watch rates, please!



"As you can see in the chart above;  Mortgage rates were in a steady decline and now we see that they will be dropping again soon but have flattened out some. Our outlook is that there will be a quite noticeable drop in rates between now and the end of 2020.  Waiting for the latter is probably better.  They will move steadily lower as time marches forward toward the end of the year and maybe even into early 2021."
 
     Please note, refinancing of homes is slowing.  There is no valid reason for this since rates are AT ALL TIME LOWS.  While we do think rates will drop further, people often refinance in droves when rates fall.  Not this time though.  Lenders are making it tougher and are using tighter lending standards than they had previously.  
 
 
 

Housing?
     

    Housing drives a large segment of the economy.  Though many people will renovate houses when the housing market is slow, new homes drive the economy in big ways and in big waves. 
 

 

     So today, though many people are concerned about their work environments and how long it might last or whether they will be able to get back to work soon, with interest rates at historical lows and moving lower, housing markets are primed for activity. These super-low interest rates are a great "bait" to get people who can buy, to buy. 

     Another motivator, besides super-low rates, is coming into the market likely beginning in about 90 days and will likely persist into early 2021, maybe longer.  Here is the motivator.  As of the end of June, there are 4.3 million homeowners who are past due on their mortgage payments. This portends a brewing problem for these homeowners and for the mortgage companies who have loaned out money on these homes.

     Let's assume that about two-thirds of these homeowners end up in real trouble and lose their homes.  So 2.86 million lose their homes.  At the peak of the last mortgage crisis (2010), we had 2.9 million lose their homes and we can all remember what a huge fiasco and financial washout that was.

     This time might be different though (I actually despise this saying as it relates to markets since people often think "different" is going to be better for them.)  Anyway... If, (and this is a big IF), banks learned anything the last time around, they might begin to try to sell those foreclosed on houses faster since the longer they own them, the more it costs the bank to get rid of it. 

     Remember, banks are really NOT in the housing business. Banks are really only in the lending business-handing out money to make their profits there.  Lending is a non-tangible business, meaning you can't actually hold a loan in your hand and housing is a fully tangible business!  You can put your hands on a house and walk on to the property and stand on what you own.  So if someone (bank) is in the non-tangible business and then suddenly, they are thrust into the tangible business, they are very poorly equipped to handle tangibles.  This is really a large part of the reason banks got so crushed and many became insolvent a decade ago.  As lenders, they were used to lots of money coming in on all those loans and suddenly the banks had to start paying money out for foreclosures,  legal fees, title work, renovations/repairs, marketing of those houses, real estate commissions and the like. So banks were caught, less money coming in and tons of money going out until those houses were GONE.


     So maybe, just maybe, this time the banks may try to hold onto those houses for a shorter period of time, lose less money on them, pay out less money on them while they hold them a shorter period and come out somewhat better in the long run. Let's hope so since here is what happened the last time around.  All that extra debt that people could not pay for which caused them to lose their homes.  All that debt really got shifted away from individuals and directly onto the shoulders of the government. All of it. 

Guess whose shoulders the government stands on?

 

 

(PLACE A MIRROR HERE)    

 


     

 

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Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
770-925-1000
800 -767- 5364
All rights reserved







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