First and foremost, we hope you and your family are safe and sound. We hope you enjoyed your July 4th holiday and were able to celebrate our country's independence. This summer, even though we do not have the usual sporting events to keep us occupied (at least not yet), we will find other fun activities like hiking, gardening, BBQing, reading and spending more quality time with our families. We hope you enjoy your summer.
Please find our commentary and your report in the following pages.
What a decade so far! We have been through a year's worth of crisis and crisis intervention in just a few months. It seems that many people are starting to fray at the edges after going through lockdowns, partial re-openings, and re-opening reversals in 21 states. On the positive side, the Feds liquidity injections (monetary stimulus) and Congress' support (fiscal stimulus) programs have allowed the stock and bond markets to stabilize and enjoy a swift re-bound from the March lows. The economic data in many areas have bounced strongly from March, but they still have a way to go to get back to where they were in January. According to Fed Chairman Powell, "the path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus". Powell added that "a full recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities." We agree with the Fed Chairman on these points.
First, the good news: food, e-commerce, and some technology are the big winners. Other sectors such as building materials and recreation (which includes sporting goods, hobby, books and music stores) have also been positively impacted, and employment is steady or up in these industries. Unfortunately, the losers outnumber the winners and there are many businesses that are not going to survive this crisis. The Wall Street Journal estimates that about half of the 23,981 restaurant closures in the U.S. will be permanent. Additionally, 35% of the 27,663 shopping and retail closures, 24% of the 15,348 beauty and spa closures, and 24% of the 5,589 fitness center closures are going to be permanent as well. Restaurants alone comprise nearly 15% of all U.S. employers.
It appears we are not going back to normal at least until late this year. That is a best-case scenario and will only apply if we get the spread of the virus under control. The most likely scenario is that it will be 2021 before a vaccine can be successfully developed, tested, produced. That means many more months with masks, social distancing, reduced travel, and no large gatherings. The best-case scenario is still disastrous for big parts of the economy. While the jump in retail sales in June was celebrated by the markets, keep in mind that we have only recovered to 2015 levels in terms of GDP.
The economy is currently being sustained by Federal government spending and Fed policies. As of this writing there are 19.5 million people who are continuing to receive unemployment benefits, all of whom are receiving at least $600 a week. Many businesses are staying alive only through the favorable loans from the Paycheck Protection Programs (PPP). The terms of the PPP loan (to receive loan forgiveness) require that loan recipients need to keep their employees on payroll for 8 weeks. For many PPP recipients this time period will be up soon, and this could possibly result in another wave of layoffs. U.S. Real Personal Incomes rose last quarter but would have been down around -9% without Uncle Sam's generosity. We do expect some additional government support, possibly to the tune of $1 Trillion. However, after the 4.8 million new jobs that were added last month, Congress may be tempted to wait. We are cautious because we all know there is no free lunch.
There are several significant dates between now and the end of the year:
- June 30 - end of credit card and auto loan forbearance
- July 1 - State and local budgets go into effect (many with significant cuts)
- July 15 - Federal tax returns due
- July 31 - enhanced unemployment program ends
- Sept 30 - student loan forbearance ends
- Oct 31 - mortgage forbearance ends
- Dec 31 - PPP grace period ends (this was already extended once)
"It's tough to make predictions, especially about the future." -Yogi Berra
There are a lot of assumptions that we used to take for granted, and that are no longer holding true. We cannot travel as easily, go to a restaurant, or visit friends without wondering about our health. Spending will not fully recover until people feel safe. Where does that leave us?
Markets have held up amazingly well, but we think there are 4 factors ahead of us that may result in market declines and increased volatility in the coming weeks: 1) the Fed has pulled back on the amount of daily liquidity it is adding to markets, 2) corporate stock buybacks are collapsing, 3) bankruptcies are accelerating, and 4) companies are going to start reporting the reality of their Q2 earnings starting next week. Demand driven recessions cannot end until demand returns. Something must restore consumer spending.
Another challenge for the economy is that when faced with uncertainty, consumers tend to save more and spend less. While increased savings is generally a good thing, as we have seen in past recessions, the increased savings and reduced spending is a self-reinforcing cycle for the economy as a whole. Even if the government replaces their lost income through unemployment insurance, people know that is only for a limited period. There are two things we can say for certain: the coronavirus is continuing to spread, and concerned consumers are spending less money because of it.
There is one simple thing that we can all do that will help address these challenges: wear a mask in public, and practice social distancing. We can live with the virus risk, but not when a noticeable part of the population acts in ways that others perceive as reckless. Even if you do not believe mask wearing works, it the perception that counts. The successful results from other countries tell us that near universal mask usage would help the economy more than another multi-trillion-dollar stimulus package would, it would work faster, and it does not add anything to the national debt.
Where are we in the business cycle? That largely depends on where we are in the virus cycle. We think we are headed into a period of stagflation, where growth is flat to declining and is coupled with rising inflation. The Fed would like the to reduce the strength of the dollar relative to other currencies. The problem is that this would increase the cost of goods for the average U.S. consumer on the things that we "need" (food, energy, gas, medical care, and shelter) and would have the opposite impact on the things we "want" (such as a new 60 inch TV).
We expect the government will continue to support the large number of unemployed for some time. However, we do not know if it will be enough to keep the stock and bond markets elevated at current levels as the virus continues to run its course. In this environment, the sectors that we think are attractive, and where we plan to focus additions to portfolio allocations are technology, biotech, utilities, real estate (mainly data centers and cell towers for their predictable revenue streams), TIPs (treasuries with inflation protection), gold, and we will continue to hold U.S. treasury bonds for their inherent safety. As the relative strength of the U.S. Dollar falls over the ensuing months, emerging markets will become attractive, assuming their virus situations are under control.
We know that stocks, and at times bonds, can be unpredictable over short periods of time. We take precautions designing and implementing your portfolio strategy to reduce some of the volatility, and more importantly, to keep you on track toward your financial goals. We will continue to monitor the global markets, making portfolio changes as necessary.
Please stay safe and well.
The Silicon Valley Wealth Advisors Team
Tracy Lasecke, CFP®
Chris Duke, CFP®
Scott Ponder CFP®
Scott Yang, CPA, CFP®
Personal Notes @ SVWA:
Roberta and Tracy: ventured out into the world delivering a motorhome they sold to some friends. They spent one night at an RV park in Barstow, California then pressed on the next morning to Surprise, AZ where Roberta's Mom snowbirds from Wisconsin. They met the buyers near the Phoenix airport where they delivered the RV. They flew back to San Jose a few days later. Both airports had few travelers as did the airplane. Protocols were maintained and they felt safe during what is now considered an "adventure".
Chris and family: we feel very blessed to be safe and have, thus far, not had any loved ones affected. We made the most of the slower pace of life and spent a lot of time together as a family. This would not been possible given our busy schedules as recently as February. We had dinner together almost every night, walked the dog as a family every evening, watched movies together, and discovered that the kids outshine the parents in Pictionary almost every time we play.
Scott Ponder and Erin: We have taken advantage of the quiet weekends to work in the garden. Who knew there were so many different projects you could do? Erin has recently found a British garden show named "Gardeners World" with amazing photography, that is giving her lots of ideas for improvements to implement over the rest of the summer. We do stop at 5:00 each Saturday for the weekly Zoom call with all the family up and down the west coast from Alaska to San Diego. It’s great touching base with everyone.
Scott Yang and family: have been sheltering in place and enjoying more home cooked meals and board games. Scott took his bike out of the shed and is taking regular rides to the Los Gatos creek trail.
Mo and Family: celebrated two virtual graduations, go Class of 2020! At first, we were a little sad that the graduation would be virtual. However, it was wonderful! I was able to hear them call my son’s name, stay out of the hot sun for the ceremony, and they froze his picture on the screen. I was able to get a screenshot and send it off to the relatives. We are all staying home and enjoying the time I take to polish my baking skills.
Danielle and Rich: have been busying keeping their 4.5-year-old busy during SIP. We are very happy we can check out library books again. Danielle has been using the lack of playdates to make progress on studying for the CFP exam.
Kelsey: I have been sheltering in place and spending my free time catching up with small projects around my house, catching up on any shows on Netflix from my queue, and exploring areas to hike.
Jared: I hope everyone has been safe and healthy. With my Spring semester being cut short, my biggest challenge since early March was transitioning to online classes. I eventually found my groove and was able to finish the school year strong and will now be heading into my senior year at San Jose State. This summer I have been able to work remotely back home in Fresno, but I am eager to get back in the office with the rest of the team.