What if it Returns…
Updated: May 11, 2020
Although the spread of the coronavirus may have slowed, with hopes of eradication by summer. What if it, “it” being the coronavirus, returns? Experts, including John Hopkins University Professor of Nursing Jason Farley believes a second wave is not only possible, however may be exacerbated later this year with the onslaught of a heightened cold and flu season. We believe the first quarter has shown that conservative investors have few places to hide, as investments in real estate, commodities, and fixed income, typically known for low volatility and uncorrelated to the broad market, witnessed record volatility. In this month’s issue of The Samra Report we discuss our views for the remainder of 2020.
In an interview at the Economic Club of Washington, D.C., Federal Reserve Chair Jerome Powell stated that he does not see a recession. A statement echoed by Treasury Secretary Steven Mnuchin, who “sees the stock market riding a wave of demand once the outbreak is contained”. We believe the term forced recession has been used to help alleviate the pain of losses and reassure investors that a recovery will be swift. Investors would be wise to understand that a forced recession is still a recession, regardless of how we arrived here.
The federal government has acted swiftly in creating a stimulus packages, dubbed as the kitchen sink, although the effectiveness of the execution remains questionable. The U.S. response is plagued with complexity and has resulted in banks creating a funding bias towards the largest loans, leaving many smaller businesses in limbo. In comparison, Denmark has put a plan into place to cover 75-90% of all compensation over a 3-month period, under the clause that employers do not lay off their employees, resulting in a nepotism free economic environment. At Samra Wealth Management, we believe the U.S. stimulus package will need to allocate an additional $3.6 trillion to 157 million, working class Americans.
Online retailers have benefited through increased sales; however, investors would be wise to understand the economic make-up of our nations GDP. 68% of U.S. GDP is derived from consumption spending, with an economy on the brink of shut down, a minimal decrease in Gross Domestic Income will likely lead to a downshift in consumer confidence, proving demand is a function of income. In the near term, the case for economic expansion is correlated to population growth and productivity. With the nation on lockdown, the script for economic expansion is flawed.
Consumption spending is not only a function of household consumption; however, investors should understand that similarly corporation are likely to limit capital expenditures throughout the remainder of 2020. We expect a drastic shift in supply-chain, with less reliance on China and institutional buyers to diversify supplier dependency.
The guidance script of most wall street firms is likely to be rewritten for the remainder of 2020. At Samra Wealth Management, our guidance remains unchanged, and our sector rotational philosophy stands to benefit. As of March 31st, Technology as a sector of the S&P 500 witnessed the lowest declines, we expect to see industry consolidation and shifts in supply chain, however an increased dependence on technology suggest this sector will outperform. Healthcare declined 12.7% in Q1, much less than the S&P 500 with a loss of 19.6% during the same time. Although elective surgeries have been delayed, healthcare is one of the least expensive sectors, and is an area that has outperformed in prior bear markets. We expect a shift in supply chain to benefit U.S. manufacturing, an area of strong balance sheets and plenty of defensive names. Financials in the intermediate term are likely to benefit as domestic debt per capita increases, trading volumes are likely to increase, and SBA loan products shielding them from negative exposure. However, the handling of the SBA Paycheck Protection Program may come under scrutiny, resulting in larger banks losing out to community banks.
The question investors should be asking is, can your portfolio sustain a similar shock, and what are you doing to mitigate portfolio risk.
Disclosure: All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Investing involves risk including loss of principal. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.
*Amended May 3rd, 2020.
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