Derek J. Sinani

Founder/Managing Partner

derek@ironwoodwealth.com

17015 N. Scottsdale Road Suite 235

Scottsdale, AZ 85255

480.473.3455

May 2020
Market Update
(all values as of 12.31.2020)

Stock Indices:

Dow Jones 30,606
S&P 500 3,756
Nasdaq 12,888

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.93%
10 Yr Municipal 0.69%
High Yield 4.34%

YTD Market Returns:

Dow Jones 7.25%
S&P 500 16.26%
Nasdaq 43.64%
MSCI-EAFE 5.43%
MSCI-Europe 3.14%
MSCI-Pacific 9.26%
MSCI-Emg Mkt 15.84%
 
US Agg Bond 7.51%
US Corp Bond 9.89%
US Gov’t Bond 8.92%

Commodity Prices:

Gold 1,900
Silver 26.52
Oil (WTI) 48.45

Currencies:

Dollar / Euro 1.22
Dollar / Pound 1.35
Yen / Dollar 103.24
Dollar / Canadian 0.78
 

Macro Overview – This Too Shall Pass

The phrase “This Too Shall Pass”, originated as a Persian adage. It was employed in a speech by Abraham Lincoln before he became the 16th president: “It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!”  This timeless phrase is as appropriate today as it was then.

Markets were encouraged with the announcement of reopening plans by various states and the probability of reigniting economic activity. Individual states started to ease restrictions and allow certain businesses to reopen for the first time since a state of emergency was declared on March 14th. Analysts and economists agree that it may be a gradual process of reopening the economy as normalcy is eventually restored.  Here in Arizona, the process appears to be cautiously underway.

Congress injected an additional $484 billion into the original Paycheck Protection Program passed in March. The program depleted its initially allocated $350 billion in stimulus funds in mid-April with over 1.6 million loans having been approved. Smaller businesses are the target for the stimulus payments. Funds critical to keeping small businesses open have been failing to reach smaller neighborhood establishments in time, increasing stresses for mom and pop small enterprises.  This additional funding will help stave off those stresses and is already showing great progress.  I have two friends (Arizona commercial contractor and a southern California surfboard designer) – both received this second round of assistance, thus increasing my confidence that much-needed funds are flowing to the appropriate beneficiaries and that we are on the road towards recovery and renewed prosperity.

Labor Department data revealed that nearly all of the jobs gained since the recession of 2008-2009 were essentially lost in three weeks. Revised unemployment claims through the end of April showed an increase to over 30 million people filing for unemployment since the pandemic shuttered the economy in mid-March. As the economy comes back online, the expectation is for most of these jobs to re-emerge as we move into the 3rd and 4th quarters.

Oil prices traded at historic lows in April due to oversupply. Lower gasoline prices will help the U.S. economy as economic activity resumes. This is an enormous cost saving for businesses and consumers alike.

 

 
This Too Shall Pass

Rates Stabilize Due To Stimulus – Fixed Income Update

The Fed pledged its continued support for the economy in the form of fixed income purchases including government bonds, mortgages, and various ETFs. The Fed also began buying corporate bonds in the open market, as well as continuing to buy unlimited amounts of U.S. government bonds and mortgage-backed securities. Lending facilities were also extended to corporations and municipalities helping to support the corporate and municipal bond markets. An increase in the money supply, as measured by M2, rose to over $17.2 trillion as of April 20th, up from $15.5 trillion on February 24, 2020. The rapid increase is a result of the massive fiscal and monetary stimulus infused in order to stem the effects of the pandemic – this stimulus will have a profoundly positive economic outcome.

Both short-term and long-term yields have fallen as substantial stimulus efforts have buoyed the bond markets. The yield on the 10-year Treasury bond ended April at 0.64%, with the yield on the 2-year Treasury ending the month at 0.20%.

Earnings Are Focus For Equities – Stock Market Review

Equities rebounded in April, recapturing some of the losses suffered in March. Stocks were enhanced by reopening prospects and stimulus efforts targeting businesses. All eleven sectors composing the S&P 500 Index experienced an improvement in April, a strong reversal relative to March. Health Care, Technology, and Consumer Staples were among the top performing sectors for the month. My expectation is for another period of stock weakness, followed by continued and durable longer-term progress.   The defensive cash we raised (pre-corona) will be thoughtfully redeployed to exploit these excellent future opportunities.

Earnings dominated equity markets as corporate earnings have become a barometer of the impact that the pandemic is having on the economy. Some analysts can’t explain the discrepancy between the economy and the stock market, with equities propelling higher in April as dismal economic data points to subdued growth.  In my experience, the stock market is a discounting mechanism, as such, it’s looking beyond today,  to a more favorable economic environment in 6-9 months.

Oil Prices Dropped In April – Oil Industry Update

Oil’s plunge in April was of historic proportion, falling below $0 per barrel for the first time ever in history.  Frankly, much of that occurrence was associated with a short-term trading anomaly and as usual, was overhyped by the media.   The collapse in U.S. oil prices, as tracked by WTI, fell as storage for crude oil became nearly completely unavailable worldwide.  Storage for crude oil has become increasingly scarce as the virus outbreak has led to a growing supply amid falling global demand, thus creating a glut of oil with minimal potential buyers.   On a positive note, the economy will have a boost with the price of gasoline expected to drop to new lows as the price of crude oil (WTI) fell below $10 per barrel in April. Lower crude oil prices have historically led to lower gasoline prices nationwide – which are a tremendous economic tailwind and cost-saving for consumers and businesses alike.  But let’s focus on renewables.

 
The IMF projects that inflation in the U.S. will increase in 2021 to 2.4%.

How The Housing Market Is Being Affected – Housing Update

A drop in mortgage rates to near historic lows has not been enough to offset a decline in demand for home buyers. The ongoing travel and socialization restrictions are inhibiting would be home shoppers from viewing and buying properties. Of the various factors influencing the housing market, employment is the most significant. No matter how low mortgage rates are, if someone is unemployed, they won’t be able to make a mortgage payment at all. Historically, rising unemployment rates have been detrimental to the housing market. The last housing contraction, as measured by the Federal Reserve’s House Price Index, occurred in 2008 and 2009, when unemployment peaked at 10% in October 2009. Some economists believe that an extended period of elevated unemployment will negatively impact the housing market.

In addition, the onset of forbearance allowance for homeowners as enacted by the CARES Act has put lenders in precarious positions. The Federal Housing Finance Agency estimates that there were roughly one million mortgages in forbearance at the end of April, representing 7% of government held mortgages by the agency. Lenders are sensitive to a deteriorating economic environment that may lead to additional foreclosures and bankruptcies – as such, today they are proactively working with borrowers – unlike the 2008/09 period.

How Inflation May Eventually Return – Consumer Sentiment

The enormous monetary and fiscal stimulus actions launched by the Federal Reserve and Congress entail billions of dollars in newly issued government debt, thus potentially driving down the value of the U.S. dollar. When countries issue and carry additional debt, the value of their currency tends to devalue relative to other currencies, thus making imports more expensive. Ironically, a weaker U.S. dollar also makes the U.S. more competitive as U.S. exports become less expensive worldwide. The FDA also reported that the recent closures of several large meat plants will not necessarily lead to shortages, but may result in fewer options for less expensive products. The International Monetary Fund (IMF) estimates inflation for countries worldwide based on various factors. The IMF projects that inflation in the United States will increase through the remainder of the year and again in 2021 to 2.4%.

Two macro economic occurrences signal a probable rise in inflation. The first is the rapid increase in the U.S. Money Supply, also known as M2, which includes money market funds, checking deposits, and actual cash. Historically, an increase in the M2 has led to inflationary pressures in some instances. The second occurrence is the potential unwinding of globalization with a renewed focus on domestic production. Globalization is now in danger of retracting, as trade fears among countries has heightened due to the extensive exposure of the virus worldwide. Heightened tensions between the United States and China have also created the notion that a decrease in low-cost Chinese made imports may materialize. (Sources: FDA, U.S. Dept. of Agriculture, International Monetary Fund)

 
nearly half of the nation’s workforce is employed by a small business

Typical Scams Surrounding Coronavirus – Consumer Awareness

The Federal Trade Commission (FTC) posted a handful of identified scams circulating throughout the country as a result of the coronavirus outbreak. Scammers are exploiting consumer fears and paranoia by targeting wary victims via email, phone, and text messages.

Below are various scams to be aware of and what to do:

1-Don’t respond to texts, emails or calls about checks from the government. It is very rare that government agencies contact consumers directly.
2-Ignore online offers for vaccinations and home test kits. There are no products proven to treat or prevent COVID-19 at this time.
3-Hang up on robocalls. Scammers are using illegal robocalls to pitch everything from low-priced health insurance to work-at-home schemes.
4-Watch for emails claiming to be from the CDC or WHO. Use sites like coronavirus.gov & usa.gov/coronavirus to get the latest information. Don’t click on unknown links.
5-Be increasingly weary about charitable organizations claiming to need assistance due to the coronavirus.

Why Small Businesses Are So Important To The Economy – Domestic Economy

The country is composed of millions of small businesses from home-based one person consultants to hair salons and manufacturing companies. As defined by the SBA’s Office of Advocacy, a small business has less than 500 employees and operates independently, not under the control of another entity.  As of 2018, the SBA acknowledged that there were 30.2 million small businesses in the U.S., 22 million of which were individually operated with no employees other than the owner. At 49.2%, nearly half of the nation’s workforce is employed by a small business, representing roughly 120 million employees. The SBA reports that small businesses have historically accounted for 60-65% of net new jobs nationwide every year, amounting to approximately 2 million jobs per year. Data compiled by the Census Bureau for 2014 identify that roughly 50% of all net jobs created nationwide were by small business employers. With over 30 million newly unemployed Americans since the outbreak, small businesses are expected to eventually hire many of the recently unemployed.

The Paycheck Protection Program is extremely critical for small businesses because of the financial burden derived by the mandatory closures. Of the various industries affected, restaurants have been one of the hardest hit nationwide, as business owners have had to lay off employees and succumb to selling take out only menus in order to survive to pay rent and utilities. The SBA’s data shows that about 60% of all small businesses either are operating at a loss or merely breaking even.

This Too Shall Pass.