Leading financial advisor Cary Stamp delivers his Market Update for early May 2020. He shares some thoughts from Scott Minerd of Guggenheim Partners, as well as his own view of proper risk management within the new normal of market volatility.
Hi. Most of you know that I’m Cary Stamp and I’m a certified financial planner. I want to share some thoughts with you and with the rest of my clients about where we see things going.
There are several states that have decided that they’re going to reopen their economies and get back to business, or at least on some level. I don’t want to alarm anybody, but I do want to share some of what I think is realistic information and then talk a little bit about how we plan to deal with that information. I’ve taken the liberty of reading a fairly lengthy report by the chief investment officer of Guggenheim Partners. Guggenheim primarily manages bonds, fixed income and credit market type investments, and they’ve done some fairly in-depth research on what’s happened to our economy and where they foresee things going.
So Scott Minerd, the chief investment officer, writes this. “To think that the economy is going to re-accelerate in the third quarter in a V-shaped recovery to the level where the Gross Domestic Product was prior to the pandemic is unrealistic. Four years from now, the economy will most likely recover to the same level of activity that it was at in January. Monetary and fiscal policymakers are pulling out all of the stops to keep the economy and citizenry afloat during this crisis. Now is too early to determine the efficacy and durability of these crisis programs. But ultimately, we will likely discover that they are insufficient, misdirected and full of unintended consequences. By the end of the year, the unemployment rate could still be in double digits and thus begins the long haul to get back to the unemployment levels that we saw before the downturn.”
So where does this leave us? What does this mean for those of us who are investors? It means that even though the stock market has painted a fairly rosy picture in the last few weeks, that’s not necessarily going to continue for the balance of the year. We don’t make market calls at Cary Stamp & Company. But what I will tell you is the stock market is generally driven by what happens with corporate earnings and if we don’t see significant increases in corporate earnings and the economy start to kick into high gear, we’re probably not going to see huge stock gains like we’ve seen since the market put in its low on March 23rd.
Our advice is not to make major wholesale shifts. We don’t do that. We do not let emotion run how we manage portfolios. But what we may want to do is take a hard look at the assets that we’re invested in. Do we have bonds that have higher risk than normal? Are they lower credit rated or are they below investment grade? If they are, we may want to consider getting those bonds into things like Treasury securities or what are called TIPS, which are inflation protected securities issued by the US Treasury. Those types of bonds will actually do well in an environment where we’ve got a lot of money going into the money supply.
The second thing that we want to look at is, do we have more in our equity side of the pie than we should at this given moment? It’s possible that we may want to trim it back, at least temporarily, and make the decision that we’re going to have a little bit more in fixed income for a temporary period of time. I’m not talking about making major shifts in portfolios, I’m talking about looking at what your cash flow needs are going to be for the next few years and considering moving 5-10% of what you have in equities into the fixed income side of the ledger in the short term.
I think that this recent bounce in the market calls for us to take a pause, consider what our options are and make a call on whether or not we want to take the chance that this recovery’s not going to fire on all cylinders. If it does, great, we’ll have most of our portfolio invested. But if it doesn’t, it will be certainly nice to have a little extra layer of protection in our portfolios so that we can get through this time. We’re here to answer any questions that you might have. We will be in touch with all of you that are our clients, and if you have any particular questions, you’re welcome to reach out to us or forward this video to your friends and family. We’re here to help. Thank you.