Blog | Forward Wealth Management

What Happened This Week (8/21/2020)

Written by Stephen Miller | Aug 22, 2020 6:15:39 PM

K-Recovery. The Top 5 holdings of the S&P 500 have returned 35% YTD; the other 495 have declined by 5% (via Goldman Sachs Investment Research). While there was discussion early on as to the shape the recovery would take, whether “V”, “L” or “W”, we have experienced more of a “K” shaped bounce—one of bifurcation among winners and losers. The “WFH” stocks are the hands down winners so far in the Covid Era. The market perception of these stocks is arguably similar to the “Nifty Fifty Era,” where any price is warranted to gain access to these “secular winners.” If this thinking persists, “WFH” stocks may continue to rally, even without a vibrant economic recovery, but the risk is high that excessive valuations—expressed through high prices—will turn out to be unsustainable.  

Will Earth Enter a Bull Market? The iShares MSCI World ETF “URTH” closed Friday at its pre-Covid level. Since this ETF represents total US and global equity markets, with a diluted but still present exposure to the “WFH” stocks above, continued progress against Covid will be a necessity to support a sustainable broad-based global equity upturn. Economically, a virtuous cycle needs to take hold, in which consumer spending creates an improving outlook causing business to rehire, increasing consumer confidence and continued willingness to spend. Thus, broad indexes like “URTH” can serve as a barometer as to whether progress combating Covid is being made in concert with a healing global economy.

Housing. We see the “K” shaped recovery playing out in the real economy as well as financial markets. Consider real estate; the National Association of Realtors report on existing home sales showed the proportion of second home buyers rose to 15% in July, returning to pre-Covid levels. However, recent search data on topics such as “eviction” and “foreclosure” from Google confirms data from CoreLogic showing a deteriorating trend in mortgage loan performance.

Spending help, not lending help. Former Fed Chair Janet Yellen echoed Jerome Powell’s calls for additional fiscal measures by telling the Washington Post last week, “Individuals and businesses are not going to make it through this unless they get grants, and only the Federal Government can do that.” KPMG Economics reported this week that the budget deficit to combat Covid may match WWII levels before the crisis is over. That seems all but assured. With a $21.4T US economy, and additional 8.3% would amount “only” an additional $1.78T in stimulus.Different This Time? Using Quantitative Easing (QE) to finance fiscal spending in response to Covid is different than the way QE was used during the Global Financial Crisis (GFC). Thus, the current assumption by policy makers that current QE efforts will not create persistent inflation may be the incorrect conclusion. Jens Nordvig said this week, “The QE process we observe in 2020 is different from 2009 in that it is much more closely tied to fiscal policy. Policy makers are not afraid of inflation, and for that reason (and due to the magnitude of the COVID shock), there is much more fiscal/monetary coordination. If the 2020 QE and QE in future years turns into a 'spending QE' as opposed to a mere Asset Swap QE, it surely has potential to be inflationary. What the specific level of spending needed to get there is hard to say.”

**This material is for informational purposes only and is not indented to be a recommendation to buy/sell any particular security or provide investment advice.**