By: Devan Robinson
Q2 2020 Economic Update
I'm a big fan of the economics group at Vanguard. Below are some of their thoughts on the economy:
On Economic Growth
"The United States is likely experiencing the deepest economic contraction on record. But Vanguard economists expect the recession to be short-lived (in fact, the shortest ever), with recovery likely starting in the third quarter."
That's great news for the economy (if correct).
"In our baseline scenario, Vanguard would expect to see the unemployment rate fall to around 10% by year’s end."
It's simply rough out there, no two-ways about it. Below is a chart of the historical unemployment rate for reference:
A more granular view
Below is a granular view of economic trends. Mortgage applications march forward but dining, flights, and hotels are down significantly.
Source: Apple Inc., FlightRadar24, Mortgage Bankers Association (MBA),
OpenTable, STR, Transportation Security Administration (TSA), J.P.
Morgan Asset Management. *Driving directions and total global flights
are 7-day moving averages and are compared to a pre-pandemic baseline.
Guide to the Markets – U.S. Data are as of July 8, 2020.
I expect we will begin digging out of the economic-hole in the Q3 but many will still be struggling. Like many recessions it will be stratified along economic class. If you were struggling going into this recession it will be hard. If you were fine going into this recession you will be fine.
How will we pay for the stimulus?
I really enjoyed this visual from Vanguard. Can our country can afford all of this stimulus? It's a great question. Vanguard believes that if developed nations achieve modest economic growth we will grow our way out of the new debt. If we have baseline growth (what we usually do), or stronger growth, all the better.
Why? The nation is borrowing at generation-low interest rates. Cost of debt, not size of debt, is the the major factor. The stimulus debt burden should be manageable.
Crowded at the top
S&P 500 visualized by market cap. Past performance may not be indicative of future results. Indexes are not available for direct investment.
There's been a lot of buzz around the concentration of the S&P 500. Technology's meteoric rise has led the top of the index to be dominated by the big-tech firms. Microsoft, Apple, Google, Facebook, Amazon, etc. This has led many to speculate whether or not this is concerning.
This isn't the big-deal some are making it out to be. There are a few reasons for this:
First: the S&P 500 is actually less concentrated than it has been in the past. We aren't in uncharted territory by any stretch.
Second: concentration at the top is a feature of markets, not a bug. Some corporations are always going to dominate the index over others; it's the nature of capitalism. By 2030 there will be another top-dog. Below is a visual of how the leaders have changed over time.
Technology was already marching towards the top and then COVID-19 solidified their position. Why? I believe it's for two reasons:
1. Technology will naturally do well during COVID. People are using technology more than ever. Shopping online, Facetime calls, Zoom meetings, video games, Facebook, etc. Technology is an essential part of our COVID lives and the market rewarded that.
2. As a sector, technology derives the largest percentage of their earnings from overseas. Apple has been re-opening stores worldwide but had to re-close several in the United States. Not all industries have the luxury of being able to access both markets at once. Capitalism has rewarded firms that can gather revenue effectively from wealthy overseas markets. Technology firms can do this really well.
The most important investment
“History will be kind to me for I intend to write it.” -Winston Churchill
Last week a client asked "what is the most important investment in a portfolio?" My answer is corny...it's yourself.
In finance there are $3,000 questions and $30,000 questions. A $3,000 question is should I get a Starbucks latte or make coffee at home? A $30,000 question is should I switch companies to get a pay raise?
Many personal finance articles focus on those $3,000 questions. I have no problem with that. Saving $3.50 on coffee isn't a bad thing but let's not pretend it's moving the needle. I think it's more effective to not sweat the small stuff and focus on big wins instead.
It's not which stock you buy. It's not P/E ratios. It's not mutual fund expenses. It's not the Starbucks latte.
It's getting an education. It's saving money. It's starting a business. It's switching companies. It's negotiating pay raises. It's investing in yourself. In the grand scheme of your lifetime wealth the $30,000 questions will overwhelm the $3,000 ones.
It's not that the $3,000's aren't important. It all matters in finance. Just don't get hung up on the small stuff. Pick your destination, hone in on it, and the rest tends to fall into place.
The New York Federal Reserve studied the impact of pay raises and salaries over time. In short here's what they found: pay raises matter, a lot. The earlier, and more often, you can earn more money will make a lasting difference in your lifetime wealth. Especially in your 20's. The compounding effect from a higher salary will trounce anything investment related.
There are two rock-solid simple ways to build wealth. Save more or earn more. Saving has a lower bound you will run into. You can always earn more.
My Dad used to tell me "never go all-in on something unless it's on yourself. If you're betting on yourself bet heavy and hard."
What's the most important investment in a portfolio? Here's the non-corny answer he was seeking: it's the S&P 500. Always bet on America.
Thanks for reading,
The foregoing content reflects the opinions of Fairlead Financial Group LLC and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful, or that markets will recover or react as they have in the past.