The V-shaped recovery is here—long live the V-shaped recovery! The main problem is that the actual economy and COVID-19 pandemic are not on a V-shaped recovery path—just the stock market. Even with its very brief but significant slide from the top (almost 40% for the Dow, top to bottom) we did not approach the valuations seen at the bottom of the last two major slides in stocks, in 2002 and 2009—not even close. But then, we have 0.7% interest rates and far more money sloshing around.
The three-legged stool of this sharp market rebound is: 1) low interest rates; 2) massive government support, and; 3) a "this too will pass" mentality. All three are actually pretty solid reasons for stocks to rebound, until something goes wrong and one or more of them goes away. If stocks weren't risky in the short run, the Dow would have hit 50,000 years ago.
You almost can't overestimate how much of a boost low interest rates are to stocks. If government bonds pay less than 1% per year over 10 years it is almost impossible to underperform that low benchmark with stocks, from almost any starting valuation. The danger is some sort of change; either a rise in rates or a serious drop in stock valuations or a long-term move down in economic growth, or even deflation. If low rates alone guaranteed stock returns, Japan would have had better stock market performance for much of the last couple of decades.
The current support from the Federal Reserve and actual fiscal spending in a few short months is far beyond the levels we saw during the years of financial crisis over a decade ago. Paying it all back, if we pay it back, should be a serious drag for years to come. Adding insult is the clearly half-baked nature of the support and the likely widespread economic waste and abuse of massive stimulus programs being thrown together.
Issues such as those already in retirement collecting Social Security receiving $1,200 stimulus checks, collectively totaling more than the GM bailout (before most of it was paid back), that seemingly angered much of the country, are getting no attention. It is probably because the alternative—mass bankruptcies and a 1930s-style Great Depression—is so scary that erring on the side of excess spending is comforting.
This stock market has been through many, many crises worse than COVID-19, including worse pandemics. One thing that has become apparent is that if you wait too long, you will miss out. Stocks move up well before the troubles are gone, so you basically have to take on that risk that things won't get better. It is possible this has gone a little too far, because things might not be getting better soon enough to prevent the next Great Depression, or at least to stop the trillions of dollars in support from being wound down anytime soon.
This whole stock market rebound seems to be riding on the death rate from the recent resurgence in cases and hospitalizations. Sharply rising daily case numbers has already slowed the reopening of many states and the global economy. If the death rate takes off next, we'll be back to costly full shutdowns for months to come. On the other hand, if the death rate more or less plateaus or even continues to decline while cases continue to rise or remain high, then from an economic perspective this is a win of sorts, as we could have business as semi-usual. This assumes there is a benefit in herd immunity, which hasn't been proven yet.
Even the worst case—no immunity gained from catching and surviving the virus and no vaccine—will lead to a new economy in the long run, with different companies selling different goods and services with a different kind of workforce. It could be a long, painful path to get to point B, but investing in stocks will still work out. But it could be a very long W-shaped recovery. Nobody wants to be in 0% cash but nobody wants to lose 50% fast because over 10 years stocks should beat bonds.
Perhaps the only reason not to be heavy in stocks is the chance something doesn't work out and we have more of a W (or even a VW) recovery with opportunities to get more for less. This can be a tough game to time, with lots of investors looking to move the trillions sitting in cash and bonds back into stocks and a high opportunity cost of not being in stocks. This is unlike the last two 50% drops in stocks, where bonds offered good alternative returns. The likelihood of getting anywhere near the valuations of the last crash bottom is slim to none, in the absence of a full bore multiyear depression.
There was surprising continuing strength in larger cap tech stocks, most of them at new highs and really the driving force in the U.S. market for this rebound. Most tech companies are benefiting from this stage of COVID-19 as the stay at home, work and live lifestyle some people are begrudgingly enjoying is conducive to consuming the services of the top tech giants. It could be the final nail in the coffin of those bricks and mortar businesses not finished off by the Internet thus far.
Or we could have a backlash against the homebound life when COVID-19 eventually goes away. People may decide they have had enough of staring at phones, tweeting, and ordering delivery, and want to return in droves to breathing that sweat aerosol-filled air in stores, restaurants, and airplanes.
The bond market was only slightly higher as rates remained low. But there was strange strength in high-yield muni bond funds, which seem to be at risk of disaster as the sheer cost and economic impact to state and local governments is incalculable.
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The V-shaped recovery is here—long live the V-shaped recovery! The main problem is that the actual economy and COVID-19 pandemic are not on a V-shaped recovery path—just the stock market. Even with its very brief but significant slide from the top (almost 40% for the Dow, top to bottom) we did not approach the valuations seen at the bottom of the last two major slides in stocks, in 2002 and 2009—not even close. But then, we have 0.7% interest rates and far more money sloshing around.
Our Conservative portfolio gained 1.64% and our Aggressive portfolio gained 1.16%. Benchmark Vanguard funds for June 2020 were as follows: Vanguard 500 Index Fund (VFINX), up 1.99%; Vanguard Total Bond Market Index Fund (VBMFX), up 0.70%; Vanguard Developed Markets Index Fund (VTMGX), up 3.40%; Vanguard Emerging Markets Stock Index (VEIEX), up 7.16%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.01%.
The three-legged stool of this sharp market rebound is: 1) low interest rates; 2) massive government support, and; 3) a "this too will pass" mentality. All three are actually pretty solid reasons for stocks to rebound, until something goes wrong and one or more of them goes away. If stocks weren't risky in the short run, the Dow would have hit 50,000 years ago.
You almost can't overestimate how much of a boost low interest rates are to stocks. If government bonds pay less than 1% per year over 10 years it is almost impossible to underperform that low benchmark with stocks, from almost any starting valuation. The danger is some sort of change; either a rise in rates or a serious drop in stock valuations or a long-term move down in economic growth, or even deflation. If low rates alone guaranteed stock returns, Japan would have had better stock market performance for much of the last couple of decades.
The current support from the Federal Reserve and actual fiscal spending in a few short months is far beyond the levels we saw during the years of financial crisis over a decade ago. Paying it all back, if we pay it back, should be a serious drag for years to come. Adding insult is the clearly half-baked nature of the support and the likely widespread economic waste and abuse of massive stimulus programs being thrown together.
Issues such as those already in retirement collecting Social Security receiving $1,200 stimulus checks, collectively totaling more than the GM bailout (before most of it was paid back), that seemingly angered much of the country, are getting no attention. It is probably because the alternative—mass bankruptcies and a 1930s-style Great Depression—is so scary that erring on the side of excess spending is comforting.
This stock market has been through many, many crises worse than COVID-19, including worse pandemics. One thing that has become apparent is that if you wait too long, you will miss out. Stocks move up well before the troubles are gone, so you basically have to take on that risk that things won't get better. It is possible this has gone a little too far, because things might not be getting better soon enough to prevent the next Great Depression, or at least to stop the trillions of dollars in support from being wound down anytime soon.
This whole stock market rebound seems to be riding on the death rate from the recent resurgence in cases and hospitalizations. Sharply rising daily case numbers has already slowed the reopening of many states and the global economy. If the death rate takes off next, we'll be back to costly full shutdowns for months to come. On the other hand, if the death rate more or less plateaus or even continues to decline while cases continue to rise or remain high, then from an economic perspective this is a win of sorts, as we could have business as semi-usual. This assumes there is a benefit in herd immunity, which hasn't been proven yet.
Even the worst case—no immunity gained from catching and surviving the virus and no vaccine—will lead to a new economy in the long run, with different companies selling different goods and services with a different kind of workforce. It could be a long, painful path to get to point B, but investing in stocks will still work out. But it could be a very long W-shaped recovery. Nobody wants to be in 0% cash but nobody wants to lose 50% fast because over 10 years stocks should beat bonds.
Perhaps the only reason not to be heavy in stocks is the chance something doesn't work out and we have more of a W (or even a VW) recovery with opportunities to get more for less. This can be a tough game to time, with lots of investors looking to move the trillions sitting in cash and bonds back into stocks and a high opportunity cost of not being in stocks. This is unlike the last two 50% drops in stocks, where bonds offered good alternative returns. The likelihood of getting anywhere near the valuations of the last crash bottom is slim to none, in the absence of a full bore multiyear depression.
In our own portfolios and the global markets, riskier investments performed well, or at least those areas that have been weaker on the way down. Our biggest winner was Franklin FTSE China ETF (FLCH), up 7.81%, slightly ahead of a generally strong month for emerging markets in general, which took Franklin FTSE South Korea (FLKR) and iShares MSCI BRIC (BKF) up 7.12% and 6.99% respectively. Europe did well. Besides shorting, there was weakness in value-oriented or lower risk U.S. stocks. We saw flat to negative returns in several holdings, such as iShares Edge Quality Factor (QUAL), Homestead Value (HOVLX), and VanEck Vectors Pharmaceutical (PPH).
There was surprising continuing strength in larger cap tech stocks, most of them at new highs and really the driving force in the U.S. market for this rebound. Most tech companies are benefiting from this stage of COVID-19 as the stay at home, work and live lifestyle some people are begrudgingly enjoying is conducive to consuming the services of the top tech giants. It could be the final nail in the coffin of those bricks and mortar businesses not finished off by the Internet thus far.
Or we could have a backlash against the homebound life when COVID-19 eventually goes away. People may decide they have had enough of staring at phones, tweeting, and ordering delivery, and want to return in droves to breathing that sweat aerosol-filled air in stores, restaurants, and airplanes.
The bond market was only slightly higher as rates remained low. But there was strange strength in high-yield muni bond funds, which seem to be at risk of disaster as the sheer cost and economic impact to state and local governments is incalculable.