Up, Up, and Away?
After our latest round of cold weather it seems like Spring might finally be here. I know everyone I’ve been talking to is looking forward to some more outdoor time and a return to some semblance of pre-COVID life as we knew it. In Minnesota, our stay-at-home order ended this past Monday and bars, restaurants and hair salons will be open on June 1st. In fact, 95% of states will either be fully or partially opened by the end of May.
While we welcome a return to normal life and agree that we need to start re-opening the economy, we fully expect the re-open to be rockier than the stock market seems to be predicting. The stock market has traded significantly higher since the lows we hit on March 23rd. Most of that has been based on the expectation that the re-opening will go smoothly, companies will get back to end of 2019 earnings levels by early next year, and that we will have a vaccine in early 2021. In fact, the Dow was up close to 1,000 points earlier this week and it was almost entirely driven on positive trial results from Moderna – one of the companies leading the race for a vaccine. My point being that the market, in general, has priced in a lot of good news. While it is true that the market is generally looking out 6 to 9 months, what they have priced in leaves little room for error. In fact, prices may already be too high for even the most optimistic scenarios. So, it seems there is a lot more potential downside than upside and we just aren’t getting paid enough to take on the uncertainty ahead for the general market.
So, what are we doing in the current environment? We remain hopeful, but cautious. We continue to have overweights to things like technology, healthcare and some parts of the consumer sector (namely Amazon and Walmart). We believe this is truly a market of stocks and not a stock market – that dynamic is likely to remain in place for some time. We are looking to own high quality companies with solid balance sheets that have some type of competitive advantage in the post-COVID era. In addition to owning more individual stocks in portfolios, we are still holding some gold and elevated cash positions. We feel being conservative and protecting capital while looking for additional opportunities makes a lot of sense right now.
So, what’s next? We feel a lot of what comes next depends on the virus. We will almost certainly have an increase in cases as we re-open – it is hard to picture any other scenario. Some of that will be from increased testing (which is a key to getting people back to work and feeling safe), but a lot will be from more people moving around in their daily lives. In fact, since Minnesota eased up on some restrictions in April, we have seen a 249% increase in the number of cases, a 117% increase in hospitalizations and a 105% increase in testing. That is not minor and similar results are occurring in many other states as well. Everyone will react differently – just know we will keep an eye on the numbers and make adjustments accordingly. We hope the restrictions that have been in place for almost 2 months in some areas have allowed our healthcare system to be prepared for an increase in the cases. If we aren’t prepared and careful as we begin to move around, this could very easily get out of hand again – leading into shutting things down again as we have seen in some parts of Asia and Saudi Arabia. China just recently locked down 108 million people in the Northeastern part of their country because of new hotspots. And needless to say, if we have to lockdown the US again it would have some pretty devastating consequences on the economy, stock market, and the general mental psyche of Americans. If that occurs, we will be taking even further defensive action as warranted.
Our hope is that the re-opening does not go as described above, but rather we see a manageable increase in cases as life begins to return to normal – that is our base case. The Fall may present some specific challenges with kids returning to school, the normal Flu season starting up and colder weather, but hopefully we are more prepared than we were before. In this scenario, we will continue to look for opportunity and add to high quality positions that we think will be able to make money now and lead us into the future. One thing is for sure – the economy on the backside of this will be different and the economy will be impacted unevenly as more people work from home, order online and socially distance for the foreseeable future. As we mentioned in previous correspondence, these changes are really just accelerating long term trends that were already present. As always, we will continue to identify opportunities for our clients.
While the outlook for the economy and the path of the virus are still very uncertain, the American will to thrive is alive and well. We have faced uncertainty many times in the past and we have hung together and come out stronger on the other side. We have faith that this time will be no different. So as the weather continues to improve, we hope you are able to enjoy some socially distanced bonfires, barbeques and yard games with your friends and family. Just remember no high-fiving your partner when you beat your in-laws at that game of bags.
Enjoy your Memorial Day weekend and as always, thanks for your trust and confidence.
Robert J. Phillips, President
Greater Midwest Financial Group, LLC.
3222 Rice Street
St. Paul, MN 55126-3047
Phone: (651) 490-9790 Fax: (651) 490-9788
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Greater Midwest Financial Group, LLC is not affiliated with Kestra IS or Kestra AS.
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