10-15 Associates

The “Grand” Reopening

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The month of June could be characterized by a few words… from a market perspective I would say disconnect, from an economic data point of view, surprise would be top of mind, and from a virus outlook, disappointing would sum it up well. To put this all together, it is no wonder the average household is feeling confused and dazed trying to figure out what life looks like for their families over the next several months. As markets remarkably climbed in tandem with new cases of coronavirus and unemployment dropped by more than anticipated, investors focused on the positives and looked past the headlines of the surge in new cases throughout the country. The Federal Reserve continued their message of support and the administration signaled the willingness to provide another round of stimulus. All three major indices moved higher, oil and gold also saw gains for the month, despite an increase in volatility. Markets around the world seemed to look forward to brighter days with emerging markets trading higher and Europe also in the green. The S&P 500 climbed 1.84%, bringing the year to date loss down to just 4.04%. The Dow Jones Industrial Average gained 1.69%, leaving it still down 9.55% on the year, and the Nasdaq continued its climb gaining 5.99% with a total return for the year of 12.11%.

Long term rates climbed modestly, but with rates closing the month at just .656%, these moves don’t really move the needle anywhere near normal. We did see mortgage rates for the month fall to all-time lows. The 30-year fixed rate mortgage averaged just 3.07% for the week ending July 2, down from 3.75% at this time a year ago. The 15-year fixed rate averaged just 2.56%, down from 3.18% a year ago which represents a 19.5% decline. According the Freddie Mac Chief Economist, Sam Khater, “Mortgage rates continue to slowly drift downward with a distinct possibility that the average 30-year fixed rate mortgage could dip below 3 percent later this year.” This may help to explain the strength in the housing market. Pending home sales jumped a record 44% in May, according to the National Association of Realtors. This follows two months of steep declines. “This has been a spectacular recovery for contract signings and goes to show the resiliency of American consumers and their evergreen desire for homeownership,” said Lawrence Yun, NAR’s chief economist. “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.”

The interesting part of the report was that every region of the country registered a jump in sales, with the West registering the largest increase. Real Estate is referred to as a local market and national trends do not always register at the local level. However, due to the severity of the pandemic in New York City, counties north of the city have seen a spike in activity. Syracuse has reported the hottest housing market in recent history. Buyers are lining up and down the street to get into showings. They are offering amounts so high over listing prices, they risk rejection from bank appraisers. Buyers are even waiving inspections and making cash offers. It is not unusual for homes to sell sight unseen, and for sellers to be considering a half dozen offers. The combination of low inventory and low mortgage rates with many new buyers looking for the ability to leave the more concentrated areas behind, has created markets like this across the country.

Employees are looking very carefully at their options and negotiating their new way of life in every industry possible. Before the pandemic, conventional wisdom had been that offices were critical to productivity, culture, and winning the war for talent. It is estimated that during the month of April about 62 percent of employed Americans worked at home. According to a study done by McKinsey research, 80 percent of people questioned reported that they enjoyed working from home and 41% say that they are more productive than they had been before. The question for organizations of all types and sizes will be what the right mix is going forward. The problem that employers face is that there is no right answer. The ability to reduce costs with significantly less space could come at the sacrifice of future productivity and collaboration. The reinvention of the workplace will need to address the need for a safe environment where people can enjoy their work, collaborate with their colleagues, and achieve the objectives of the organization. All we know today is that the face of the American workplace will look very different in 2021!

Surprisingly, people are returning to work and at a faster pace than economists had estimated. The most recent jobs report showed that the economy added a record 4.8 million jobs in the month of June, and the unemployment rate fell to 11.1%. This was the second consecutive month of better than expected data. The reopening of the economy is bringing relief to workers across the country. However, as stunning as the headline number is, the economy is still down nearly 14.7 million jobs since February. The reality is that America is dealing with a severe joblessness crisis and millions of people are relying on government aid to make ends meet. To further complicate the data according to Michael Pearce, senior U.S. economist at Capital Economics, “with the spread of the virus accelerating again, we expect the recovery from here will be a lot bumpier and job gains to be more muted.” Hospitality and leisure were hit the hardest during the lockdown. As states reopen their bars and restaurants, workers are returning, but so too is the virus. These jobs accounted for nearly 30% of all the gains last month, with some cities now stalling or rolling back their reopening. What will it mean to the jobs picture for the coming months?

Reading the tea leaves has never been more difficult. In May, we saw a surge in consumer spending, up 8.2%, compared to a fall of 12.6% in April. Although the headline is encouraging, we can connect the spending to the stimulus checks and the unemployment benefits in addition to the pent-up demand. At the end of July, the surplus unemployment benefits will expire, and consumers are still concerned about the economic environment they see ahead. Consumer sentiment rose in June to 78.1 compared to 72.3 in May but remains below the median forecast of 79.3. What that data shows us is that the rise was led by an increase in the northeastern states where consumers turned very optimistic, expecting minor infections, the economy reopening, and an improving jobs environment. Details of the data show the number had peaked earlier in the month and was on the decline. Optimism faded as the reopening was quickly met with news of rising infections.

The emotional roller coaster that June took us on can help explain the activity in markets. At the close of the month the S&P 500 has swung 2% or more on 38 days this year, on pace for the most since 1933. Looking forward, the only thing that seems certain is more turbulence. Between July’s earnings season to the presidential election in November, along with the ever-present risk of a virus resurgence, it’s the perfect storm for more volatility. Global market strategist, Youset Abbase, recently commented, “Volatility like this could easily last another three to six months, until the more significant questions around Covid are answered, you have every reason to believe volatility will be elevated.” June 11th is an example of that risk, when the S&P 500 declined by 6% in a single day on news of the virus spread in several states.

Our long-term investment strategy re-evaluates short term risk as one of the drivers of our price target forecasting. We will continue to make adjustments to the risks we are willing to accept as part of our longer-term strategy. I doubt very much that July and August will be summed up as, “the lazy days of summer.”

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