June 8, 2020: Recent Positive Developments

Jun 9, 2020 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

 

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Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Wednesday July 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Recent Positive Developments

In general, we try not to make too many comments on economic affairs as we profess that we are not experts in this field. However, every now and then, we do want to jump in to clarify some widely confused data and facts. This has become even more relevant as rumors, half baked opinions and some out right faked news are abound in this chaotic social media era. This is one of those times. 

In this newsletter, we want to try our best to point out some of recent developments. 

What does the jobs report really say

The Bureau of Labor Statistics (BLS) reported on Friday that employers had added more than 2 million jobs in May and that the unemployment rate had unexpectedly fallen. This was a big surprise to almost everyone. Stocks immediately shot up. Some, however, were very suspicious and even claimed the report was rigged. 

The whole controversy stemmed from an error the BLS admitted in the report: 

In the household survey, individuals are classified as employed, unemployed, or not in the labor force based on their answers to a series of questions about their activities during the survey reference week (May 10th through May 16th). Workers who indicate they were not working during the entire survey reference week and expect to be recalled to their jobs should be classified as unemployed on temporary layoff. In May, a large number of persons were classified as unemployed on temporary layoff.

However, there was also a large number of workers who were classified as employed but absent from work. As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue.

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

The misclassified 3 percentage points (or about 4.9 million) counted as employed are those who are furloughed (temporary laid off). They should be counted as ‘unemployed’. However, since BLS didn’t do that in April, so they decided to continue to count these types of people as employed in May. 

This creates a firestorm among media: some proclaimed the report is rigged and some said the added jobs were not real. Here are what we dug out from the report. 

  • Either way, the economy added jobs
    • From household survey (one of the two surveys BLS did to gauge the job market), adding back the misclassified temporary layoff people to unemployed in May and April would result in unemployment rate 16.4% in May and almost 20% in April. So still an improvement. See the following (5.4 million in May vs. 8.1 million in April include those temporary laid off workers otherwise misclassified as employed)

    • From the establishment survey (mainly going through payroll data that do not include self employed and farm workers covered in the household survey), the nonfarm payroll employment increased by 2.5 million in May. This is a confirmation to the household survey result. This survey does NOT have the misclassification error.  
  • However, some might claim that the added jobs are mostlly supported by the recent government PPP (Payroll Protection Programs) loans as companies receiving a PPP loan are required to keep employees till the end of July. This might or might not be true. But one thing is sure: the number of people with a job not at work declined by 3.1 million (see below) from April to May. This might indicate that companies receiving PPP loans are recalling employees to work even though in some situations, there might not be much to work on (such as restaurants or transportation companies that had very little business due to shutdown and social distancing). For those people, however, they might consider themselves working. 

  • Regardlessly, 20 or 25 million (if those temporary layoffs are added back) people lost jobs in May: this is a big number, compared with 5.8 million unemployed in February. So in total, the economy probably lost about 20 million jobs from February to May. 

Our take is that the economy indeed added jobs in May. However, it’s hard to guess how much of such addition was influenced by PPP and other stimulus programs. Nevertheless, one can claim that government programs indeed make a major impact here. 

The impact of the Federal programs

This leads us to an important question: how effective are the federal stimulus programs. Our very anecdotal evidences indicate these prorams indeed have some major impacts:

  • The 1200 stimulus checks helped to cover many low income family one month expense.
  • The generous federal supported unemployment benefits have given low mid income earners better monthly income (than their regular income) till the end of July. 
  • PPP backstops many small businesses’ employment cost till the end of July. 
  • The upcoming Federal Mainstreet loan facility for small and mid size businesses seem to be loose enough for many businesses to qualify to borrow, further extending help. 

In addition, the Federal Reserve’s gigantic financial market intervention such as Treasury and investment grade corporate bond purchase and then the controversial (illegal?) high yield junk corporate bond purchases have injected large amount of money to the markets and depressed interest rates close to zero, creating TINA (There Is No Alternative) pressure for investors to purchase stocks instead. 

These programs have done wonder to stabilize financial markets in the short term. The harder part is whether they can help to eventually mitigate and improve cash flow issues for businesses to stay solvent and make profit (how much). Even in a longer term, if such programs indeed succeed to prop up economy, whether they will finally prop up big inflation. At the moment, judging the strength of financial markets, investors are betting solvency will not be an issue and earnings will come back strong (maybe in a year?). The bet here seems to be very speculative, albeit with some reasons. 

Covid-19 risk subsides?

One of the very encouraging news in the Covid-19 pandemic front is that WHO (World Health Organization) just stated that asymptomatic spread of coronavirus is ‘very rare,’ This means that people who are infected but do not have symptoms don’t easily transmit the virus to other people, This is a very important discovery/development as it’s much easier to trace and contain those who have shown symptoms. Remember that, compared with previous virus induced epidemics, Covid-19 pandemic is unique in two ways: big transmission rate R0 (R naught) and it can be spread by asymptomatic infected people. If the second factor is removed, this is a much different ball game. 

Of course, the problem might not be as simple as it shows. For example, maybe many symptomatic patients only have very mild symptoms and thus they tend to ignore them and not have themselves tested and isolated. This would still result in wider spread. So it’s still too early to precisely understand the implications of such a new discovery. 

On the other hand, as more states are reopenning and as the recent protests have become more wide spread,  there is a danger that the number of symptomatic cases will rise again to overwhelm the healthcare system, thus forcing some stricter shutdown or social distancing again that will again strain the economy. 

To summarize, being rigorous and objective can help us to see through noisy and subjective opinions. The above positive developments do lend reasonable support for being optimistic. Whether that’s good enough to sustain the economy and thus the recent financial market strength for long, however, remains to be seen. 

Market overview

Last week’s stock market strength did address the remaining weakness we pointed out in our previous newsletter. Now, practically all of the stock assets are in uptrend: 

As of 06/08/2020

Description Symbol 1 Week 4 Weeks 13 Weeks Trend Score
US Stocks VTI 6.04% 11.26% 19.04% 10.66%
Russell Midcap Indedx IWR 7.82% 15.56% 17.8% 8.96%
Gold GLD -2.41% 0.19% 1.21% 8.5%
Russell Smallcap Index IWM 9.17% 16.24% 17.44% 7.66%
International Developed Stks VEA 6.13% 13.82% 14.21% 6.52%
US Equity REITs VNQ 9.56% 17.44% 4.49% 5.56%
Utilities XLU 4.02% 12.36% 0.05% 5.39%
Emerging Market Stks VWO 6.23% 11.76% 9.56% 5.25%
US High Yield Bonds JNK 2.52% 7.42% 5.58% 3.56%
Total US Bonds BND -0.3% 1.05% 0.21% 2.55%
Treasury Bills SHV -0.02% -0.01% 0.06% 0.58%

Short term wise, stocks are extremely overbought. Furthermore, they are now back to historically high valuation. The combination of the current ongoing Covid-19 pandemic, the big economic disruption it created, the US China friction and the recent social unrest are all major risk factors that are still present. 

We call for caution and again, the best defense is for us to stay the course. In times like this,  we emphasize the following: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

For more detailed current market trends, please refer to 360° Market Overview.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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