Markets Reprice Equities for a Prolonged Economic Recovery

Monday, June 29, 2020 - US Investors enter the week cautiously after a roller-coaster ride last week. After a seemingly positive opening early in the week with banks stocks soaring and investors anticipating good news on the vaccine front, markets took a surprise dive on Wednesday and Friday as it became clear that efforts to contain the Coronavirus had failed in the Sunbelt States threatening to extend regional lockdowns or worse. Investors increasingly hope for local officials to enforce social distancing and the use of face masks which would significantly move forward the reopening recovery. Face masks oddly have become a political football debate for state and local politicians. Will the battery powered toothbrush be the next health tool to enter the debate?

US markets closed down last week with the S&P 500 finishing down 2.86% and the Nasdaq Composite 1.90%. The broad market as measured by the S&P 500 closed the week at 3009.05. The NASDAQ Composite closed at 9757.22. As of early Monday morning, overseas markets are mixed with the S&P 500 futures appearing to stabilize as we enter a short trading week. Energy and Bank stocks took the brunt of the hit as investors anticipated the potential for lower demand for energy and the possibly of bank earnings suffering due to bad loans and with that dividend cuts. The announcement by regulators to end bank share buybacks and scrutinize dividend payouts on a quarterly basis took its toll as well on investor sentiment.

Investors are increasingly wondering if the aid from Washington will be sufficient enough to support the real economy. In the meantime, the trillions of dollars sitting in bank checking accounts and showing up in the latest M1 money supply measurement indicates that there is plenty of cash ready to jump into the stock market on the dips.

The continued tension between expectations for a quick V Shaped Recovery and a longer drawn out recovery has been leading to risk on and off days with “Recovery Stocks” being Risk On and “Stay at Home” Covid-19 Stocks being Risk-Off. For investors who want to hedge in the volatile months that usually characterize late summer, one may want to consider building a “barbell” portfolio; one end of the barbell consisting of ETFs that would move up should a vaccine suddenly be discovered which would lead to a rapid upsurge in asset prices and on the other hand have a Covid-19 portfolio consisting of defensive ETFs that support a continuing recessionary environment. Investors should consult our weekly Select List to research the appropriate ETFs.

Other investor concerns include increasing trade and geopolitical tensions with China, dropping oil prices and upcoming US elections in November. This week investors will be focused on Thursday’s Jobs Report. While these numbers have stabilized to some extent, economists expect increases in layoffs by state and local governments to start showing up as the Coronavirus takes its toll on tax revenues. Since late March, none of these concerns have been able to stop an apparent roaring early stage bull market complete with IPOs and significant debt underwriting.

All these issues got us thinking about what effects the Coronavirus will have on big cities and the political, social and economic environments to follow. Cities face 4 challenges:  density in population aids the spread of the virus, social unrest and how to efficiently travel efficiently in tall buildings and what to do with un-needed office space as a significant number of workers permanently work from home.  All of this will affect the tax base. The Black Lives Matter protests are likely to intensify as we close in on the November elections. This social movement is likely to morph into a broader socio-economic protest focused on affordable housing and the wealth gap.  Expect none of these issues to be dealt with by Washington until 2021 or later. The abundance of office and retail space in big cities would call for caution when investing in Real Estate ETFs or REITs. These challenges will likely force a serious “rethinking” on how to resolve these issues bordering on a “New Deal” type infrastructure program to put people to work rather than pay them to stay home. Unoccupied office space can be converted into housing stock. Many changes may lie ahead…

Traders and active investors can use ETFs to take advantage of real-time market volatility – both up and down!

To best support the ETF selection process, the ETFG Weekly Select List highlights the 5 most highly rated ETFs per Sector, Geographic Region and Strategy as ranked by the ETFG Quant model.

We suggest keeping a mindful eye on tools like our Select List and Risk and Reward Ratings that can be used to evaluate the vast set of opportunities in the ETF marketplace. Today’s market realities require a new approach to macro investing, one in which individual investors now have access to tools via ETPs to customize risk and return profiles in their portfolios. Use our Scanner to find those funds.

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