Monday Morning Wrap Up – June 1, 2020

Welcome to summer. As the Great Lockdown ends and states continue to loosen Covid-19 restrictions, Americans are venturing out to shop, socialize, get their hair cut and eat at outdoor restaurants, tables spaced six feet apart. The U.S. economy is slowing returning to work.

While the reopening is encouraging for the economy, there remain many challenges for customer-facing businesses. This is likely to be a long process as social distancing measures remain in place limiting full capacity of restaurants, hair salons and other in-person businesses.

U.S. – China Tensions Flare

On the global stage, U.S. – China tensions flared last week, which could warn of a hot summer ahead, and we don’t mean the weather.

The latest escalations of friction between the U.S. and China remind us that the global power struggles that faced the world’s two largest superpowers before Covid-19 haven’t gone away.

Gold gained on news last week that China hardened its stance on Hong Kong democracy demonstrators, with a resolution to impose national security laws intended to suppress protests.

The Trump Administration, meanwhile, continues to seek a trade deal with China. The on-going trade talks could limit an American response that could anger China as long as talks continue.

Meanwhile, protests at home cropped up last week…

Nationwide Social Unrest

Protests were seen in 30 U.S. cities last week over the death of George Floyd, a black man, at the hands of a Minnesota police office. At least 25 cities were forced to impose curfews. In Washington D.C. clean up crews worked on Sunday to sweep up broken glass from storefront windows and office buildings and were cleaning graffiti off buildings near the White House.

The Economy and Markets

Over two million additional Americans applied for unemployment benefits last week, bringing the total to an unprecedented 40 million claims over last 10 weeks.

Second quarter U.S. GDP growth is estimated to be an unheard of 40.4% decline, according to the Atlanta Fed’s GDPNow model.

In the midst of this truly devastating economic news, the stock market rallied last week. The S&P 500 closed above its widely-watched 200-day moving average, in another sign of a major disconnect between Wall Street and Main Street.

It is often said the markets are not the economy. And, the economy is not the markets.

That is quite clear.

The market is pricing in perfection – a perfect reopening with a fast-tracked Covid-19 vaccine and a swift return to pre-pandemic activity.

Stock market investors are betting the economy will recover and corporate earnings won’t be far behind. They aren’t taking into consideration the true economic wreckage of 40 million lost jobs in ten weeks and a 40% decline in growth in the second quarter.

Companies can’t make money if people don’t have jobs and can’t spend. Even though the businesses are reopening, they are not at full speed. To think that corporate earnings will rebound to pre-pandemic levels is folly.

Expect to see tough economic numbers over the next several months.

What do we know? History shows us that financial markets overreach. They overreach on the downside and they overreach on the upside. The recent gains in the stock market are just one more overreach in a series of wild of swings that we’ve seen since the start of the year.

It’s All About the Consumer

Even with the reopening, the coronavirus has already had a significant impact on American’s everyday finances, from their paychecks to their spending habits. These trends are likely to stay in place even after the pandemic resolves.

It’s consumer spending that makes our economy go round, with roughly two-thirds of U.S. GDP driven by things you and your neighbors buy. The willingness of Americans to buy at a normal pace will be the key consideration on whether we have a “V” shape economic recovery or a lengthier, “U” shape recovery.

What’s Next?

This Friday, the Labor Department will release the May employment report.

Forecasts are calling for a 20% unemployment rate. That’s right. The unemployment rate in the Great Depression stood at 25%. We aren’t far behind. We’ll let you know how the numbers look and what it means for you, your portfolio and the economy in next week’s report.

The Bottom Line

In 2020, we’ve seen the Fed slash interest rates back to zero, making cash and bonds an unappealing alternative to investors. Make no mistake, gold’s relevance and importance to both global monetary bodies and individual investors is climbing every day.

As we entered 2020, gold was already showing the beginnings of a bull market, or rising market. There is growing evidence that this was indeed the Dawn of a new Bullish Decade for gold, with multiple forecasts for new all-time highs ahead.

New Study Shows Heightened Financial Worries

Over seven in 10 (72%) say the impacts of the COVID-19 pandemic are making Americans rethink how to protect their retirement savings from volatility, according to a new study released by Allianz Life Q2 Quarterly Market Perceptions Study last week. Other findings include:

  • 58% of Americans say the economic impacts of COVID-19 are having a negative effect on their financial retirement plans.
  • 54% of Americans are worried the market hasn’t bottomed out yet.

In the midst of these financial concerns, gold stands strong, with gains of over 14% since the start of 2020, acting as it has for centuries a safe-haven in the storm and a vehicle to preserve and grow your wealth.

David

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