Monday Morning Wrap Up – June 15, 2020

A wake-up call hit Wall Street last week.

The Dow plunged over 1,800 points in one day, or 6.9%, chalking up the worst day since March.

Rightly so, many have questioned the stock market’s near vertical rally in recent weeks, while the pandemic rages on and many businesses are a skeleton of their former selves.

Last Thursday, the excessive optimism collided with reality and stocks plunged.

Signs that coronavirus cases are surging in some states with new “hot spots” emerging in places like Arizona, Texas and Utah, triggered the sell-off. Confirmed Covid cases in the U.S. topped two million last week and over 113,000 people have died, according to Johns Hopkins University data.

The economy has reopened. And, government officials reveal there is little interest in closing it back down as cases surge. Yet, the virus has not been tamed.

This dose of reality, that the country and businesses aren’t going to suddenly ‘get back to normal,’ hit Wall Street investors head on last week.

Indeed there is incredible progress underway, with over 160,000 potential vaccines in the works for Covid. Even if a vaccine is approved within 6-12 months, there is not enough manufacturing capacity to quickly churn out the 400 million vaccines that would be needed to protect every American.

Progress is being made. But, there remains a long road ahead before our daily lives and the economy will return to normal.

It’s Official – We Are In a Recession

Last week, the National Bureau of Economic Research (NBER) told us what we already knew. The U.S. entered a recession in February.

That marked the end of the record-long 128-month expansion in U.S. history, going back to 1854 when record keeping began.

Last week’s quick plunge in the stock market revealed that investors are no longer confident that a “V” shaped recovery in the economy is likely.

The Covid pandemic is still with us, and will likely be an overhang on economic growth for the foreseeable future.

Fed Chief Powell Warns Of Long Road to Recovery

In a somber message to the country last week, Federal Reserve Chairman Jerome Powell predicted a slow recovery for the U.S. economy in the wake of the deepest recession since the Great Depression.

He expected unemployment to fall to 9.3 percent by the end of 2020, leaving millions of Americans still without a paycheck.

“My assumption is there will be a significant chunk … well into the millions of people, who don’t get to go back to their old job … and there may not be a job in that industry for them for some time,” Powell said last week.

Notably, the safety net created by Congress will disappear for many Americans on the low end of the income spectrum. In July, the extra $600 a week in unemployment benefits expires. Many economists are concerned that jobs will likely still be scarce at that time.

It’s the ripple effect that can hold the economy down.

Unemployed people can’t spend. That means businesses like day care centers, hair salons, gyms, restaurants will see less money coming in. Those businesses will suffer and can’t hire new workers, and may need to lay more employees off. Those unemployed people can’t pay their rent. Landlords then are put in a tight spot and may not be able to pay their mortgages. It’s a vicious cycle that spills over into every aspect of the economy.

Remember the dot.com bust?

Just because the stock market climbed in recent weeks doesn’t mean the economy is okay. To the contrary. It’s been excessive optimism and a whole new crop of day traders driving the stock market higher in recent weeks.

Indeed, as professional sports have shut down, day trading activity surged at low-cost, discount brokerages around the country. The usual sports betting set, looking for excitement,  turned to day trading as the country was under shelter-in-place orders.

In fact, the day-trading boom that helped drive stock-market euphoria to its highest level in 18 years, increases the odds the stock market will retreat once again within the next year, Citi told its clients in a research note on June 5.

No wonder, sound-minded investors are pouring money into gold this year, for safety, security and as a vehicle to preserve and protect their wealth.

Fed Pledged to Keep Interest Rates at Zero Through 2022

At last week’s Fed meeting, the central bank pledged to keep the benchmark fed funds rate at 0% – 0.25% through 2022.

Never before in history, has the Fed come out and stated that interest rates will be so low for so long. Monetary policy has reshaped the normal movement in the Treasury and interest rate markets.

Rates are being artificially suppressed at zero and will stay down for years.

Who does that hurt? Savers. Older Americans who need to reduce their risk profile on their portfolio as they age. Where can Americans safely park their assets? Certainly not in the stock market.

Gold is Up Nearly 15% in 2020

Throughout it all, Americans are rushing into the gold market seeking the safety and security of precious metals.

Huge demand for precious metals and the safety they provide drove premiums on New York gold futures up sharply in recent weeks and months. The result? Banks have been flying in tons of physical gold to New York to store the bullion in Comex vaults.

“Gold has reached America from all over the world,” said Allan Finn, commodities director at Malca-Amit, a company that transports gold securely. “The flows into New York are unprecedented,” he told the Wall Street Journal last week.

As the paper gold markets gyrate and see dislocations, it once again underscores the peace of mind, stability and security of owning your own tangible assets.

Physical gold ownership means you can hold your gold in your hands and store it safely in a home safe or a bank safe deposit box.

Indeed, there’s no substitute for physical gold ownership in today’s rapidly shifting digital world.

Best,

David

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