Spike in Volatility
We saw a spike in volatility last week, starting on Thursday, because of the rising tensions between the US and China. It’s no secret that the tensions have been building in recent weeks as the Chinese government really continues to take heat for the virus. Last week we saw other escalations as China started trying to initiate a new national law in Hong Kong in an effort to basically take away its autonomy. That was met with US senators introducing a bipartisan bill that would sanction Chinese officials who try to enforce that new law. Also, the Senate passed legislation that would basically ban certain Chinese companies from listing on the US stock exchange. The rising tensions are a big deal and is something we’re watching carefully. It’s important to know that the US and China trade deal getting done last October was one of the main reasons we saw the market go up last year and was the big reason the markets and the economy had so much momentum coming in to this year before the virus. Right now is clearly not a good time for animosities as both countries are hurting economically. We expect a big tug of war in the market between the positives of the economy trying to open back up and the negatives being caused by the volatility and rising tensions between the US and China.
Last week we focused on potential bankruptcies within the retail space and with other US companies. Clearly there’s tension between bondholders and investors along with companies trying to get through this crisis. What came out this week, that we think was interesting, is that countries also can default. This crisis is not just impacting companies’ earnings, it’s impacting countries’ revenue from a tax standpoint. Argentina is going through its ninth default. We don’t think Argentina will be the last country to find themselves in this position. You’re hearing about cities, states in the US, and European countries that are struggling. There’s a lot of stress outside of just retail, such as in restaurants and others. In the US there’s a lot of tension between the investing public and managers of money, companies, and countries that just can’t pay their bills right now. As this crisis goes on for longer and longer, the bills are going to have to be paid and the only way to get through that is through default and bankruptcy. That’s something that’s going to start to grow and expand as a risk to markets. In addition to that, we’re seeing tension out of DC on the next stimulus bill. Estimates were for $3 trillion in this bill and one of the sticking points is that the two sides greatly disagree on whether or not federal funding should go to states to allow for mail-in ballots. In 2016, around 1% of all mail-in ballots were rejected due to clerical errors. Either they weren’t signed correctly, the back of the ballot wasn’t filled out or the wrong person was circled. There’s clearly more room for error on those mail-in ballots. If an expansion of mail-in ballots happens, we could see up to one and a half million votes just not counted due to errors like the ones mentioned. That’s not necessarily far and there’s a lot of contention around that. A $3 trillion savings bill could be held up just because of something so small.
We are still seeing tension from still dealing with a pandemic and the impact on the economy. Data came out recently with a little bit of good news, in which we are in need of. When the pandemic started and the first reports from that came out at the end of March, it wasn’t good. April was a really tough time as well but if you look at the United States, Japan, and the Eurozone, four of the largest economies of the world, the rate of decline in May was less than the previous months. That was both on the service side and the manufacturing side. The analogy among us that we always use is that this situation is like a supertanker in the ocean. You’ve got to stop it a couple of miles before you can turn it. The last round of data that’s been reported clearly shows that we’re getting to the point where we are getting it stopped and then we can turn it and start really making some progress. The main numbers, both on service and manufacturing, really showed that these declines are starting to slow down.
Greg Powell, CIMA®
President and CEO
Email Greg Powell here
Bobby Norman, CFP®, AIF®
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Senior Vice President
Email Trey Booth here
Ashley Page, JD, MBA
Senior Vice President
Email Ashley Page here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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