This recent market environment has been a strong one, but we wanted to go behind the scenes to really look at the facts and figure out what’s really going on. Right now, there are many stocks that are down this year. In regards to sectors, Airlines are down about 52% year-to-date. Banks are down 33% along with energy which is down 32%. Auto is down 30%, consumer finance is down 27%, and utilities are down 5%. With all that being said, we are still seeing strength in the market. There are a lot of positives out there, so we want to take you behind the scenes to see how that impacts your portfolio in relation to all the economic news that’s going on. Is it as good as it seems or is it as bad as it’s going to get? That is one of the questions we’re debating.
Some of the airline stocks started to rally this past Friday while at the same time they were laying people off. With those people being laid off, that’s a consumer that’s not going to be spending money. We saw a great surprise in the economy which added 2.5 million jobs back into the workforce. The expectation was that it would decline by 8 million. Certainly, there’s not an employment analyst on the planet who saw that coming but it was good news in that the market and portfolios were up last week. As investment managers, the Portfolio Team at Fi Plan Partners doesn’t just look at the headlines. We always read and analyze the full report. Looking into the full report of unemployment, we see it could cause some concerns because it’s not all positive. The unemployment rate is still 13.3% and we’re still 19.5 million jobs below where we were before the virus started. One other thing that was interesting about the new job number is that the average hourly earnings went down which indicates that it was the lower-paying jobs that were hired back. From an economic standpoint, it’s great to see people come back to work but from a market standpoint, we would like to see higher paying jobs come back. Higher wages gives people the ability to save their excess earnings and then invest it in the market. While, economically, it’s good to see jobs come back, we really want to start seeing the wages go back up to where they were before this happened. Another point of concern is in the layoffs at the state and local government levels. The government laid off 571,000 jobs and more are expected to come. That’s a nationwide problem because state and local governments are the largest employers in the nation. The reports show that the massive monetary and fiscal stimulus helped the recovery. However, it will be important to see if the quick recovery will cause Congress to do less and hold back on a further stimulus that the market might be anticipating. Also, with the economy slowing down, state and local governments are not going to have the tax revenues that they’ve been used to getting. That alone will play a big part in determining if they’re going to hire more people or have to continue to lay them off.
Permanent vs. Temporary
A lot of the stimulus from the government that we expect to end in July may explain why over 2 million of the 2.5 million jobs that were added back were leisure, hospitality, and temporary jobs with lower wages. We saw, month-over-month, nearly 300,000 additional permanent job losses reported. It’s interesting to see the discrepancy between temporary and permanent. We saw temporary jobs added while the number of permanent job losses increased. This is something that is going to have to come to a head at some point and maybe it’ll happen in July when the stimulus either ends or is extended.
The Federal Reserve is trying to keep the issues with the jobs at the government level from being a problem. Last Wednesday, they opened a lot more bond-buying across all 50 states. In essence, they said that each state government can choose a municipality, county, or some combination of the two where the Federal Reserve will go in and do direct buying from that municipality or that county government. This should really help because a lot of the payrolls in the government jobs sector are off due to tax revenue not coming in. Where we saw a lot of push on the employment side from the owner-managed businesses, now we are turning towards government help. Government employment is 16.7% of our economy, and it’s 20% in 9 states, including our own state of Alabama.
OPEC plus, which includes the OPEC countries plus Russia, met last Thursday. They came out with the decision to extend the production cuts of 9.6 million barrels a day through the end of July. They were at a point where they had to decide to extend or end their production cuts which coincide with a lot of the endpoints for the stimulus of the US economy that is coming up in July. When we look at weekly data, we’re just now starting to see the miles driven and gas being used. Because of these cuts by OPEC, we’ll see the price of oil start to rise which will help the US energy sector. It has been hurt year-to-date but has become such a small portion of the economy because it has shrunk so much over the last year. Gas prices have been heavily depressed over the last few months and are going to start to rise just in time for people to start using it more. That may have a negative effect on the economy and how consumers use the savings that they have built up over the last few months. That July end date is starting to build up a lot of capacity from energy cuts, stimulus, the peak of summer for driving, consumption, and more. That is going to become a very profound point to watch. In the strength of this market that we’re seeing, there’s still a lot of lagers in sectors that are not performing well, and on the other hand there’s a select few that we’re seeing take the market up. There are industries that are having to reinvent themselves to figure out how they’re going to make their earnings. The tech sector is one that’s already indicating that they will be having more people work from home going forward no matter what. If people work from home, they’re going to have less of a need to fill up their gas tank.
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.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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