The Wall of Worry
The proverbial wall of worry is typically built by bricks of fundamental doubt. The fundamentals have been lacking in information as of late. A lot of the market is technical versus fundamental and the technicians have been very positive. Last week, we saw the S&P 500 hold a very important support zone. That support is a price level where buyers have come in and held the market higher for the S&P. Last week, we had a short week because of the holiday with low volume, but the market rallied and held that very important support number of 3090. We are now looking at 3210 for the next support level. The area in between 3090 and 3210 is very important because the market can rally up to that point where there may be resistance. Our viewers need to focus on that 3090 as a support level on the S&P 500 over the coming weeks. When the market pulls back, it should hold that 3090 an if it does, that will show a lot of positivity. This is being very pondered from a technical standpoint because we could see markets moving higher in the short term. in the medium term, the bricks of the wall of worry are probably going to be built by next week’s earnings announcements from companies. We feel like we have been dealing with COVID-19 for years now, but it’s actually only been less than a quarter. We will get our first glimpse of boots on the ground when the corporate reports on the impacts of COVID-19. The current estimates are for a 45.7% decline in S&P earnings. It’s not necessarily what they report but what they say about the future. Everyone knows, looking backward, what is going to happen and that reports are going to be bad. What companies say about going forward and how optimistic they are will be important. Around 170 of the S& P 500 companies have removed forward guidance which is a very important indicator of where things are headed. We are sort of flying into this earning season more blind than we have ever before which fuels the worry even more. The wall of worry has been built on uncertainty, but we will get to see some facts starting next week on how much money companies may have needed to borrow to fund current operations. We’ll get to see where they’re seeing the growth in the next couple of quarters and for next year. Everyone knows how rough 2020 has been. What people think 2021 will look like, is becoming very, very important.
We had a client last week asking if they should, in order to hedge against the US election and the uncertainty surrounding it, be overweight in their portfolio in international equities? While that makes sense from a diversification standpoint to have some exposure to the international markets, it’s not necessary to be overweight international markets. Here are a couple of reasons why that’s not the best option. One, there is a weaker economic outlook for international countries, especially in the Eurozone. We think the US will hold up better with the pandemic. Two, international equities have underperformed the US markets for 10 years now. Third, international markets and indexes are more heavily weighted towards financials and industrials. While the US markets are more heavily weighted towards healthcare and technology, healthcare and technology continue to outperform and be the top two sectors. Fourth, there are structural concerns internationally and specifically with BREXIT along with Hong Kong losing some of their autonomy to China, which isn’t good. Another reason is that there are slower central bank responses overseas. So again, from a diversification standpoint, yes, it does make sense in some cases to have some exposure internationally, but not necessarily be overweight in it.
A Spike in Jobs
There has been a lot of worry surrounding the job number month after month. However, recently, expectations have been crushed with positivity in that area. For the month of June, 4.8 million jobs were added for Americans. That still leaves around 20 million jobs open however if this trend continues, we are going to see a lot of support from the consumer side. When more people are in the workforce and making more money, they tend to start putting it back in the economy. Companies earning should start to raise as a result which in turn gives the market a boost. Of all the jobs we lost initially from COVID-19, we have already hired a third of them back. That shows unprecedented growth. Also, not all the stimulus we had from the PPP program or the Main Street program from the Fed is out there yet. The Payroll Protection Program still has an estimated $130 billion left to go not to mention that President Trump is about to sign an extension of that. The extension changes when you can apply for PPP. On the Main Street side, a lot more banks and credit unions are jumping in to help. So, the point is, we have put a third of those jobs back without all the stimulus used, which is an amazing thing. It is important to look at COVID-19 cases and see, as they rise if this job number will keep improving or not. The month of July will be important to look at along with the GDP number coming out at the end of the month.
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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