Over the last month, we have talked a lot about S&P 500 levels from a technical analysis standpoint. We have seen the S&P 500 fall between the 3,200 and 3,400 range. On our weekly vlogs, we have talked about how that 3,300 mark has been our new threshold. With the election and debates coming up, it is important to point out that our next resistant level is 3,390 and the next support level will be at 3,240. These are two very important marks to watch as seasonality and volatility picks up as it normally does in an election year and in mid-October. These numbers will give us an indicator, leading up to the election, for if we are having more of a bullish or bearish market tone. This is important to watch over the next few weeks.
Debt has a large impact on companies and individuals. It is an asset that can be used as an asset, but it is often used as a liability. Currently, as a nation, we are sitting on around $64 trillion in debt, which is a record high. A part of that has been a large increase in high yield and investment-grade debt in companies. We all are aware of what has happened this year and how companies have had to lock down and shorten their balance sheets. There has not been a lot of demand in certain parts of the economy. So far, through the first three quarters of the year, there is $2 trillion in new debt. That is 40% above the previous record set in 2017. There is a lot of new debt but is that really a negative thing going forward? Will that hinder companies? Oftentimes, new issuance of debt is a hindrance to future growth because companies must spend money to pay down debt. However, at these extremely low levels, that may not be a bad thing. We have had a lot of meetings this year with clients who we have worked with to refinance their mortgages. That is a new debt issuance but the carrying cost or monthly payment went way down. Some of these companies might be reducing their debt payments by issuing new debt. If companies do not have to spend down their cash, they can use it to pay off debt. They could use it to pay special dividends to investors that could turn around and buy back stocks. There’s a lot of ways if we see the economy continue to grow, that the companies can use this large amount of debt that they’ve taken on to increase growth if they don’t have to use it as a rainy day fund. There’s still a chance of rainy days because a lot can happen in the next 90 days, so it is good that companies and individuals are holding extra cash right now because who knows how the year is going to end. If things go better than expected, this cash could be a springboard for companies to expand and use capital expenditures to merge, to pay dividends, or buy back stock. It could be a good thing if used well, even though right now it looks possibly detrimental.
Market Balance Sheet Review
The market is looking for direction. As we move through this fourth quarter and start to go through the checklist, people will start to get a good indicator of the strength of this economy. We want to see where we stand on what we call our market balance sheet. We know that historically, October is one of the more volatile months. No guarantees here, but the fourth quarter, in general, is historically the best month of the year in terms of performance. Going all the way back to 1928, the fourth quarter averaged up 2.6%, which is better than the other quarters. In reviewing our market balance sheet, we look at it as a corporate balance sheet in terms of assets and liabilities. Right now, as it stands, heading into the fourth quarter, we have a lot of assets for the market right now. Monetary policy and the Fed’s rate cut have been a couple and continue to be a big help to the markets and portfolios. Another asset is Fiscal policy. The government has done a great job with PPP loans along with income replacement and if we get another stimulus here in the next couple of weeks, it could be a big boost temporarily for the markets. Another asset is commodity prices. Energy prices are down 30% which is helping consumers at the pump. Liquidity is the next thing that we look at. Central banks around the world are pumping liquidity into their country’s finances and helping the money supply growth, which again has been a big boost to the markets. The liabilities out there that we are watching for are corporate profit growth and economic growth. They are expected to be muted over the next couple of quarters. However, any surprise to the upside will boost the market. Trade tariffs will also be a liability, which is no surprise. The trade deal has suffered during the pandemic as China’s relationship with the world has taken a hit. Lastly, the Federal budget deficit is set to spike with a massive fiscal policy. With all that being said, there are some great things in the market happening in terms of assets on the balance sheet.
We have cut the unemployment rate in the country by half since the beginning of the summer, right after the pandemic really picked up. The unemployment rate, in terms of absolute numbers, got to a high of about 22.4 million but is down to about 11 million now which is great progress. In addition to that, according to a report released this weekend by the National Federation of Independent Businesses, about 36% or more than a third of their members, cannot fill jobs that they have open. As we know, the NFIB is made up of excellent companies. Another report that came out said that 50% of construction firms are not able to find people to fill jobs. Another area needing a lot of workers is in the warehouse and logistics sector. We are starting to get into a holiday season which means the number of open jobs will only increase. Not only have we made tremendous unemployment progress since the beginning of the pandemic, but there are a lot of jobs that are opening back up in good professional places, which is a good thing going forward.
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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