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Our September 2020 US Economy and Investment Update

The Economy and Our Investments

In 2020, after February-April three month Coronavirus bear market, most sectors in the US stock market have gotten stronger since the April pandemic bottom in late April. Then, more recently, we saw another big market surge in the month of August after the FED pledged to keep interest rates "lower for longer".

In investor speak, when the Fed says it will keep interest rates "low longer," it means the Fed is worried that the US economy has not stabilized nearly enough to take into account the big national unemployment numbers, outlook regarding the resilience of Covid-19, and how to deal with the massive US debt that has ballooned to historic levels since Trump took office.

Since our last Update, the Fed has said it will leave interest rates at near "Zero" for up to three years. Such desperate measures signify the deep underlying weakness of the US economy and the fragility of the stock markets. It also means the Fed will leave interest rates low simply to help the 50% of the S&P 500 stocks that are trending toward their bearish long-term levels.

That said, the Federal Reserve Board wants to create the appearance that they know what their doing. But the truth is they have never had to deal with the deep economic effects such a novel pandemic has caused. Truth is, the Fed is lying about their ability to keep the US economy from getting weaker.

Market strength and sell offs

Until the first week in September, the NASDAQ 100 Index and S&P 500 Growth index continued to make new highs, primarily with the help of about 15 large companies, mostly in the technology and renewable energy sectors.

Yet the New York Stock Exchange Index and the Small Cap 2000 stock index are still below their pre-Covid February highs.

In the near term, we are seeing the end of the retail "emotional herd" investors spending all their investable cash buying stocks and stock indexes. Now, we are experiencing a much needed stock sell-off which hopefully will provide us with new attractive buying opportunities sooner rather than later.

My biggest intermediate term concern is the desperate sociopathy of Donald Trump and the dangerous lengths he will go to intentionally create fear-mongering chaos - or try to sabotage the November vote.

If Trump believes a majority of his cult voters will believe his election corruption lies, he will manipulate it. A Constitutional crisis would not only create massive civil unrest, it will surely roil the stock markets as well.

The Pandemic and Our Investments

Which brings us to our stock and bond market investment opportunities. 

With the pandemic still raging - with over 200,000 American deaths, Trump keeps pretending the Coronovirus is no longer an issue.  And with no new economic stimulus in sight, when the Main Street economy is in the doghouse for too long, eventually the Wall Street economy will see a reckoning that is directly correlated to the real economy 

After almost 6 months of Trump's political folly, denial, voodoo medical claims, and 200,000 American deaths later, it is definitely the Trump Virus! 

More importantly, whatever "post-pandemic" turns out to be, no one really knows what is going to be the new norm with the US or global economies. I'm pretty sure it will not be "business as usual" like we were living with before Coronavirus.

Investments

Just know that as your money manager most of our decisions are based on the reliable investment concept of "follow the big money."

"Follow the big money" means we only invest in fund, stock, and bond vehicles that the large institutional money management firms are in the early stage of investing - and avoid the investments institutional firms are shunning or withdrawing money from.

Going forward, this proven yet always evolving strategy is now successful 75%-90% of the time (when backtested for many bull and bear markets over the last 10years).

The quantitative investment tools we use incorporates and integrates all relevant financial information automatically, simply because we are observing the "objective" volume of money invested, not the "who" or the "why" a potential investment is trending up or down. 

Put another way, our human error-neutralizing investment strategy removes the daily distraction "noise" resulting from the endless information hustle of the financial media, out of touch political operatives, and social media. 

Warning!

Whichever clueless "gerontocracy" gets selected in November, the desperate civil unrest and the white supremacist mob attacks that Trump has encouraged will continue. 

Yet Americans must understand that our Nation's unacceptable income inequality cannot be ignored anymore. The Coronavirus - which in just a few months has clearly exposed our Nation's deep inequities - has certainly let the obvious economic cat out of the bag!

It is no longer tenable that American citizens who sincerely want to work and contribute productively be denied fair and livable economic opportunities, including equal police protection under a non-racist rule of law.

If we are to get back to some degree of national sanity, the top economic 20% of US citizens must accept that our vastly unequal US capitalist system has gone way too far on the callous greed side. If they don't, we are going to see a new version of 21st century American fascism.

The counter-protesting working class whites (mostly young men) - who feel that their only value to society is being "white", own guns, and have a false savior like Donald Trump guiding them - need to quit blaming everyone but themselves for their self-imposed economic failures.

Uneducated white Americans - who are being left behind by our economically clueless two-party corporate power structure - will only achieve productive change for themselves and their families by no longer voting for the same vile fear-mongering, race-baiting right wing politicians who treat them like ignorant chumps.

The elitist Trump RNC doesn't give a damn for these increasing violent "white nationalists." Anyone with sane perspective can see Trunp is only manipulating their anger to act as his personal political intimidation army. Like they always are, they will ultimately be discarded and ignored by Trump and his minions after the election in November 

Americans must get back on a sane cooperative political economic path very soon and stop allowing themselves to be used and manipulated by opportunistically power mad political forces.

If they don't, expect to see more demonstrations, more civil disobedience, more ignorant looting, and more deranged white supremacy vigilantism and anti-Semitism.

Finally, my primary professional responsibility is to your financial well-being and retirement security.

Know that we are only investing attractive investments using the well-tested strategy described above - and that our money management tools works effectively 80%-90% of the time.

In spite of the apocalyptic future Trump is trying to terrorize people with, know that we will make money in any political economic market environment.

Rocky Boschert

"The mind is like a parachute. You only survive when it opens and stays open" - Frank Zappa

#HateHasConsequences

Investors are stuck between elation and confusion

"Trump says if gun owners turn against him along with everyone else, he will have DOJ Stasi leader Barr throw out 2nd Amendment at Yankee Stadium mound appearance." - Pierre LaWayne

Now that we are a month into the 3rd quarter of 2020, we are once again seeing an overwhelming spike in a growing number or US states Donald Trump or Fox News, the stock market rebound we saw in the 2nd quarter is eliciting mixed emotions.

Last quarter investors were being reassured that the 20% drop in global equities during the first quarter was probably temporary. The Wall Street pundits also tried to reinforce an often reliable investing lesson on staying calm during a market panic. Although it is a lot easier said than done, by not selling during a market crash, investors avoid locking in losses while also sacrificing the potential of even a partial rebound.

But in a recession, a stock market rebound is not the same thing as a stock market recovery. That said, today, market risks are still very present! 

The stock market performance stall we saw late in the 2nd quarter indicated that quickly rising COVID-19 case numbers can trigger another correction. Even though some macroeconomic data appears to be improving (at least temporarily), the global economy is undergoing its biggest recession in modern history.

Nasty surprises in in some company earnings reports and stock market returns can be expected.

Why Did Stocks Rebound in the Second Quarter?

The stock market rebound of last quarter reflected the hope that investors’ worst fears had been averted. While the road to recovery will continue to be bumpy, a total global meltdown or prolonged depression is not on the horizon yet, given the underlying fiscal and monetary stimulus commitments by governments and central banks around the world.

Yes, interest rates are expected to stay at historic lows for several years, further reducing the appeal of safer government bonds that offer almost no yield. This forces investors into the stock market, making it good for current stock market participants but risky for investors who end up chasing the quickly inflated "no where else to go" stock market valuations.

Market gains were also driven by what now appears to be a short-term jump in retail trading volumes. I guess that means the casinos were closed and the bored gambler invested in stocks to assuage their addictions.

Still, today, with record amounts of cash parked in money-market funds, there’s plenty of pent-up buying power to be deployed when any type of consumer or investor confidence improves.

Wide Dispersion in Returns

For now, confidence differs markedly by sector. In the second quarter, technology stocks continued to surge as investors rewarded companies that profit from enabling remote work, online shopping, and other stay-at-home activities. Also in the 2nd quarter, the consumer sectors outperformed the defensive sectors such as utilities and staples.

But the financial sector continues to struggle because low interest rates curtail lending profits.

Value stocks, which include a large contingent of banks and dirty energy companies, continued to underperform growth stocks by a wide margin.

Concentration Risks Are Growing

The wide dispersion of returns in different parts of the stock market is creating new distortions. The extreme case is the Russell 1000 Growth Index (most of our IRA portfolios have a 10% allocation in this fund - symbol IWF), where five stocks now account for a record 36.9% of the entire benchmark.

In the more broad global benchmarks these same names have a larger combined weight than any entire country’s market, other than the US. Partly as a result, US stocks now account for 66% of the MSCI World, versus just 30% three decades ago (Display, right).

Why is this a problem? In the past, extreme levels of concentration in a small group of stocks has typically reversed, with painful consequenses. If some of today’s mega-caps start to underperform, investors who own a benchmark or a heavy concentration in these names could be exposed to losses.

Plus, stock valuations are another concern. US stocks are now much more "expensive" than usual relative to the rest of the developed world (Display).

Still, many US stocks offer good return potential, especially relative to bonds. However, current high valuations inevitably reduce the long-term returns investors can expect from the US market as a whole.

What Happens Next?

Investors should brace for more surprises as coronavirus risk persists.

Many companies suspended earnings guidance in first-quarter reports, leading to an extremely wide dispersion in earnings forecasts. Investors should gain more clarity on which companies are coping better with the effects of the pandemic.

Investing amid the COVID-19 crisis also requires an ability to look beyond the summer of 2020 and develop a longer-term investment strategy that reflects a highly uncertain environment. Sectors and industries will be redefined as weaker companies in weaker sectors fail and stronger companies flourish. 

Three Guidelines for Investors

As investors, how will we approach our equity (stock) exposures in the second half?

First, accept that volatility as a defining feature of today’s markets, while minimizing sharp swings in either direction. Second, as we always try to do, deploy money only into investments that are seeing an inflow of investor capital. Third, only invest in assets, sectors, and/or individual stocks that are going up - and avoid the assets and sectors that are struggling make gains. 

The second quarter of 2020 demonstrated that equity markets can counter a severe exogenous shock when provided with enough external support. But performance patterns have been anything but even.

As the pandemic crisis and its related economic problems continue to unfold, avoiding the most vulnerable businesses and identifying sector, companies, and countries with financial staying power will be necessary to generate good returns in a market that may continue to reflect a wide dispersion in results through the current recession and the hopefully sooner rather than later recovery.

Rocky Boschert

Our Monthly US Economy and Fidelity Investment Update

May 1, 2020

Economic Fact: When the 2400 combined stocks of two small and mid-size company indices (IWM & MDY) are underperforming the performance of the large company stock index (SPY) - the US economy is failing most of the American people.

Put another way, when the powerful lobby money Wall Street corporate elites (and their largest S&P 500 companies) are the primary stock performance beneficiaries of the political economic policies of their (s)elected US Federal government, the US politicians and their corporate masters are either corrupt, incompetent, or both (regardless of political ideology).

Hence, below is the current real life "performance" look at the US economy as represented by the overall US stock market for exactly the past 3-years (June 1, 2017 through May 31, 2020):

SPY (500 Largest US companies):          + 42.4% (12.7% annually)
IWM (2000 Smallest US companies):      + 7.17% ( 2.2% annually) 
MDY (400 Medium-size US companies:  + 9.51%2.9% annually)

Specifically, the 3-year stock index performance numbers above speak volumes about the success or failure of our current National political leadership:

* Because SPY is seriously outperforming both IWM and MDY, the current political and corporate leadership is failing most Americans.

The success or failure of the US economy can only be judged by the performance of the entire stock market

Using the US stock market as a reliable and practical gauge for the current health of our total domestic US economy, one can look at the comparative 3-year plus performance of the combined US stock indices that include the 1) small company stock index (symbol IWM) and the mid-size ompany stock index (symbols MDY) - and compare these true US Economy indicators to the big lobby-money controlled "politically-connected" large Company stock index represented by the the Standard and Poor 500 index (symbol SPY).

Why? Because only when the smaller company US economy is doing well we are truly seeing a democratically-led political economy.

In other words, the intermediate to long-term performance of both IWM & MDY - compared to SPY - is a much more reliable indicator of the underlying success of the US economy - under whatever National political "leadership" we currrently have

When IWM & MDY each outperforms SPY over a 3-year period, only then is the US economy is doing well for most Americans.

For the most part, in our quest to be informed about our money, it is best to ignore or independently question the political rhetoric we hear from the Wall Street lobby money controlled politicians - especially the extreme ideologues currrently in the White House, US Congress - as well as the self-promoting that comes from the big corporate media like Fox, CNN, and MSNBC.

Put another way, if the smaller US stock companies are seriously underperforming the large stock companies - those that are contributing $ billions more lobby money to the politicians who write the business and tax laws, the US economy is not being managed or led well by the powerful lobby money "corrupted" two-party political duopoly.

Rocky Boschert

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