By Todd Bogda
I extend continued good wishes to everyone as we try to manage, make sense of and survive this difficult period in our history.
I am glad our local leaders have chosen the familiar traffic light as the means to communicate the levels of “openness.” The message is so common to our everyday lives that even young children understand the metaphor. Green means go, or so I thought. Green now appears to be a very yellowish green, especially for travel.
Despite PA’s strict rules from the beginning, many states, like Maine, will not let Pennsylvanians visit without two weeks in quarantine or a negative COVID test. If you choose to visit a very risky state, such as Idaho, you must quarantine for two weeks upon return to PA. Last I checked on the CDC website, Idaho had 18,694 cases (1.04% of population) and 152 deaths, yet it made the PA mandatory travel quarantine list. Our neighbor New Jersey is just shy of 175,000 cases (2.02% of population) and 15,804 deaths. Yet we are free to come and go from New Jersey without two weeks in self-quarantine. NJ residents are also free to travel to Maine without restriction. New Jersians, it appears, are universally loved!
Adding to the growing list of head-scratching developments is the seeming disconnect between markets and the economy. In times like these, it is important to remember that the stock market is not the economy. The Federal Reserve Board’s recently released median estimate of long-run GDP growth will be 1.8% after a tumultuous drop of -6.5% in 2020. This long-run growth rate is well below our previous 30-year average growth rate of 2.47%.
Despite this lackluster forecast, broad equity market indices like the S&P 500 Index are near all-time highs. How can we reconcile this diversion? The Fed’s aggressive monetary policy is causing markets to price tomorrow’s earnings into stock prices today, essentially pulling forward the growth in time with a lower interest rate to discount the future earnings stream. With the 10-year U.S. Treasury Note yielding 0.58%, it is not surprising investors are pouring into stocks, with the dividend yield on the S&P 500 at 1.85%.
Monetary policy’s influence on markets notwithstanding, it is hard to ignore our everyday anecdotal evidence when contemplating the challenges facing the economy. The travel and leisure industry is in limbo. Working parents will have to manage school-age children who will likely perform part of their learning at home. Even hospitals are facing an estimated $202 billion in losses from the pandemic due in part to canceled and forgone services.
The number of sectors suffering from this crisis is many, yet the beneficiaries of the working from home (WFH) online world are more specific. The top five largest companies in the S&P 500 have benefited wildly from this pandemic: Facebook, Apple, Amazon, Microsoft and Google. When we dissect the index to look at the performance of the top five holdings vs. the remaining 495 companies, the results are as expected.
The top five companies have returned +35% year to date, while the remaining 495 companies have lost -5% collectively. The impact of the top five holdings in the index is enough to pull the broad index up a slight 2% year to date.
It is important to note that portfolio diversification still remains the best defense against rapidly changing economic conditions. It is reasonable to expect a largely reopened U.S. economy will greatly benefit the struggling sectors while taking some air out of the COVID high fliers.
Since the lockdowns started, 495 companies have been stuck at a red light, while five companies have traveled on green with no traffic. The lights will eventually change.
Todd is a Financial Advisor at Stonebridge Financial Group. His focus is providing exceptional service to individuals, families, and institutional clients, implementing investment portfolios and asset allocation techniques in an effort to achieve client-specific investment goals.