49% of Americans said they expect to live paycheck to paycheck each month. Additionally, 53% said they don’t have money worth at least three months of expenses saved in an emergency fund.
Those figures are from earlier this year before the pandemic began. Also, as you can imagine, these would be much worse today as the economic fallout from the coronavirus spreads into its fifth month.
Michelle Connell, the founder and president of Portia Capital Management, says the numbers show how weak the US consumer was even before the pandemic, so the prospects of a “v-shaped” recovery are “grim.”
“When the U.S. economic shutdown began in March, we were told to expect a “V- shaped” recovery. The consumer and the economy were originally expected to be fully recovered by the end of 2020 at the latest. Now the grim realities are starting to show,” says Connell.
The Rally and Tech Stocks
She points out that the stock market rally has been concentrated in just a few tech stocks. She also says that essentially every other stock that isn’t a tech stock hasn’t participated in the rally.
Since the S&P 500’s March drawdown of almost 35%, the index has almost retraced the year’s high and is currently 4% up for the year to date. But further analysis finds that only a handful of technology stocks have led this rally,” says Connell. She added that “Investors have focused on the companies that support “shut-in” consumers and workers.
The result has been that the top 10 names in the S&P 500 now comprise more than 27% of the index’s market weight and large-cap growth stocks have returned 20% year-to-date. To a large degree, the other 490 names and other investment styles have not participated. For instance, large to small “value” names are still down between 10%-to-16%% year-to-date.”
She says retail investors overtaken with “boredom” have piled into the markets. She also mentions that they “poured fuel on the government’s fiscal and monetary fire.”
Smart Money in Cash
So what should smart investors be doing right now?
The best idea, according to Connell, is to watch what professional money managers do in their own accounts, not what they are doing in their managed accounts.
And right now, they are in cash.
“You can always determine an institutional money manager’s real opinion on valuations when you ask them what they’re doing with their own money. Currently, many institutions are sitting on cash positions as large as 20% to 25% in their personal accounts.”
She adds, “If you’re sitting in cash, don’t feel dumb. History is on your side — and you are also in good company. Interestingly, over the past 30 years there has been a strong inverse relationship between the unemployment rate and the performance of the S&P 500. This relationship has been upended only over the past five months. Obviously, the $2.44 trillion of fiscal stimulus that has been pumped into the U.S. economy has created an artificial market environment. At some point, this inverse relationship will represent itself and the stock market will correct.”
She says to prepare for the correction by putting together a list of stocks to pick up at bargain prices.
“Be ready for pullbacks in the stock market and dislocations in private markets. And make a shopping list.”