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Wall Street Warns: More Pain Still to Come

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Wall Street Warns: More Pain Still to Come

Despite his hopes to have the country operating normally by Easter, President Trump announced in a press conference last night that he is extending the social distancing mandate until April 30, and now hopes the country will be on the road to recovery by June 1.

That’s going to put additional pressure on an already struggling economy as restaurants, retailers and other businesses stay shuttered for even longer.

And despite last week’s dramatic rally in stocks, many on Wall Street are saying that things are going to get much worse before they get better, and are expecting further declines in the market.

Goldman Sachs’ U.S. chief equity strategist David Kostin wrote in a recent note to clients that “bear markets are often punctuated by sharp bounces before resuming their downward trajectory.”

Kostin says there were six distinct rallies of 9% or more between September 2008 and December 2008 during the financial crisis.

“Most bounces involved optimism around monetary or fiscal policy support. However, the market low did not occur until March 2009, when the pace of economic contraction began to slow,” Kostin added.

John Velis, a currency and macro strategist for the Americas at BNY Mellon, agrees that there could still be plenty of downside left in the markets.

“COVID-19 infections in the United States are still growing in number and we are not close to the peak of ‘the curve.’ Indeed, one could argue the worst is yet to come on the public health front, and this could entail ever more pain on businesses and employees — and the market.”

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, also believes the market is still searching for a bottom.

“This analysis continues to keep us concerned that the U.S. equity market hasn’t found a bottom yet. It also reminds us that after the most severe equity market drawdowns, durable bottoms have taken time to form – something we think will be the case this time around as well. We are growing increasingly skeptical about the V-shaped recovery thesis in stocks. In particular, we are concerned that there has been too little discussion about the longer-term collateral damage from the public health crisis.”

Mohamed El-Erian, the chief economic adviser at Allianz, said in a Bloomberg op-ed article last night that even with last week’s rally he expects stocks to resume their slide.

“I fear that this is more likely to prove a temporary exception to what, unfortunately, is still an outlook for high stock market volatility around a still-downward trend.”

And economist Nouriel Roubini, known as “Dr. Doom” said in a recent tweet to “beware of bear market “head fake” rallies. The market can’t truly Bottom till the Virus tops & the rate of increase of new cases is sharply down.”

This isn’t to say investors should sit on their hands and do nothing until the market drops further. If you have a long-term outlook and can average into positions over time, adding a bit here makes sense while waiting to see which direction the market goes. If it drops further, you’ll have the chance to add more at even lower prices. And if the market rallies, today’s prices will seem cheap.

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Have a 401k? You Can Now Invest In Private Equity Funds

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Have a 401k? You Can Now Invest In Private Equity Funds

There’s good news for investors who are looking to add a little spice to their retirement accounts. For the first time ever, defined contribution plans – like 401ks – have access to private equity investments.

U.S. Secretary of Labor Eugene Scalia said in a statement yesterday that this step “will help Americans saving for retirement gain access to alternative investments that often provide strong returns.”

Typically viewed as a way to outperform the stock market, the average private equity investment has actually underperformed the stock market over the last 10 years. According to a study by Bain & Company, private equity investments returned an average of 15.3% compared to 15.5% for the S&P 500. The study does mention that top-tier private equity funds did manage to outperform the market.

Scalia’s announcement went on to add, “The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”

You won’t be able to invest directly into private equity funds in your 401k. You’ll only have access through specific investment vehicles like target-date funds. Defined benefit plans – like pensions – have had access to private equity investments for some time now. So, as Scalia mentions, this move now levels the playing field for investors.

Securities and Exchange Commissioner Jay Clayton supports the decision to allow defined contribution plans access to private equity investments. He also mentions that the new capital coming in will increase the funding sources available to private businesses.

How It Should Be Perceived

Investors, however, shouldn’t look at the ability to invest in private equity funds as a panacea of retirement riches.

Private equity investments are often much riskier than traditional stocks. As we mentioned earlier, they don’t always provide greater returns.

In an interview with Fox Business, Ed Slott, founder of IRAHep.com, said that investment losses in February and March may have caused a sense of panic among savers who might be searching for larger returns.

“Some of those [private equity] returns are sensational but, with anything, you could lose a boatload too,” Slott said. “It doesn’t mean private equity always makes money.”

You may lose money while investing in private equity funds. When that happens, you’ll likely have no recourse against your broker or fiduciary who put you in those investments.

As part of the announcement, Slott noted that there is a “liability shield” for fiduciaries. As long as they follow the guidelines set out by the Department of Labor, they will be within their fiduciary obligations. This makes it harder for investors to sue over losses.

The ability to invest in a private equity fund is alluring. However, the best advice comes from Alano Massi, the managing director of Palm Capital Management.

“Should that investor not feel comfortable with private equity, or simply does not understand it, then he or she should not participate,” Massi said.

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Business

We Just Set A Record For The Greatest 50-Day Rally In Stocks

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We Just Set A Record For The Greatest 50-Day Rally In Stocks

The S&P 500 just turned in its best 50-trading day rally since the index expanded to 500 companies in 1957, according to research from LPL Financial.

Over that time period, the index has returned 37.7%. If history is any indication, there are plenty more gains ahead.

LPL went back and looked at every 50-day rally since 1957 when the index expanded. Their research found that six and 12 months later, stocks were higher 100% of the time.

The average return for the six months following a 50-day rally was 10.2%. On the other hand, the average return for the 12 months following a 50-day rally was 17.3%.

After the longest bull market in history ended this year when the S&P 500 dipped all the way down to 2,191.86 on March 23, the market has been on a rocket ship higher. In just 50 trading days, the index has climbed 41.7% from the March 23 low. This puts it only 9% below the all-time high set in February.

Markets have been pushed higher by a combination of record stimulus packages and low-interest rates. In March, President Trump signed the $2 trillion CARES Act that provided financial aid to families and small businesses. Around the same time, the Federal Reserve cut interest rates to zero. Also, more recently it started directly purchasing Treasury bonds, mortgage-backed securities and even bond ETFs as it pledges an unlimited amount of asset purchases.

Uneven Recoveries Despite A Rally

While the stock market has surged higher over the last 50 trading days, recovery has been uneven, to say the least. This comes with some stocks – and entire industries – getting hammered by the economic lockdown caused by the coronavirus. Meanwhile, others, particularly those that benefit from people being home all day – and working from home – have lead the charge.

Amazon, Facebook and Netflix have all surged to all-time highs. Meanwhile, the video conferencing platform Zoom has jumped 228% this year alone.

On the other side are stocks like cruise line operator Carnival Corporation or American Airlines. Both have fallen 66% as the travel industry came to a standstill.

Despite the appearance of strength by the stock market, even the greatest 50-day rally in history can’t shake the doubters loose.

Since the rally began back in late March, the country has had more than 40 million people file for unemployment. Our country’s economic output is expected to drop by as much as 50% this quarter, and numerous CEOs refused to provide forward guidance for their companies as they just simply don’t know how bad and for how long the economy will suffer.

Throw in ongoing civil unrest and a very strong likelihood of a full-blown trade war between the US and China, and it remains to be seen if the economic recovery can continue to blossom in the coming weeks and months.

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Business

Nobel-Prize Winning Economist: Time to Admit Our Programs Have Failed

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Nobel-Prize Winning Economist: Time to Admit Our Programs Have Failed

Senate Republicans have endorsed a bipartisan bill that would give small business owners more flexibility on how they choose to spend their PPP loans. However, at least one outspoken critic has said the program failed American workers.

Senate Majority Leader Mitch McConnell and Senator Marco Rubio, who chairs the Small Business Committee, both endorsed the Paycheck Protection Program Flexibility Act. This almost passed last week, in a nearly unanimous 417-1 vote.

“I hope and anticipate the Senate will soon take up and pass legislation that just passed the House by an overwhelming vote of 417-1 to further strengthen the Paycheck Protection Program so it continues working for small businesses that need our help,” McConnell said during a speech on the Senate floor Monday.

The Paycheck Protection Program provides forgivable loans of up to $10 million to businesses. The money is for businesses with fewer than 500 workers that were affected by the coronavirus pandemic.

Originally, for the loans to be forgiven, the businesses had to abide by strict requirements. They need to let loaners know how the money could be used. Around 75% of the loan had to go towards maintaining the businesses’ payroll. This includes salaries, health insurance, leave and severance pay, as well as having to rehire workers by June 30.

Easing Up Restrictions of Programs

The bill endorsed by McConnell and Rubio that passed on Thursday would ease some of those restrictions. This includes allowing businesses to spend 60% of the money on payroll. It also includes freeing up 40% of other expenses like rent and utilities. The new bill would also remove the requirement of rehiring workers by June 30. Also, it gives businesses 24 weeks to spend their PPP money on. This is far longer than the current 8-week limit.

The new bill isn’t perfect. However, they created programs such as this in an effort to address concerns by small business owners. Many of these business owners think the loan forgiveness requirements can become too strict to meet their needs. Many are fearful of inadvertently violating the rules and being on the hook to repay the loans.

Nobel Prize-winning economist Joseph Stiglitz says that no matter how they structure PPP loans, they have failed the American worker.

During an appearance on CNBC, Stiglitz said “The problem wasn’t just the amount of money. It was how the programs were designed. Our programs have failed, and we have to admit that.”

He says the loans went to the businesses who were most connected, not the ones who were most in need.

“The businesses with the best connections with the banks, the best customers, got at the head of the line, and those weren’t the smallest businesses, they weren’t the people who needed it most,” he said.

He said a better way to keep workers employed is looking at a model from Denmark or New Zealand. In the said countries, the government paid companies directly to keep workers on their payroll.

Stiglitz added, “We just haven’t thought enough about how we get money to the businesses in ways that make sure they really keep the attachment to the workers with those businesses.”

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