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Passed Pawn Advisors August 2020
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Passed Pawn Advisors

A next generation digital investment advice firm utilizing the latest methodology and technology to create sensible and affordable financial solutions for our clients

Quote Of The Month

Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula.”

-- Jerome Powell, US Federal Reserve Chairman, at Jackson Hole

Economic Highlights

  • The COVID-19 cases continued to rise at a slower pace, as the country continues the reopening process.

  • Payroll employment increased at a slower pace.

  • Industrial production and housing activity increased robustly.

  • The Congress is still discussing more stimulus, and the Fed pledges low rates for years to come.

  • The 2020 Election is about to enter a final stretch, and national and geopolitical risks to the markets abound.

 

Market Highlights

  • US Equities had another strong month in August, with S&P 500 Index closing higher by 7.2%.

  • Foreign equities also rallied, with Developed Markets up by 5.1%, and Emerging Markets added 2.2%.

  • US high-grade bonds lost -0.8%. while high yield added 0.7%, but foreign bonds continued their run, with high grade and high yield posting 1.2% and 2.9% gains, respectively.

  • Commodities continued their rally, up 6.8%, with oil still managing gains, up 5.9%.  Gold, however, consolidated, down -0.4%.

  • US Dollar was the worst-performing major asset class again, down -1.3%.


 

Observations and Expectations

August turned out to be a great month for US equities, with both high return and low volatility.  The market seems to have been on autopilot, ignoring the obstacles in the distance.  The narrative continued to paint the “Great Reopening” as steadily progressing, while the corporate earnings as either surpassing expectations or irrelevant one-time blips.  There may be other logical explanations of the recent runup, and of the Hot Reads articles argues that the low discount rate makes the future corporate earnings and thus equities more valuable.  Yet, the market head-spinning may be coming to an abrupt end as we’re heading for the most volatile part of the year, with many market risks possibly materializing straight ahead.

Looking forward to September, we’re bracing for the eventual market pullback, and hoping that the support will hold.  The market has clearly gotten ahead of itself on many fronts.  First, in our view, it’s discounting the possibility of a strong second wave of COVID-19, at the time of many offices and college campuses reopening, even though the virus prefers colder weather.  The hope for a viable vaccine is still likely premature.

The economy has been reopening, but many jobs have been lost and are not coming back.  At the same time, the Congress and the White House are playing politics with the essential second installment of the Coronavirus relief package.  Unfortunately, that’s to be expected with the elections looming.  And the biggest risk in the upcoming US elections is undermining the process itself.  Should the results be contested by either side, coupled with prolonged investigations, lawsuits and street protests, we as a country may be faced with the worst Constitutional crisis since the Civil War.  While long-term opportunities remain in the market, the short-term risks and expected volatility will be the dominate theme.

 

Sector Update

Energy as a sector has had a good run off the April fantastic collapse, but that run appears to be over.  Even as the crude still regains ground, the fossil fuel-heavy sector reverts to the selling pressure.  With green alternatives in energy and transportation are gaining hold and becoming cheaper, the writing for many of the sector constituents is on the wall: adapt or die.  Investors should consider themselves warned.

Basic Materials is a sector that is a leading indicator for the economy.  And its equities are the sector’s leading indicator.  So being the best-performing S&P sector for the last 1 and 3 months supports the US manufacturing and construction recovery.  The government-sponsored infrastructure projects, the “New” New Deal of sorts, is likely in our future (see more in the Question of the Month).  This would help recover many lost jobs while gearing up the economy for the next technological advances in energy and transportation.  Investment in materials should bode well for this vision.

Market Data

Want to see a market snapshot and all your favorite stocks in one place? Try our market data pages.

Question of the Month


This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

What will be the Government’s likely plan to replace the lost jobs?

Answer

With the unemployment still stubbornly high and many jobs lost for good, economists and market observers are increasingly questioning the future economic development.  As unprecedented as the pandemic consequences on the US economy have been, the effect on unemployment has in fact one historical parallel: The Great Depression.  Then, as it is now, the economy was entering a vicious cycle of bankruptcies and unemployment causing more bankruptcies and unemployment.  Back then, the solution that the FDR Administration came up with is the New Deal.  A large Government-led multi-year and multi-faceted infrastructure program, the New Deal has laid the groundwork for the next phase of the American technological development that helped win WWI and finally kicked in in the 1950s.  At the same time, the unemployment problem has been largely addressed and the future economic prosperity virtually assured.

We obviously live in a different world today.  But many issues facing our economy are not dissimilar.  Many roads, bridges, railroads and airports are aging and require upgrades or replacements, especially in light of our new health requirements in the Age of COVID.  The coming switch to the environmentally friendly energy and transportation will require a giant effort across industries and government agencies.  Finally, the telecommunications are also entering the new era of 5G and beyond.  It is arguably even more important in today’s economy that the physical infrastructure, and building the cell towers, fiber optics networks and data centers is about to kick into high gear.  Some of this work is done by private companies, but an argument can be made that it’s in the national interests and should be on a larger  scale, and therefore the government involvement is necessary.

The Trump Administration, as to some degree several administrations before, have put the infrastructure spending on the agenda.  Yet, as with previous administrations, seemingly more pressing matters and the opposition to what was viewed as spending-only bill have pushed it aside.  Now, like never before, this may be the only viable way to revive the economy.

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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Passed Pawn Advisors, LLC, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment assets mentioned above. Motif Investing portfolios that may be presented are created by Passed Pawn Advisors, LLC, and are available for purchase through their site.
 
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