No one is too sure about this
Well folks, much of the same from the past few days remains today with protesting by day and some violent looting by night. To some surprise, futures were positive and the opening was met with upward momentum in the Dow Jones and the S&P 500. Investors appear fixed on finding the positives, citing optimism about reopening and a COVID 19 vaccine being reasons to buy despite the ongoing civil and economic gloom.
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Fundamentals
Tuesday Close:
· Dow Jones Industrial Avg: +1.05%
· S&P 500: +0.82%
· NASDAQ: +0.59%
· US 10 YR: 0.678% | 99 5/32
· Crude OIL: $36.92
· COVID 19 Global Cases: 6,441,152
Indices Overseas:
· FTSE 100: +0.98%
· Nikkei: +1.19%
GDP’s downward spiral
The Atlanta Federal Reserve branch’s center for quantitative economic research is suggesting the second quarter 2020 U.S. GDP figure to be an ugly one. Their GDPNow outlook is projecting a decline in GDP of 52.8%.
There appears to be a lot of downward pressure on U.S. manufacturing, which, in turn, is holding down U.S. economic cornerstones: consumption and private investment.
The GDPNow estimates, the article says, tend to get more accurate as the end of the quarter comes closer, which is June 30.
We should be expected a bad Q2 given how extended the lock down protocols were as well as the slow reopening process. Key Fed analysts are still optimistic for a modest recovery in Q3 and even some positive growth in Q4, as indicated by the ‘swoosh’ recovery chart. That being said, nearly every industry and sector will follow a different recovery pattern based on the challenges faced that are particular to that industry. For instance, manufacturing and industrial production might experience a faster bounce back, whereas consumer retail and the restaurant industry might face a longer crawl back to life.
It will be important to follow the jobs report on Friday (June 5) to see what’s happened in April. The current expectation is that we are likely to see that another 8.3 million Americans have filed for unemployment, bringing total unemployment in the U.S. to 19.5%. There is a lot of material circling that makes understanding the economic recovery as a whole difficult. All I can say is to be prepared for a longer than anticipated recovery.
Read more here: https://www.cnbc.com/2020/06/02/gdp-is-now-projected-to-fall-nearly-53percent-in-the-second-quarter-according-to-a-fed-gauge.html and here: https://www.frbatlanta.org/cqer/research/gdpnow
Its only paper
Today, I created a portfolio that I will follow on a paper trading system called Alpaca Markets (https://alpaca.markets/). I think that this will be a nice challenge for myself, and because a reader suggested that I follow some investments over time. (shout out Mark A.) I’m choosing paper trading because I do not have the capital required to make such a sophisticated portfolio and I can have fun with it through the process and not worry so much about actually losing.
These are the investments I have chosen to build the portfolio and the percent (%) allocation of the portfolio each investment is:
· AGG: iShares Core U.S. Aggregate Bond ETF (12%)
· SPY: SPDR S&P 500 ETF (35%)
· FLYT: Direxion Flight to Safety Strategy ETF (8%)
· MTUM: iShares Edge MSCI USA Momentum Factor ETF (25%)
· AAPL: Apple Inc. (5%)
· VEU: Vanguard Total World Equities (ex-U.S.) (15%)
My goal was to target a portfolio with an overall beta between 0.75 and 0.85. With these weightings, I managed to develop the portfolio to have a beta of 0.79. (Beta measures the volatility of an investment relative to the market, or its systematic risk. A beta value less than one means that the portfolio is less sensitive to market changes, since the market is considered a beta of 1.0.)
Using the Capital Asset Pricing Model (CAPM), and current risk-free U.S. Treasury rate (U.S. 10YR Bond at 0.68%), I was able to calculate a probable expected return on the portfolio of about 6.8% with a total variance (another measure of risk) of about 15%.
The CAPM is the most used method of pricing returns of an investment, given 3 inputs: Beta, the risk-free rate, and the market risk premium. Because we are in a very low risk-free rate environment, the overall projected return will be lower than in January. We won’t get into the usefulness or lack thereof of CAPM here, but it is worth looking into if you are interested. (read more here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2505597)
I will continue to follow this portfolio as time moves forward and make any changes as I see necessary. Right now, the goal is to get high equity exposure both inside the U.S. and around the globe. The equity risk is to be balanced by the bond etf as well as the flight to safety etf.
I’ve not really gotten into something like this before, so I am excited to watch and see how it goes over the coming months, especially given the current activity in the financial markets.
Quick takes
· NYC extends nightly curfew to end of week, according to Mayor De Blasio. (via CNBC)
· Oil prices are seeing upward movement today as traders anticipate further supply cuts. (via WSJ)
· Donnie threatens protesters with Insurrection Act to calm the streets. (via NPR)
· Facebook employees stage virtual walkout to protest Trump’s violent posts. (via NY Times)
· Tokyo issues stay-at-home alert after new jump in COVID 19 cases. (via CNBC)
· The gold industry is seeing spark of M&A activity despite the overall market still feeling shy. (via FT)
· Economist from St. Louis Federal Reserve Branch suggests negative rates could be needed for a strong economic recovery. (via CNBC)
Reader’s Corner
The reader is following what is going on politically between the U.S. and China. Tensions have risen notably in the past couple weeks surrounding a multitude of issues from trade to dealings with Hong Kong. China has suggested a Cold War with the U.S. could be on the horizon.
But what exactly does that mean?
Get the WSJ’s take on that issue here: https://www.wsj.com/articles/dear-america-a-cold-war-with-china-will-be-expensive-11591094926?mod=hp_featst_pos3
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