[Market Madness] Edition 0072
Laborious Labor
Slight disappointment
Well folks, the weekly jobless claim from last week missed expectations, coming in at 1.48 million (versus the expected 1.35 million). Total continuing claims had fallen 767,000 to bring the total number of unemployed people to 19.52 million. This stirred the futures and the open this morning. By midday, and some help from bank stocks, we saw markets move between green and red as the instability continues.
Bank stocks saw a boost from a relaxing of the Volcker Rule by regulators. This more easily allows banks to roll back some of the post-2008 Dodd-Frank restrictions that were put in place to help prevent overt risk taking by the banks. This will be an interesting development, as many of the regulations imposed by Dodd-Frank are heavily bipartisan in nature. We will have to keep an eye on any developments from this change in policy.
Starting soon, I am going to start a new weekly segment collecting career insights and advice from friends and mentors in my network. The goal is to provide a sense for different finance career paths, their day-to-days, and much more! Stay tuned for the first segment on July 10th, and any updates between now and then.
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
Fundamentals
Thursday Close:
Dow Jones Industrial Avg: +1.18%
S&P 500: +1.10%
NASDAQ: +1.09%
US 10 YR: 0.681%
Crude OIL: $39.04
Market Madness Portfolio: +0.93%
COVID 19 Global Cases: 9,649,159
Indices Overseas:
FTSE 100: +0.38%
Nikkei 225: -1.22%
Hang Seng: -0.50%
TEDRATE: 0.15
LIBOR (3 month): 0.28375%
IMF plays the correction card
The International Monetary Fund (IMF) is stepping in to warn the crowd of something we’ve discussed at length here on Market Madness — the growing disconnect between what we are seeing in economic data and what we are witnessing in the financial markets.
'“This disconnect between markets and the real economy raises the risk of another correction in risk asset prices should investor risk appetite fade, posing a threat to the recovery,” the IMF said Thursday in its updated Global Financial Stability report.' (excerpted from article)
Their analysis concludes that there is a major distance being built between true values and the runaway rising market of asset prices. This trend is something that they are noticing across the major develop economies and markets, and the opposite effect in emerging market economies (market prices below fundamental valuations).
'“According to IMF staff models, the difference between market prices and fundamental valuations is near historic highs across most major advanced economy equity and bond markets, though the reverse is true for stocks in some emerging market economies,” it said.' (excerpted from article)
The challenges that come from a correction can be devastating for all market participants in the short-term, particularly given the global economic conditions now. That is not to say that we should not experience market corrections, as they provide a reality check to market prices when compared to the fundamental values underlying those prices. It is also expected that there should be a correction in asset prices since the IMF predicts a contraction of nearly 5% to global GDP. This decline to global GDP should not be a surprise since nearly all production had been paused for almost two quarters of the year. As production sets off to pick back up in the second half of the year, there will still be a lot of uphill challenges to get back to production levels we saw in late December and early January.
When output falls, the underlying asset prices naturally should fall accordingly. Pricing this information into the market should allow for investors, and the market at large, not be put into a state of shock and therefore, decrease even further. Given the ongoing news about novice retail investors entering the market and making ‘interesting’ bets on stocks, we can only hope that the contraction does not spook this subsection of the market too much, resulting in an even larger selloff.
Having the understanding that a short-term correction does not indicate a loss of value forever is key to investing for the long-term. Share prices will come back, and most likely return and even surpass the highs of January. As contractions are a natural part of the economic cycle, long-hold investors need not be too concerned. Shorter-term investors may be weary of the impending threat of a decline in prices above what we’ve been seeing the past few days. Regardless, it is still a little too early to judge how and when this contraction will occur, if at all as well.
401(k) shake up
As you may or may not know, 401(k) plans are the latest and greatest in company-sponsored retirement benefit plans. They are the successor to the pension plans that many of our parents knew and loved. Many regulatory and policy changes have been suggested over the years to help make the 401(k) more closely resemble its predecessor. A new policy change is aiming to implement Private Equity investments into the plans, something that was also available under pension plans of the past.
Private Equity firms have long since been trying to break into the retirement/401(k) space, and with good reason; the market for 401(k)s is nearly $8 trillion dollars. This step forward in the policy is marked as a victory for these PE firms. They will be able to start offering their investments in a target-date format (which adjusts the stock-to-bond allocation from riskier to safer as someone ages and approaches the ‘target date’).
'“401(k) plans have become a huge pool of long-term money,” said Fred Reish, an attorney who specializes in employee benefits. He said other illiquid investments, including hedge funds, may also use the guidance to market themselves as additions to target-date funds.' (excerpted from article)
The downside comes in the likelihood of increased fees on these 401(k) plans; an area which has seen beneficial and notable declines over the years. The increase in fees is a potential drawback for consumers, who are less happy when the fees they must pay go up. However, since PE firms typically target a much higher return than the traditional equity markets, the trade-off could be less noticeable than currently anticipated.
"Critics note the effect fees can have on fund returns. Private-equity fund managers generally collect a 2% management fee plus 20% of the profits, versus less than 0.5% a year, on average, for the stock funds that dominate 401(k) menus, according to BrightScope Inc. Private-equity funds must generate consistently higher returns to compensate for those fees and the extra risk investors run when buying illiquid securities, said Rosemary Batt, a professor at Cornell University. After fees, they “shouldn’t just meet the stock market but beat it” by at least 3 percentage points, she said. It is hard to tell how much return private equity delivers." (excerpted from article)
This is an area that may seem dry on the surface, but like with the PE folks, there are many dollar signs in this industry. Late in 2019, we saw the passing of the SECURE Act, affording small businesses the ability to establish 401(k)-type plans for their employees. Now, we are seeing this movement into the PE space, hoping to boost returns and increase the slice of the pie for different investment choices and styles. Cool stuff is on the horizon here, I can imagine.
Quick Takes
No quick fix for the new coronavirus spikes in U.S. states. (via CNBC)
COVID 19 studies bring about large demand for trial drugs. (via WSJ)
Pandemic cited as reason for Canada’s sovereign credit downgrade. (via WSJ)
Yesterday, the U.S. had its highest single-day of new COVID 19 cases, surpassing the April record. (via CNBC)
Wirecard falls into insolvency. (via FT)
Texas to pause reopening process amid rising hospitalizations. (via WSJ, headline only)
Google to begin deleting user’s location history (after 18 months) by default. (via CNBC)
Reader’s Corner
The reader liked this article I got word from a friend (shout out Connor) about the impact of COVID 19 on the developing world. Read that here.
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Behind the Madness
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