Quote of the Week

“To solve the economy, we must solve the virus.” Neel Kashkari, American banker and politician who is President of the Federal Reserve Bank of Minneapolis.

Technical Corner  

Here is an interesting statistic. The S&P 500 Index is 16% below its February 19th all-time high, but all the median stocks of the S&P 500 trade at a more substantial 25% below its high. Five well-known tech companies make up a hugely disproportionate share of the Index and they are all positive year to date with the range being between +3% and +29%. So, all is not so well in Mudville because 495 Casey’s are striking out.

In case you somehow missed it, the US Unemployment Rate hit a 90-year high in Friday’s Jobs Report release for the month of April. Weekly Jobless Claims data suggest that, for many Americans, it’s going to get a lot worse on the labor front before it gets any better.

Investor consensus and policymakers alike keep expecting consumers and businesses to lever up, but the data I’m tracking continues to suggest otherwise. Per Federal Reserve researchers: “Some 42% of American non-financial public companies are discussing slashing investments, 27% are talking about cutting equity payouts, and 17% are focused on drawing down on credit lines, conclude economists Andrew Y. Chen and Jie Yang. At the peak of the last recession, the figures were 25%, 11%, and 7%, respectively.”

The other huge concern I have is that we are coming out of the “sequestration” too early. All of the scientists say that we need greatly expanded testing and enough people to do the contact tracing of people who had contact with infected people. We don’t have either at this point. This virus is highly contagious vs. the flu or the common cold, so testing and tracing are critical. If we get this wrong, we will be back to where we were in March, only worse.

Dr. Thomas R Frieden, former director of the CDC, stated, “We’re reopening based on politics, ideology, and public pressure. And I think it’s going to end badly.”

A few weeks ago, I was accused of being too negative. For those of you old enough to remember the TV show Dragnet, Sargent Joe Friday was always saying to people he was interviewing, “Just the facts.” I hope I am relaying “just the facts.” As a point of reference, I went back and read some old letters I wrote when the markets and economy were positive. I wasn’t negative then.

For America, I genuinely hope the science is wrong.

Larry’s Thoughts

I know, I know, Larry is negative again.  However, I think you should know that Americans are expected to pile on debt during the pandemic.

Americans have been chipping away at their debt, but very slowly. A new report by Northwestern Mutual found that adults who carry debt owe an average of $26,621, exclusive of mortgages, and 13% said they expect to be in debt the rest of their lives.

The good news is that the total average debt among those who have debt has been declining over the years. It was $29,800 in 2019 and just over $38,000 in 2018. But that was before the coronavirus outbreak.

Covid-19 continues to have far-reaching economic effects on people’s daily lives. As the full extent of its impact comes more into focus, it is reasonable to expect these numbers will increase as people start to rely more and more on credit to try and adapt to their “new normal.”

The “2020 Planning and Progress Study” conducted by the Harris Poll between February 12 and February 25 and including 2,650 American adults, found that nearly three-fourths (74%) of Americans reported having some debt, and 33% spend fully one-third of their monthly income paying it off.

Credit card bills (22%) and mortgages (21%) are the leading sources of debt for Americans. Car loans (8%) and personal education loans (8%) followed as the next highest sources of debt.

Of the 42% of Americans who report holding credit card debt, the average amount is $5,400. Of that debt, more than half (52%) went toward paying for necessities such as rent, utilities, and groceries. Thirty-six percent went to discretionary expenses such as entertainment, vacations, or dining out, and 11% was used for educational expenses.

The study also found the 30% of respondents either or always adhere to paying the minimum amount due on their credit card bills, just covering the interest without paying down any principal. Furthermore, 33% pay higher than a 15% interest rate on their cards, and 9% do not know what interest rate they are paying.

While nearly two-thirds indicated they would hold their credit card debt for one to six years, 12% expect to be in credit card debt between 11 and 20 years, and 7% expect their credit card debt to last more than 20 years.

The study also found that Americans have regrets about how they have handled their credit cards. Sixty-one percent said if given a choice, they would have changed the way they used credit cards in the past. Fifty-six percent would have limited their use to cover necessities primarily; 37% would have gained a better understanding of interest rates, and 23% would have waited to get a card until they really needed one.

More than half of respondents (58%) said carrying debt has had a substantial or moderate impact on their ability to achieve long-term financial security. Additionally, many indicated that debt hampers their ability to reach major financial milestones. It forces them to delay significant purchases, and 36% said they put off saving for retirement, and 29% said it delayed them from buying a home. Another 8% said they deferred having children, and 7% said it delayed getting married.

Sgt. Joe Friday

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These are the opinions of Larry Lof  and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the US economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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