June 9, 2020 Letter to Clients

We hope you and your family are faring well during this extraordinary time. As we have now reached the halfway point of the year, it would be an understatement to say that to date 2020 has been unlike any other year we have experienced. In recent days, unhealed social wounds have been brought painfully into focus across the nation. Please know that each of us at LePage Financial Group are deeply committed to promoting justice, healing and wholeness for all members of our community. Our firm is committed to empowering people to change their financial lives for the better. At times like this, we are reminded that part of that work is nurturing a stronger connection to our entire community, in whatever ways we can. With all that has transpired this year if there is anything we can do to offer support to you or someone you care about, please let us know.

In this mid-year letter, I would like to discuss some common questions I have received from our clients and provide some meaningful insight into the on goings of both the market and economy.

Why is the Stock Market Doing So Well When the Economy is Doing So Poorly?

It’s confusing for sure. With the economy doing so poorly because of COVID-19, many are left wondering what could possibly be driving the recent and ongoing stock market rally. With the sudden, dramatic drop in consumer spending coupled with rising unemployment numbers, the stock market appears to have become divorced from the economy. Economic indicators can help provide context for what can often seem counterintuitive behavior, especially as we face intense global disruption.

  • The stock market is known as the foremost “Lead Indicator”. Markets tend to rebound well before any concrete improvement in the economic fundamentals is apparent as stock prices today anticipate where the economy will be in 6-9 months out or longer. Investors buy shares based on expectations for what will happen in the future, rather than what is occurring in the here and now.
  • Unemployment is a “Lag Indicator” - not so great at forecasting but provides useful insight into past economic data. During the last recession, the stock market bottomed in March 2009, several months before we saw unemployment numbers peak.
  • Plans to reopen the country are well underway invoking consumer and investor confidence that there will be an economic boom to come. This is evidenced by “Coincident Indicators” which show the state of the economy as it is right now. Gasoline deliveries are trending higher, airlines are seeing more bookings and even the supply of toilet paper has become less of a concern these days, with Google searches for TP falling to near-normal levels.

Optimism has also lifted stocks higher in recent months as investors are hopeful for a swift economic recovery as the country begins to reopen and news of a fast-tracked vaccine continues to make headlines.

Is the Stock Market Having a Rally or Recovery? What is the Difference and Why Does it Matter?

The stock market goes up and the stock market goes down. When and why are age old questions that get talked about probably just as much as the weather. On March 12th, the Dow Jones and S&P 500 officially entered bear market territory, defined as a 20% decline in the stock market from an all-time high, bringing an end to the 11-year historical bull market run. Since that date, the markets have already recovered a significant portion of losses and you may be left to wonder if the worst is behind us. What is occurring is known as a bear market rally, a normal occurrence when stock prices bounce higher, reverse, bounce again and then head back to fresh lows. This can occur again and again until such time that one of the upward bounces takes hold and we enter a fresh new bull market. Deceitful things, market rallies can be. They can be long-lasting, going on for weeks, months or even longer and give investors false sense that the markets are in a recovery…right up until they drop again.

 Indicators that this is a narrow rally versus a full recovery:

  • Not all sectors have joined in the rally. Technology has largely propelled the markets upward and only a handful of companies at that. Microsoft, Apple, Amazon, Alphabet (Google’s parent company) and Facebook have most certainly benefited from people sheltering at home, using social media more and ordering goods online.
  • Representing approximately a 20% share of S&P 500 market capitalization, these mega-cap growth stocks not only are powering the market higher now, they are continuing a trend we saw from them during the bull market run.
  • The uneven nature to the rally is further highlighted by tech’s big gains against the struggling consumer sectors such as retail and travel, indicating the rally is too narrow. For it to be sustainable there needs to be broad participation amongst the various sectors, something we are not yet seeing.
  • The fear of missing out, commonly referred to as FOMO, has also contributed to the rally’s success by encouraging a new wave of investors to inject money that had previously sat on the sidelines into the markets, particularly into well-known technology stocks.

What have the Federal Reserve and Congress Done in Response to the COVID-19 Crisis?

Both the Federal Reserve (the Fed) and the Federal Government have taken a broad range of steps to combat the economic disruption caused by COVID-19. The cumulative relief packages by both the Federal Reserve and Federal Government dwarf what we saw in 2008. To date, Congress has passed trillions of dollars in fiscal programs, while the Fed has added trillions of dollars in monetary stimulus. The tables below highlight the herculean efforts taken by both to mitigate the economic effect of the virus.

Monetary Response:


Fiscal Response:

What Can Investors Expect for the Second Half of 2020?

When I last wrote to you during the thick of the stay at home orders, massive containment efforts consumed the country as new case numbers continued to rise. The tireless work done by frontline employees has fortunately allowed many states to begin reopening in phases. It remains to be seen if a second wave of the virus will sweep the nation. If that were to occur, which we certainly hope it does not, we do not anticipate a shut down of the economy on the same scale that we saw at the start of the year. Looking ahead, businesses will face significant challenges as the economy reopens with strict protocols leading to a reduced workforce, reduced revenue and a likely increase in costs associated with adjustments to business models that the crisis demands. Even with many returning to work, we will continue to have a double-digit unemployment rate through the end of year, although likely lower than recent spikes. As the markets continue to work through this uncertainty and the country navigates a constantly changing social situation, investors are likely to experience ongoing volatility.

With the long-awaited summer season approaching, I recognize that many of us will be experiencing a vastly different season than usual. This summer’s slower pace will hopefully give us more time to reflect on what matters most to each of us. In looking at my closing message in our last letter, I believe now more than ever the importance of reconnecting and reengaging with our loved ones and turning to what brings us and those around us peace.

We wish you and your family the very best.


Steve LePage