Investor Insights

September 2020 Investor Report

Published: November 1, 2020Updated: October 29, 2020

By: Stash Graham

The stock market pulled back sharply in the face of concerns over the increased possibility of a “Double Dip Recession”. The reason for this concern: Capitol Hill’s priorities have shifted focus from getting a fourth stimulus bill completed to nominating a Supreme Court justice. This shift in priority put immediate downside pressure in the markets. Federal Reserve Chairman Jerome Powell has mentioned on several occasions in the last month that fiscal stimulus is needed to keep the current economic recovery going. As of this letter (September 29th), the S&P 500 was down more than -4% on above-average trading volume. From an industry perspective, the technology sector led the market lower. The technology-heavy Nasdaq Composite Index was down approximately -6% during the same period. We have warned in the past that the narrow breadth of this market rally has given a false sense of how overall markets have done. Most S&P 500 stocks are still down -20% from the highs. Conversely, the technology sector components within the S&P 500 have led the headline index higher over the Summer. As their stock prices increase, their influence grows for the good and the bad. September was the first time we saw a pronounced pullback in the technology sector and hence this puts significant pressure on the S&P 500 headline index. In total, the S&P 500 has now finished in the red for four consecutive weeks. Gold prices were down -4% as of this letter after almost reaching $2,000 per ounce for the 2nd time this calendar year. In last month’s letter, we warned that you might see Gold take a breather considering the abnormal rise in the precious metal. We still believe Gold should have a good couple of years as we believe the Federal Reserve will be forced to maintain an aggressive money printing program to maintain asset price stabilization.

Markets were not helped by President Trump’s former FDA Commissioner appearance on CNBC where he warned that the COVID-19 was going away anytime soon. Markets lost a quick percentage point within an hour of Scott Gottlieb’s late August appearance. “I think most peoples’ perception is we had one epidemic in New York, in the New York region, we came down the epidemic curve, we had another epidemic in the Sun Belt, so that really looks like and feels like a second wave,” Gottlieb told CNBC’s Squawk Box. “I do think that we’re going to have a third act of this virus in the fall and the winter and it’s likely to be more pervasive spread in a broader part of the country.” On Tuesday, September 29th, Gottlieb returned for another appearance to CNBC stating, “As we head into the fall and winter, the conditions are right to see continued, more aggressive spread of this virus.” This appearance put a stop to a nice two-day rally that the market was enjoying at the end of the month. We continue to monitor this situation closely as another wave of the virus spreading will negatively impact total spending (as we witnessed this Spring). As the economy is teetering on expansion or contraction, we need everyone to continue to spend. As we have illustrated in the recent past, high-income earners are especially important now that low-income earners have lost the government transfer payments from the 3rd stimulus bill. If citizens pull back on spending, independent of the reason, the economy is not sustainable.  

On September 18th, the Federal Reserve released its annual Survey of Household Economics and Decision-making. We were more interested in the special supplement that they released with their annual fixture detailing the economic downturn on the American household. First, and most importantly, 77% of consumers said they were doing at least okay financially, up from 72% in early April. This is welcomed news; however, this should not be too surprising as we have witnessed the economic reopening across all 50 States and trillions of dollars in checks sent to American families. Second, the pain among the lowest income earners continues as job creation for this income group remains absent. As reported by the Fed, only 25% with household incomes below $40,000 have regained their prior employment. This statistic compares with 39% of those with incomes of more than $100,000 that have regained their prior employment. We pointed to the decline in job listings in last month’s letter, a lot of this can be explained by the lack of small businesses opening and the lack of revenue growth over the last 3-4 months. Notice the charts below from Harvard-based Opportunity Insights and how flat the lines have been since our initial economic rebound in mid-May (small business openings on left and small business revenue trends on right). If small businesses, which make up half of the employers in the country, are not reopening as economic restrictions have been paired back then it will be hard to project material job growth over the next year. For now, a reliance on the government for economic stability and growth continues.

All of this is occurring at a time when the other part of the labor market equation is still finding trouble. On September 24th, the Department of Labor threw the market a curveball as initial jobless claims unexpectedly increased after weeks of a slow move lower. While the initial jobless claims rate has fallen from the 1+ million per week, the current range is still higher than the peak layoff weeks during the Great Financial Crisis and Dotcom Bubble. We warned that another round of layoffs was likely to occur but this time from the larger companies. Last week, Aerospace/Defense giant Raytheon Technologies announced a 15,000 person layoff. Financial services firm Raymond James announced they are laying off 4% of the company payroll. We must start to see a climb in the number of job postings to maintain pace with the amount of the Americans being laid off.

Oppenheimer Holdings, Inc Senior Secured Bond (Maturing in 2022)- Our bond was called for early redemption during the last week of the month. The investment firm raised another senior secured bond earlier in the month for a lower coupon rate (5.0%). While we are not surprised by the call, we are disappointed that another quality high yielding bond (coupon rate 6.5%) gets called a couple of years in advance by a non-investment-grade company. Our partners, who are holders of the Oppenheimer bond, should expect to receive their principal and accrued interest in early October. The end of the year will have an eventful finish. We will continue to monitor all newsworthy events. Please feel free to reach out to us with any questions!

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Graham Capital Wealth Management, LLC (“Graham”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Graham and its representatives are properly licensed or exempt from licensure.