Stick to the Plan

Earlier this year, after the market plummeted, we presented two potential paths for its future:

• a V-shaped recovery, where the market would bottom, quickly recover, and hit new highs.
• a W-shaped recovery, where the market would bottom, start to recover, but would ultimately relapse and revisit the prior lows.

If you recall, although most felt a W-shaped bottom was probable, our preferred and expected path was the V-shaped recovery. Because of that expectation, we did not flee stocks. Instead, we rotated into companies with the strongest earnings and sales.  Thankfully, that plan has worked considerably well so far in 2020.

“Sticking to the plan” has been one of the keys to success.  Maintaining a disciplined approach and not letting fear or panic dictate how we ran the portfolios during the March market crash paid off. It reminds us of Proverbs 16:3:

“Commit to the Lord whatever you do, and he will establish your plans.”

At Ambassador, we not only seek to multiply what God has entrusted us to manage, but we also commit to doing so in a biblically responsible fashion. By committing our plans to God and sticking to the “proud to own” plan, we avoid both fear and greed as motivating factors.

Now the path forward for the markets is still one marked with challenges and uncertainty. The August and September choppiness we spoke of a few weeks ago is still underway. With the U.S. economic recovery recently hitting a speed bump, the U.S. dollar has begun weakening. With a weaker dollar, commodity inflation follows.

In July:

• The Producer Price Index (PPI) soared 0.6%
• Wholesale gasoline prices surged 10.1%
• The Consumer Price Index (CPI) also increased by 0.6%
• Even more concerning, Core CPI—which excludes food and energy—surged 0.6%, as well.  This was the largest monthly increase since January 1991.

With inflation clearly heating up, this presents good news and bad news. The good news is the Federal Reserve (the Fed) is doing all it can to prevent deflation from setting in. That can cripple an economy. The bad news is soaring commodity prices can also lead to higher consumer prices for an already shaky economy. The Fed is doing all it can to balance these two threats.

Last week, the Fed announced its July Federal Open Market Committee (FOMC) meeting minutes.  The minutes reflect they are less optimistic about the U.S. economy, and thus they are considering lowering their economic forecasts for the second half of 2020. The minutes also showed that they expect GDP and unemployment numbers to be less robust than they previously forecasted.

The Fed continues doing all it can to stimulate the economy by keeping key interest rates between 0% and 0.25% for the foreseeable future. It will also continue purchasing $120 billion worth of Treasuries and mortgage-backed securities every month. These activities have certainly boosted the stock and housing markets!

We have seen the stock market hit new all-time highs, and the housing market is on fire too. Recently, the Commerce Department revealed that housing starts surged 22.6% in July to an adjusted annual rate of nearly 1.5 million units. Consumers are clearly taking advantage of low mortgage rates, and this is creating significant demand in the housing market.

Overall, the Fed’s actions and notes combined with the latest economic data and the lower summer month trading volumes have created a choppy market environment. This type of choppiness should most likely continue for at least a few more weeks. Any dips in the market should present good buying opportunities. The best path forward remains sticking to the plan as we navigate these choppy waters.

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.