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CIG Asset Management Update May 2020: Stay the Course

The good news within these numbers is that for the month of May, the FAAMG stocks and other 495 stocks were up almost equally. This could be quite constructive, as a broader number of stocks contributing to the overall return of the S&P 500 may lead to a healthier market.

We are encouraged as more states begin the process of re-opening their economies. It remains to be seen how the civil unrest that has followed the death of George Floyd in Minneapolis over the past few days will impact re-opening efforts.

On May 22, Barron’s published an article, “Day Trading Has Replaced Sports Betting as America’s Pastime. It Can’t Support the Stock Market Forever.” Within this article, Jim Bianco from Bianco research argues many people who typically would gamble on sports went to the stock market as sports have been shut down. In addition, many Americans took their coronavirus stimulus check and invested it into stocks. Online brokerages have seen a surge in new accounts this year. Robinhood saw three million new accounts in the first quarter, and the total number of stock positions more than doubled year-to-date⁽⁶⁾, even with the platform suffering crashes and glitches on heavy trading volume days.

Bianco believes that this retail investor mania has driven much of the markets’ 30%+ retracement from the low.⁽⁷⁾ Retail investors piled into low-priced stocks that were down considerably, hoping to make big profits if they rebounded. The dangers here are i) hundreds of companies have withdrawn their revenue guidance for 2020⁽⁸⁾, ii) only 63% of companies beat analysts’ consensus expectation – the lowest quarterly figure in seven years⁽⁹⁾, and, finally, iii) multiple pharmaceutical companies have put out “market-moving” positive press releases without remotely having the vaccine data to back up their claims⁽¹⁰⁾.

As we talked about in our recent webinar, we at CIG believe the path to successful investing over the long term is to develop a plan, exercise discipline, and stay the course. Retail investors piling into stocks that are down significantly or betting on vaccine cures, looking for short term profits, is not a long-term plan.

The most encouraging news in May was the May 28 unemployment claims report that showed continuing claims decreased by 3.86 million to 21.05 million. This is the first decrease since February, before the shut-downs. Although the absolute level of continuing claims is still over three times higher than the post-Great Financial Crisis high of 6.64 million⁽¹¹⁾, we are happy to see claims heading in the right direction. Volatility, as measured by the VIX, has also decreased from 34.15 on April 30, to 28.43 on June 1. This is still high versus historical averages; however, it is a far cry from the March 16 high of 82.69⁽¹²⁾.

If volatility continues to fall and high frequency data following the progression of the economy reopening improves, we are likely to continue with the plan to rebalance towards the strategic equity targets. If volatility surges and reopening efforts are hindered by a resurgence in coronavirus cases due to the recent crowds of people protesting, we have a plan. Please always be mindful that our main objective is to reach the return necessary to achieve your goals as outlined in your financial plan, not to pursue returns without regard to risk. Valuations remain excessively high.