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Tom L. Stringfellow, CFA®, CFP®, CPA, CIC | June 15 , 2020

The following has been compiled from information and comments provided by the investment professionals of Frost Investment Advisors:

The Grinding Comeback…

The markets reversed course last week bringing the three-week rally to a halt.  By Friday’s close, the S&P had lost 153 points over the prior five trading days, with most of the damage the result of an unexpected Thursday sell-off (down 5.9 percent).  A number of factors contributed to the market’s relapse, including concerns over an increase in new COVID-19 cases and a Fed warning of a few rough months still ahead.  With all states essentially open or opening for business, an uptick in new COVID-19 cases caught investors’ attention, along with concerns that the openings were premature. 

Although it is highly unlikely that any of the states will reverse course in their efforts to restart daily lives, the market jitters dovetailed with some downbeat comments from Chairperson Powell.   The FOMC head was clear that there were no expectations for interest rate hikes until probably late 2022 (a potential positive), while he also implied that we still had a long way to go before the economy looked normal (a negative).  His comments were generally reassuring, as he emphasized that the Fed’s focus remained steadfast and that it was dedicated to providing market stimulus with the use of new lending facilities and continuing asset purchases.  Year-to-date, Fed asset purchases have amounted to $3 trillion, bringing its balance sheet up to a current $7.17 trillion and growing.

During the market sell-off last week, investors quickly found that few hiding places existed, although some were a little worse than others.  The price action was a bit more frenetic with the more cyclical energy, financial and industrial company stocks.  By Friday’s close, investors had cashed in $11.1 billion from their equity funds and invested the proceeds and additional money market assets, to the tune of $26 billion, into bond funds.  Over a four week period, the flows were a little more significant, with equity sells totaling $38 billion and fixed income fund purchases totaling $77 billion.  Despite last week’s scare, the S&P 500 has still managed to hold on to returns of ~36 percent since the March 23rd lows. 

Given the market rally since late March, pundits have expressed some concern that stock prices were getting ahead of themselves.  The news over the past few weeks though has painted a picture of an economy trying to restart from its sudden stop earlier in the year.  Although the economic data has continued to be difficult to understand, we still must separate the recent past history of the economy with what the data is telling us going forward.  One example, and also one of the biggest surprises for the week, was the job market data.  The much stronger than expected job report for May (+2.5 million rebound in employment) was more than expected, given that states and businesses were beginning their re-opening phase.  While it is only a fraction of the huge number of jobs lost, it is one of several macroeconomic buildi®ng blocks that point to a longer-term economic recovery.  As the economy awakens, we expect that initial jobless claims will continue falling and June payrolls will show a larger increase in jobs as the opening efforts increase across the states.  This expectation depends of course on how significant the recent spike in COVID-19 cases turns out to be.

More news this week should give us a better understanding of our progress, including whether investors have continued to exit equities or they’re willing to be more thorough and sift through the economic news for the positives.  One headline that almost certainly caught investor attention was from the National Bureau of Economic Research (NBER) as it recently declared that the U.S. economy had peaked in February followed by a recessionary call in March.  Readers may remember that March was not only the market trough but also the beginning of a revival.  Whether it was a bear-market rally or the beginning of a recovery is still to be determined.  Looking back to 1980, four of the five previous recessions resulted in positive S&P returns 12 months after the recession was declared.  The exception was the dot-com bubble in the early 2000s.

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