Henry+Horne Wealth Management President Michael Carlin and Joe Taiber discuss the market in the third quarter of 2020, the impact of the coronavirus, the upcoming election and more.
Good morning, everyone, it’s Michael Carlin, president of Henry+Horne Wealth Management, with your Manage the Funds podcast, your Capital Market Outlook. Once again, we are joined by my favorite, my friend, Joe Taiber. Thank you so much for joining us, Joe, again.
Thanks for having me again, Michael. A pleasure to be here.
Oh, come on. You’re most welcome again. Joe is the founder of Taiber Kosmala, our CIO Resource. We couldn’t be happier. So, we are going to be going through everything about the world economy, the stock market. There’s an understatement, a tremendous amount for us to be covering. But before we get into all that, I’m curious, with all the stay at home things that are going on right now, Joe, for you personally. I know that I am here at the house, again, having been shut-in, I spend a lot more time looking around the house like a lot of other folks are doing. And so I am doing a pretty good-sized landscape project. Cutting trees down and replacing trees is going to be planting about 9 Ficus trees. They’re called Indian Laurels. We’re getting some fruit trees and all of that stuff, which I’m excited about. I’m really, really excited about it. I wonder, is there anything that you’re doing like everybody else is doing? In this COVID shutdown?
Well, I’ll continue on the arborist theme, Michael and say I’ve been spending a lot of time myself outside in the garden in the city. So I’m in the city of Chicago. And on a very short list of things that are nice to do. Recently I’ve been spending time outside with my wife in the backyard gardening amongst our three River Birch’s, which is a pretty rare thing in the city of Chicago. Our yard, our backyard we have three huge River Birch’s in a pretty small plot backyard. So it’s a shady little Shangri-La. And that’s what we’ve been spending a lot of time and a little bit of wine at times.
I’m not that much fun. I really am not. So for me, it’s just the greenery. So we’ll wrap up more on that later off-line. So let’s go ahead and dive into the market outlook. There’s on the edge of too much to cover. So I’m going to go ahead and share my screen and take us through this market outlook. I thought this was a neat picture. I mean, the ultimate sign of the times. You’ve got Treasury Secretary, you’ve got Federal Reserve Chair, Powell you’ve got Mnuchin and Powell touching elbows, not shaking hands with masks on. If this isn’t a sign of the times about how, you know, governments are governments working towards creating a better financial future for or at least a smoother recovery for the U.S. economy and the fact that they’re masked and not shaking hands. I thought that was pretty neat. But getting into some of the data and again, just to reiterate, we looked towards the data to gain a greater understanding of how we need to continually make proactive changes for client portfolios.
So we’re gonna take you through the world of the US economy and the stock markets to see to it to show you what we see and then start to reveal the greater picture about how we see these facets coming together to share our vision of the U.S. economy and how we’re helping to navigate client portfolios moving forward. So, if you look here, Joe, as I’m sure you see the second quarter, 2020 returns, what a great bounce-back across the board.
But if you’re looking for a year to date returns, I think what would be surprising is that many people look at the tech market that responded very well with a positive number or the large-cap stocks like the Dow Jones or S&P 500 that were down only about three. But look at Small Cap International and Emerging Markets still year to date down 13, 11, almost 10 percent for emerging markets. Joe, you know, look at the credit markets. High yield still down for the year in emerging market debt.
Again, had a nice run, as did emerging markets recently. But wow. I mean, it’s really a tale of two different parts of the stock market, because not all areas of the market responded equally.
Joe Taiber
Yeah, no question. Remarkable. Six months. First-quarter, obviously, really bloody with the Coronavirus in March and April, February, March, April and then followed by 20 plus percent return for the second quarter. First time since 1932, we’ve had a minus 20, followed by a plus 20% return quarter after quarter. The only time that ever happened was 1932 in fact. So just speaks to the volatility, the rare error volatility in a quick V-shaped recovery of the stock market. I think later we’re going to talk about the shape of the economy, which doesn’t look so much like a V-shape, but certainly, pretty remarkable performance when you look at the stock market.
International markets versus U.S. markets, like you said, Michael, you can definitely drive a truck through the dispersion returns across those, which I think we’re going to cover a little bit more finally later on. But, yeah, definitely pretty remarkable for six months of 2020.
Yeah, it’s important again to gain a greater understanding of where what we have seen and if you look, it’s interesting to me when you look at the Fed balance sheet, I just want to provide a little very, very quick perspective, because for those that are avid listeners to our market outlook, this is not new to you. But Fed balance sheet expanded really through 2015, held strong through 2018. They started to let their balance sheet slide. Interesting that as the Fed’s balance sheet was sliding, so did the U.S. stock market performance. And then take a look at what happened to the US Federal Reserve balance sheet, starting with COVID. And as soon as the balance sheet expanded, it moves hat in hand with the S&P 500 also surging higher. So there really is a direct link between Fed intervention and providing a market calm and subsequently market performance. The other quick little thing on the side is that the Fed still has an infinite amount, more room to continue to pile money into the US economy. This has been good for U.S. stocks. I’m speaking about the Fed interjection of capital. We do have ample proof that with the absence of the Fed helping, that isn’t necessarily helpful to the market with the Fed helping, it’s very helpful to the market. I mean, Joe is there any color that you need to add to that or just is what it is?
Joe Taiber
Well, it is what it is. You and I talk all the time and I just reiterate the importance of liquidity as a marker of true north almost. And this is a case in point. So making sure that you have a really solid grasp on what’s happening with the backdrop of liquidity is of paramount importance. And that first picture of Powell and Mnuchin I think is really, really funny, because, I mean, if you really think about it, they’ve been arm in arm in this response. Then there’s a kind of an inside joke as to whether the Fed and the Treasury are, you know, kind of friends. Are they dating or are they married right now? And will they stay arm in arm? And how long will they in order to supplant what we need in terms of the economy and the like? But, yeah, the massive, massive response from the Fed. Unlimited QE. Definitely the biggest driver of the recovery. No question.
So what I would encourage all the investors and clients alike listening to this podcast to consider is that as you see the Fed speak change, so potentially, should your portfolio allocations change with it. Because it has shown to be very critical for market performance. The fiscal response was impressive. I just wanted to show from a historical standpoint, we haven’t had a surplus since the Clinton days. We’ve been running a deficit since here and red on this chart on the left.
And what the estimates look like for how much we’re gonna be spending more than we’re taking in revenues is staggering, especially, again, given the total size of the US debt where it stands right now. So with the fiscal response that totaled over two and a half trillion, we’re looking at right now the House and the Senate and even the President seem to be aligned, that there’s going to be yet another stimulus bill as we’re having part of the CARES Act starting to unwind here at the end of this month, July. So, you know, Joe, I mean this, you know, to me, I look at the fiscal response, it’s been impressive, but much like what we’re going to be, you’re supposed to read the tea leaves, so to speak, to use one of your terms on what the Fed is doing. So should you be reacting both positively and or negatively to what we’re getting from the fiscal response as well?
Yeah, and very important here in the month of July and something that you and I are working hard to make sure we keep an eye on, which is the Congress reconvening on July 20th and making sure that we have a real close ear to the ground on a response, because that July 31st termination, particularly of the extended unemployment benefits, the market will become anxious here in the short term if nothing is done. Our overwhelming belief is that something will be done because politicians ultimately want to be re-elected.
So in March, there was anxiety, anxiety, anxiety followed by action. Finally, when I say anxiety, I mean market volatility. It’s happened every time we’ve had a debt ceiling debate and back and forth across the aisle as well. And every time a deal does get done. So this month is really interesting from a fiscal perspective because they need to get something done. They have a short window to get it done, but we do believe it will get done.
And if for some reason it’s not done, we’re going to work, will likely take some action. And that’s for some reason they’re going to the market response and then maybe we would find a way to double down. But that’s a whole different thing, for now, we’re going to operate on the money that is going to happen. Again, this is just another way of showing how as soon as the government’s fiscal and fed responses as those things were happening, it provided stability to all different kinds of things, not the least of which is even high yield. I don’t want to spend too much time there because with each one of these slides we could spend 10 minutes.
What I thought was interesting is a slide that you brought to my attention. And this was Bank of Japan owns almost 80% of all ETF domiciled in Japan and this dovetails with the fact that the Federal Reserve here in the United States was buying a couple of different junk bond ETFs. And that’s a novel idea. That’s very not new, it hasn’t been seen before here, but my goodness, in Japan it has. The Bank of Japan owns almost 80% of all ETF domiciled in Japan. And it makes me wonder if our central bank may follow the same suit. And whether or not it’s a good thing. I think that if you look at the Japanese market, the stock market in particular, it doesn’t seem to indicate that it’s likely a good thing. But is there any color or commentary you have to something a really strange fact like this?
Well, let’s break it down to what it means maybe which is supply and demand. So, you know, the Bank of Japan coming in and acting, it’s a massive demand, push or demand suck out of the market in terms of ETF supply, keeps prices elevated, and keeps prices stable. It’s a supportive act. How long they can sustain that demand is the question. And furthermore, their ability or inability perhaps to be able to back away and remove that demand from the market. The fallout of that would be that prices would soften you know, for the Bank of Japan. So it has never happened here in the United States until now. And the Fed, just in the last 30 days, has grown in terms of their importance in the fixed income market. BOJ is buying equity and fixed income and REIT ETF’s, which is across the board shotgun approach, it seems. The Fed to be clear, is only buying fixed income ETF’s. But they are buying investment grade corporate and below investment grade junk oriented ETF’s. They have, in fact, they’re now a top-five holder of the four most widely traded fixed income ETF’s market here, the U.S., which is already stunning to even think that that’s here. So something certainly we will keep a close eye on, but a big market change fundamentally for sure.
Things that I never thought I’d hear you say or things that would enter my eardrum would be that. Let’s switch gears to the jobs picture. This is increasingly important. This is a great chart that you again introduced us to at BCA, the research group there. So what I want to share with our viewers and listeners is that we’re aware of the historical significance of the unemployment rate, but the thing that stands out Joe is that in April, May time period the consensus was that unemployment would crest over 20%. And there was, of course, that major miss that economists didn’t predict where the job market was supposed to be over 20%, it went down to 14. And here we are, we’re looking at US unemployment still greater than 10%, but down significantly from where it was. Which helps create part of this positive backdrop, I think, that we’ve been experiencing.
And secondarily, it also reinforces the relative positivity of the jobs numbers that we’ve been seeing I say relative because they’re still very elevated from where we’d like to be and where we were just even a few months ago. But it also supports the story, that there was a time where 80% of those that were looking for unemployment were saying that their unemployment is likely to be short term. And the fact that the job market has recovered as much as it has is supportive of that may be a lot of these job losses do seem to have been temporary in nature. It seems to me, Joe, that despite the fact that this is good, supportive information for the stock market and for where we are right now, that this would change overnight if we didn’t get some kind of extension of the CARES Act, unemployment insurance that’s expiring at the end of this month. That’s how I read the situation. Both supportive but without additional government intervention could lead to some particularly large trouble.
Joe Taiber
Yeah, I couldn’t agree more. I think the upside surprises were driven by both the monetary, but particularly the fiscal response. So unemployment benefits, one time stimulus checks and the like, just keep people in jobs. The PPP program was contingent on not firing people, as an example. So May’s job number was shocking. You were right. I mean, there was talk of 20% unemployment, in fact, we peaked at about 15 roughly. And that is, I think, largely because the fiscal. So May’s jobs number was expected to show a negative 7.5 million losses of jobs in May. And instead, it came within 2.5 million gained. In June, did the same thing. June came in at 4.8 million gained when they expected, only three million. So we’ve got back to back months of really, again, relative, but pretty strong upside surprises, largely because of the fiscal response.
Well, we’ll have to wait and see what approach the government’s going to do. And so as a result, Joe, again, you mentioned 15% unemployment, but here we have the chart on the left. And we’ve seen what unemployment has done sequentially month after month after month. We’re seeing improvement in weekly jobless claims. And because we do, we’re also looking at the trends and the trends do indicate right now on a short-term basis, again, assuming that the government continues to provide some kind of stimulative effort here and in continuation at the end of July. Given this trend analysis, it looks supportive of the market move that we’ve experienced so far. I don’t know if there’s anything else to say about that move from a data standpoint, looking at the charts.
I don’t think so. I think everybody’s trying to paint the outlook in terms of a shape. I think the job market particularly I mean, an initial sharp recovery, I think likely has a little more room to come or to grow. But the lingering effects of elevated unemployment are definitely posing some headwinds, I’d say, so sort of that shape that you and I have talked about is more of a square root oriented shape where you’ve got a nice uptick, but then we expect to plod and churn a little bit.
Right. So, as I look back to markets like we experienced in March of 09 or even June of 09, as the market bottomed in March and was recovering in June, the unemployment picture was still rough in June and when the market bottomed in March of 09, it’s not like it went sequentially month after month after month higher. It did have a tick up. It did have its challenges. But the overwhelming move was positive from there. I look at this chart, it’s got a lot in it. But again, similar to where we were in 09 in where we are today, it just seems to me it rings some semblance of similarity in the fact that we’ve bottomed out and given the facts and information that we’re looking at right now, it seems to be and the data is very supportive historically speaking, about the market continuing to move forward from here, not without its rough patches or difficult times, as we’ll talk a little more about. I don’t want to sound optimistic because there’s a lot of hurdles that we have to accomplish between now and then, but we are overwhelmingly in the camp that we are going to be properly positioned for good long term growth after this. This most recent bottoming out is that is not how we would handicap it? Big picture?
Yeah, I think so. I think so. I mean, I have a hard time not being at least marginally constructive when you think 12 months and beyond 12 to 18 months and beyond. And yes, your term challenges, whether it’s I know we’re going to talk about the election at or the fiscal side or reliance on the monetary. Here in the near term, certainly. Or coronavirus, for that matter. Second wave. So there’s definitely near-term headwinds and some dark clouds, but longer-term, which is the way you win the investing game is making sure you keep your sights set on that longer-term. We feel pretty good looking out all over there.
We don’t have it in this market outlook with the detriment of missing a few good days of the market, it’s a killer. So, I thought this chart from AllianceBernstein was pretty interesting, where it shows that their forecasts were for U.S. economic growth and or contraction, expecting a 4% contraction in the U.S. economy here in 2020, which pales in comparison to a 10% contraction for the European area. To me, I find that interesting. I know that there’s kind of this growing range where there is maybe AllianceBernstein had a negative four for the US and there are some that had forecasted a negative 10% U.S. GDP hit. But if it’s somewhere even between negative four and negative 10, just the amount of stimulus that we’ve already done fills the bucket with what we would have lost. And it just also seems to me that given the fact that Europe is doing better with the response to their COVID-19 and economic reopening, if they’re looking at a negative 10 and we’re only looking at a negative three, it sounds like there might also be an additional opportunity for too much negativity with regards to overseas investing.
Yeah, I totally agree, and that’s sort of skating to where the puck is going and which is what you have to really focus on it. And I think you’re right. I mean, Europe took more draconian, I guess, containment measures and it resulted in a bigger draw down in terms of economic activity. But we’re kind of seeing the flip side of that a little bit, arguably right now. And whether it’s Coronavirus fallout or relative Coronavirus fallout or some other considerations, valuations or a currency, also very important as we look at non-US and the way that we’ll be leaning portfolios likely in advance of this. So, yeah, I would concur with your comments here.
Yeah, it’s interesting. I know you see the U.S. dollar has taken a pretty significant hit. And when you look at the trend, it doesn’t look like it’s getting any better. And we have begun to tilt towards international, which I think for us, is a really good long-term move particularly with where those markets are. And we look at the U.S. consumer and we tend to do this every quarter because we’re still a consumption-based economy and again, largest, both of shutdowns and increases in retail sales. With the latest data that I’ve seen, haven’t quite fully recovered to where we were with retail sales. But again, a nice bounce and a positive trend. Same with personal consumption. Biggest drop down. Biggest increase. Still nowhere near where we were. And then we’re looking at consumer sentiment and consumer confidence is two to four measures similarly to the retail sales numbers. Biggest move down. Pretty nice increases on both of those indexes. So, when you’re looking at the state of the consumer from a spending standpoint, we have seen some nice improvement. We’ve seen some nice improvement with confidence. So, in a consumption-based economy, I look at this as constructive meaning, I look at it, I want to continue to very carefully watch the sentiment in spending data to make sure we’re seeing signs of continued improvement, to continue to feel confident about the way the economy’s starting to recover.
Yeah. Consumer behavior is a key driver, as I think everybody listening probably knows, whether you look at retail sales or personal consumption expenditures or competence sentiment measures, keeping a really close eye on all those things. I’m looking at the trajectory and particularly now with respect to this resurgence of Coronavirus and its impact, the potential impact. It’s really interesting to see and we’ll talk about this in a little more detail a little bit later in terms of coronavirus, but focusing on the mobility of the consumer in Google search trends are two things we’re doing that are really interesting to see. It’s more predictive behaviors of consumer behavior. And then when you look at your home, Michael, in Arizona versus Europe in particular, you’re seeing a real dispersion in mobility trends of consumers, the willingness to go out, do things this that the other is, is locking down in Arizona as opposed to what’s happening in Europe as well. So that’s something that certainly we’re watching very closely.
Yeah. Well, yes, we continue to watch that data for you. And then we look at how all this economic data feeds into the leading economic indicators. So this chart, when you see LEI, the first two leading economic indicators and it’s interesting when you look at the Chinese leading economic indicators, what a sharp bounce that it had. We’ve seen the formation of that bounce here in the United States. I don’t know if we’re gonna see the follow through, we’ll let the data dictate that. But what’s nice to know is that it seems on a historic basis, like in the bottoming of the leading economic indicators in 08, as that started to improve, that did kind of check the box in terms of marking the bottom of where the stock market hit and then the subsequent recovery, so if we’re using data to help guide us in our most recent leading economic indicators, check the box in terms of bottoming out and saying it’s safe to invest. It’s another component in this greater fabric, this mosaic, if you will, of what’s painting a positive picture about where we are with the stock market and it being solid for us to be as constructive as we are in the market.
Yeah, I mean, leading indicators, looking at the economic basket of indicators, particularly diffusion index, which is more of a leading indicator, so something that’s very important to be monitoring and it should feed into, again, 12 and 18 month forward, more constructive view for sure. It should feed into that narrative.
Right. No doubt. And this is where we start to talk a little bit about the market’s trading range. I thought this piece that you guys put out was compelling in that we see this kind of wedge formation here in blue where the S&P 500 peak in late February to its peak decline March 23rd to subsequent move higher. And we’re really kind of in this narrowing trading range. Historically speaking, I’ve seen a lot of different charts, from the market correction of 1987 to 2009 to even the dot com bubble bursting in that you kind of look at the length of the decline. And then you draw this midpoint and you’re able to reliably invest in a trend moving upward. But we seem to be hitting this pocket of consolidation, even though we’re in an upward trend. It just seems to me that we’re running out of gas a little bit here. And, we could spend a lot of time on Tesla. I think as part of this consolidation trend in the market running out of gas. Part of that story was yesterday, in my view, where Tesla ramps up to somehow 1700 bucks a share and then ends up losing about 200 points of steam to close it 1500, which is still a huge move.
Yeah, I mean, that summer. And by the way July, August timeframe really plays into this sort of churn narrative. And this has been historically the time of year where markets tend to lack conviction, lack direction, largely because they’re lacking volume. Not surprisingly, because people historically have been taking vacations and spending time with family and the like in July, August. Consolidation, a churn type market this summer feels very apropos, just given the fact that we’ve got some kind of clouds here in the near term with respect to Coronavirus ticks, with respect to the November election, which generally doesn’t really get priced into a market until maybe October, September time frame. But I think markets are probably looking at this one maybe a little more closely and certainly, we’ve seen a trend. I think we’re going to touch on that in a bit. We see the trend in the polls at least pivoting toward a Democratic sweep on that front. I think there’s a lot of things that argue for some consolidation, the top-heavy nature of the index itself. And I know you’ve pointed at Tesla as a poster child of some pretty crazy valuations. When you look at the fact that the four biggest stocks in the S&P 500 represent close to six trillion dollars in market cap, it is the most top-heavy S&P 500 that we’ve had since 1969. So you can’t not acknowledge the fact that there’s got to be a breather in the index. And some of these I’ll call it runaway, you know, top-heavy names, I guess.
It’s hard not to favor those names, especially given the fact that you have the whole stay at home trend with each of those names plays a huge role in the stay at home economy. And speaking of staying at home, money is leaving mutual funds in record amounts. Equity mutual funds, stock mutual funds. At the same time, we do see, again, money going into stock-based ETF. But the amount of money that’s leaving equity-based mutual funds and the amount of money that’s sitting in cash needs to be discussed, at least mentioned. So here’s my mention of it. Joe, I like to look for contrarian indicators, indicators that give us the understanding of whether or not people are pricing too much fear into the stock market. And you’ve seen cash hit that crescendo and start to come down a little bit. Isn’t this something that investors should look at as something to provide future fuel and future growth to the stock market?
Overwhelming yeah. This is back to supply and demand. This is pent-up demand for investments, for earning money on your money. Because money markets, we all know, are paying next to nothing. So, when you’re faced with nothing or something, even a dividend yield in stock, for instance, it becomes a really compelling tradeoff at some point in the record pile of cash on the sidelines is music to my ears as a longer-term or even intermediate-term equity market investor.
I also liken it to the fact that you tend to want to invest when no one wants to invest. We’re starting to kind of sow the seeds of a lot of discontent on people and hear their opinions on the market. I’m going to rush this one real quick, Joe, in that when you looked at the percentage of stocks above their 50 day moving average, you did have a couple of bottoms and the bottom of 2018 December. What a great time to invest. March 23 of 2020. What a great time to invest. I think the cause for alarm that people had was that, oh, my gosh, did we go too far, too fast? Here several weeks ago in June with market prices moving higher. We’ve seen that come down a bit, which I think is helpful in more of a historical norm. So hopefully this settling in process that we’re told is consolidation’s settling in process is one that we’re almost all the way through. Again, Joe, this was another one that you introduced us to. From a historical standpoint, there are major economic market lifetime events that occur where we tend to turn inward, and we tend to become more focused on ourselves. This is where World War One, World War Two, the great financial crisis where we’ve got to get back to manufacturing, it’s about U.S. jobs and you tend to be less focused on global trade and global matters. COVID-19 seems to be having that impact as well. This is something I think we should watch very closely because part of the globalization story has also been a key to unlock market growth, economic prosperity for many Americans. So how are we looking at this chart? I know you have a lot of thoughts and feelings around, and I’m curious as to what you see now.
I love charts that look at 90 years of data. I love the historical takeaways of them. And this is a great one. I think if you plotted the S&P 500 on this same chart, you’d see exactly what you just said, Michael, which is what globalization led to was really exceptional wealth effects globally. Profit margins are peaking back in 2007, big due to reduce labor costs and lowering of trade barriers and increased trade and competitive differentiation, those sorts of concepts. So, the global financial crisis and COVID I would argue both sort of have spawned the narrative that I think everybody is familiar with and certainly reads about with respect to isolationism or populism and really nationalism at the core. And that wave, there’s very specific investment takeaways or economic takeaways, I guess, from that wave. If it continues and I think Trump and several others globally have really captured, Boris Johnson alike, have really captured this nationalist undercurrent and done really well with it politically. The economic and financial market takeaways are to us pretty clear and it’s just economics 101. If you get a reduction in globalization, you have an increase in labor costs. You have tariffs likely moving higher, which increases input costs over time. That will take profit margins down for sure and it will make inflation higher. So, all in all, what does that mean? That means that higher inflation does not bode well for bonds. Reduced profit margins, definitely post headwinds to stocks, but relative to bonds still are a more attractive investment. So, it’ll be really interesting to see how that narrative here in the US and globally kind of continues, but this is a great 90-year chart.
Which in my view, Joe, all of that is very supportive of the fact that a lot of the older U.S. economic industries and stocks alike, don’t do well in that environment and a lot of the new ones do. Zoom just doesn’t use that much steel. We can read this and I’m going to shoot through some of these.
I just want to make a note. We are aware of the Coronavirus cases and we hope that you and your families are safe. Certainly in Arizona, we’re facing a major secondary wave. Hopefully, it’s starting to crest right now if you look at some of the data. Yes, the deaths have gotten significantly better, but we are attuned to what’s happening with Coronavirus cases because that also then folds into shutdowns. Shutdowns fall into a redo of what we saw in March to the extent to which that there are shutdowns, that the U.S. economy would suffer significantly. So, we are very attuned to that and we recommend that you also move your portfolios as necessary given how that data continues to unfold. I thought that this was neat in that the COVID recovery versus The Great Financial Crisis, and that when you lay these two charts out is the subsequent move down was greater with COVID than it was in the financial crisis, again, we got more data. The market moved a lot higher with COVID as it did in the great financial crisis. But it’s interesting in terms of weeks in duration where we’re really just a few short weeks away, Joe, of maybe seeing it depending upon how the government reacts, perhaps in what was the second wave of bad news that came from the banks and the financial institutions in the financial crisis. What if we don’t get the right government response, it seems entirely likely to me that we would have some kind of a redo potentially of what we saw in March. And then we would have a similar pattern potentially from these markets, what we saw in 2009.
Yeah. Well, there’s a lot of lot to unpack there. I think the key difference, though, between March, April and July, August, awareness is very different. The at-risk populations are much more isolated and certainly more aware now than they were then. The public overall, I think is better prepared and I think, though, the will to lock down and reinitiate the lockdowns across the public and policymakers obviously most very pretty, pretty low. So I think a repeat of March, April downdraft, this is highly unlikely and I’m talking 30 plus percent. However, I think, you know, again, fits and starts a continuation, an increase. I mean, death totals, death rates are falling, but death numbers, there are record highs in Arizona, Texas, Florida, California. So, I think there’s some anxiety and we’re watching mobility. If we see a 10% correction, I think we’re more likely to be in the buy the dip camp very much like we were in March. But that’s kind of how we’re seeing the big picture there.
There’s your playbook. Hope you wrote that down. That’s what we’re doing. I think the earnings guidance, we’re going to be running short on time. Let me say again, those companies that aren’t providing guidance are doing worse stock performance-wise than those that are providing guidance, so be careful of that. If you’re investing in stocks that pulled guidance because they use COVID as that blanket excuse, you may want to be cautious there.
We saw improvement in PMI, a nice, good economic indicator. We talked a little bit about the LEI bounce. We saw proven PMI. And then, Strategas does a nice job of putting what are our liabilities, what are our assets and what’s kind of neutral for us, economically speaking. And what I note is that there’s a dramatic improvement overall in a lot of our key economic indicators, whether it be employment or consumer spending. Some of these things are neutral. But I think, again, it continues to support this bounce. It continues to support where we are market-wise. We’re watching to see the changes there.
And so, Joe let’s spend a few minutes on Mr. Biden, shall we? Not a lot, because I don’t have a lot of time. Let’s spend a few minutes. What a change a Coronavirus makes to the election. Here you got the introduction of Coronavirus. You went from a GOP House, GOP Senate likelihood to overnight, it seems, a Democratic sweep. And similar with Biden, I’ve got a lot of data in here, Joe. Again, I’m happy to share these slides with those folks that want to know about what a potential impact might be. So, Joe, Democrat versus Republican election coming. How do you wrap that up?
I would say this, a Democratic sweep is definitely looking more likely with the Coronavirus, as you said. Biden’s tax policy and Biden’s reregulation, I suppose, of the economy pose risks certainly to the Stock Market in the short term. The tax policy and the increase, particularly in corporate taxes, back to 28% is the base case expectation right here. That translates to about a 14% decline in EBITDA over the following 12 months, so mark that up as a correction. Longer-term than that, it’s probably a wash. Certainly from a tax standpoint, it’s a wash.
The difference historically between a single party sweep and a gridlocked government, gridlock is always good, we know that. But a single party sweep and or gridlock after a 12 month period after the initial absorption of the policy changes and actively become clear, really important that there’s not a huge difference 12 months out. So, you expect some near-term volatility, potentially a correction in the case of a Democratic sweep, adjusting for the reduction in earnings from a tax perspective, but longer-term, probably a wash.
Buying opportunity. I want to just indicate just to make sure, again, this is good data for people to know, is that not all areas of the market have responded similarly. Year to date, we’re aware that the top 10 of the S&P 500 rallied. This is through July seven to 10 %, but the bottom 50 down negative 39. Different sectors of the economy have responded better or worse through different pathways. Just understand that, though, when people look at the kind of blind optimism that the market seems to be indicating, not all areas of the market have responded accordingly. We did a little bit of the comparison to 09 to where we are today. You talked a little bit about the large-cap growth market, how it continues to move. Small stocks look like they provide some areas of opportunity, Joe, to do some bottom fishing, as we mentioned at the top of the call. Small stocks haven’t rallied as much as other areas of the market. I know that we’ve started to increase our exposure to small-cap. We’re trying to do a little bit of bottom fishing there. I think municipal bonds still have provided us a nice opportunity. So, Joe. In conclusion, we’ve got some areas of opportunity. We’ve pointed out a number of areas where we’re being cautious, where we’re looking at the data, where we are going to pivot to take profits in and to sit on the sidelines. In some instances, we’re also talking about where we would pivot in potentially get more aggressive. So in conclusion? What would you like to say? The third quarter of 2020.
I would say this, I think what you’re doing there at Henry+Horne in terms of the rotation towards more alpha oriented areas, of the market outperforming areas of the market, in other words, is exceptional. And the fact that your leading client portfolios intentionally, to geographies and to sectors that you feel with high conviction represent a good opportunity, again, 12 to 18 months out. Keeping an eye on short term volatility but pivoting towards longer-term opportunities is how you invest wisely. And it’s a pleasure working with you guys and your team there, Michael, to help you guys do so.
Yeah, we could not do it without you. So, yes, we are excited that the portfolio evolutions that you, the team and I, we’ve all worked on together these past number of months, the changes have been great that we’ve been making. And I think that your portfolio preparation that’s coming really, you know, enmasse, I think your client, most clients will see pretty significant changes likely in August as we prepare for the election and everything else. It’s notable. So, Joe, we did it with literally one minute to spare. Thank you again for tuning in. Joe, thank you for attending. Good luck with your garden. I can’t wait to be in the garden one day in one shape or another.
Thanks again. Stay healthy. Tune in next time. Take care and have a wonderful day. Thanks.
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