I live about five blocks from the office and on nice days I walk to work. The summer of 2021 has brought back the joy of that simple walk on Market Street! One of the things I love about living and working in Frederick is that I get to see people I know as I walk back and forth from the office, share smiles, a hello, or stop at one of our wonderful restaurants for a quick drink or dinner. I am so happy to see people out and about, smiling again and sharing evenings together.
This summer we welcomed Sara Hargett to our office. Sara is our new administrative assistant—the cheerful voice you will hear on the phone and the one with the bright smile to greet you when you visit the office. Yes, you read that correctly. We are so excited to be welcoming vaccinated clients back to the office! We’ve missed seeing you (and so has Penny).
We will be offering you the option of in person meetings or Zoom meetings going forward. While we would love to see you in-person we know that not everyone is comfortable with that yet, or you may just prefer to have some meetings virtually. Just let us know your preference when we schedule your next meeting.
In this newsletter, you will find our Quarterly Market Update, an article about “Unemployment Clarified”, and an article about “The Difference Between Gambling and Investing.” We are in the process of scheduling both educational and social events in the fall. We will share details soon!
With many states winding down their participation is Federal Pandemic Unemployment Benefit Programs (Maryland opted out as of July 3rd), it seems like an ideal opportunity to discuss Unemployment Benefits, and the role of Unemployment and Unemployment Benefits in the context of current economic conditions.
First, let’s discuss eligibility for Unemployment Benefits. Unemployment insurance is a joint state-federal program, administered by each individual state. There are guidelines set forth in federal law, but each state sets its own eligibility guidelines. You will usually qualify if you:
• Are unemployed through no fault of your own. In most states, this means you have to be separated from your last job due to lack of available work.
• Meet work and wage requirements. You must meet your state’s requirements for wages earned or time worked during an established period of time referred to as a “base period.”
• Meet any additional state requirements.
The COVID-19 pandemic spurred the federal government to provide states with the flexibility to amend their laws to provide unemployment insurance benefits in multiple scenarios related to COVID-19, including:
• An employer temporarily ceases operations due to COVID-19, preventing employees from coming to work.
• An individual is quarantined with the expectation of returning to work after the quarantine is over.
• An individual leaves employment due to a risk of exposure or infection, or to care for a family member.
So now that we know a bit about Unemployment Benefit eligibility, what impact has the expanded benefit program had on the labor market and the economy? What others factors are at play, what impacts are we seeing now, and what impacts are we likely to see in the future?
What impact has the expanded unemployment benefit had on the labor market? Some of you are undoubtedly familiar with President Harry Truman’s quip about a “one-handed economist.” On the one hand, there are some cases where the $300 per week additional benefit boosted the effective wage of some recipients to more than $15 per hour for full-time work. This was undoubtedly a disincentive for some folks who would find themselves making less than $15 per hour if they were working, as opposed to collecting unemployment. On the other hand, there are ongoing requirements to continue receiving unemployment benefits, including that recipients must be actively seeking work (the specifics of what this means varies from state to state), and that recipients can not continue to collect benefits if they turn down a “suitable offer” (this definition also varies from state to state). Anecdotal reports indicate that many, if not most, individuals receiving unemployment benefits are out of work as a result of COVID related factors, not because they are gaming the system.
This leads us to consider: what other factors are at play in the labor market? The number of workers who became voluntarily unemployed is at its highest level since November 2016. Workers are feeling empowered to quit their jobs to look for something better, which is a positive development for economic growth. In combination with other factors, this has driven wage growth, most notably in leisure and hospitality, which has seen wages increase nearly 8% more than the private sector as a whole.
Total labor force participation – the number of working age people either working or looking for work – remains nearly 2 million people fewer than in June 2019. Lack of childcare and persistent fear of getting sick could be holding people back. If so, the return to school in the fall, and increasing vaccination rates, should result in an increasing labor force through the end of the year. It’s also possible that some of the labor force simply won’t return. Roughly 440,000 of the 2 million are over the age of 55. Likely, some have made the decision not to go back to work, leading to a more persistent labor force shortage.
What do all of these factors mean? In the near-term, employers are hard-pressed to find employees. Many have resorted to sign-on bonuses, and increased wages to attract workers. This – among other factors – is contributing to an uptick in inflation, which has the potential to persist for some time. As has been the case for so many things throughout the COVID era, we should expect a continued bumpy ride for the labor market through 2021. As the world shifts ever further into a post-COVID world, we will see a move toward new normal in the labor market, and across the economy as a whole.
The Difference Between Gambling and Investing
People sure seem to love video games, movie theaters, and decentralization these days. Or at least that’s what it seems like based upon current investing trends. Anyone who has been paying attention to the market action associated with GameStop (GME), AMC Entertainment (AMC), and Bitcoin (BTC) can attest to that. The prevalence of questions from friends, clients, and acquaintances that I receive also confirms the buzz that has been created around meme stocks and cryptocurrency. These questions range from “do you own GME?!”, to “how do you NOT believe that Bitcoin will make me a millionaire?”. Ultimately, every one of these conversations comes down to one comment from me: “understand the difference between investing and gambling”.
For those who may not have been paying attention, there are a few investments that have gone on some pretty wild rides up and down over the past 12 months. GameStop started 2021 around $17 per share and reached a peak of $483 per share intraday on January 27th, a trough to peak gain of 2741.17%. AMC Entertainment began the year around $5 per share and hit $72.62 per share intraday on June 2nd, a trough to peak gain of 1352.4%. Bitcoin was around $9700 per coin in June of last year and hit a high of $64,863 on April 12th, a trough to peak gain of 568.69%. All of these outsized gains occurred in very short periods, and had many people questioning why they hadn’t bought those particular stocks when they were so cheap. That question leads to people chasing these stocks and others as they go up with hopes of getting rich off one big win in the stock market. The big problem with this type of thinking is that after these stocks went up very rapidly, they came crashing back down even faster, with GameStop down as much as 75% from its peak within a single day. This means those who chased to the highs suffered huge losses.
There’s a couple of things that are interesting about this type of behavior. The first is that few are immune to falling into it. Regardless of a person’s financial literacy, or market IQ, they still start seeing dollar signs and get the urge to buy. The second interesting thing is that this behavior is in direct contradiction to one of the oldest adages when dealing with the stock market: buy low, sell high. In times like these, people seem to follow a different principle: buy high, hope it goes higher. Lastly, is that both of the aforementioned interesting things are not generally related to investing, they’re related to gambling. When the Powerball starts to approach a billion dollars, people start dreaming of a more opulent lifestyle, and those who never buy lottery tickets find themselves going out to buy some. People playing blackjack will sit at a table with the person who’s already been on a hot streak, and roulette players will put chips on the most recent winning numbers hoping to hit it big.
Now, there’s nothing inherently wrong with gambling, as long as you can keep it within reason, and don’t lose money that you can’t afford to lose. When it comes to lottery tickets, casinos, and even horse racing, people can find themselves spending every last cent in the hopes of getting that one big win, and “making it”. Often enough, friends and family will reach out to these people to help them deal with a serious gambling problem. The issue with things like the current popularity of meme stock and cryptocurrency trading though, is that most people don’t view it as gambling. They will lose thousands of dollars trying to get that one big stock win, and will do so until they run out of money. However, since this type of behavior is viewed as “investing” and not gambling, it’s rare when this is viewed as a problem by friends and family—in fact, these people are often applauded for “taking an interest in the markets”.
So, with all this talk of gambling, what does it mean to be truly investing? By definition, investing is the act of putting forth capital with the expectation of income or profit. While gambling can technically be described in a similar way, the difference lies in the level of risk that is being taken, and the amount of speculation associated. Gambling involves a large possibility of total loss in comparison to the possibility of increasing the value of your bet, and is completely speculative. Investing involves a smaller possibility of total loss to increasing overall value, and can have little to no speculation.
The other key differences between investing and gambling are strategy, diversification, and discipline. While there are strategies to gambling, an investment strategy is significantly more involved than just understanding the statistics of particular bets. An investment strategy starts with a goal, which can be as simple as increasing overall value, or as complex as planning for retirement expenses. From that goal, a diversified asset mix that maximizes the probability of achieving that goal can be determined, along with a plan on how that asset mix may change over time. Discipline comes into play at this point, as the strategy that was created needs to be kept to. Rather than making knee jerk reactions to market movement, or jumping at the newest “hot” stock, stick to the formulated strategy and remain diversified.
Now all of this doesn’t mean that a riskier investment strategy is wrong, or that safer is always better. Since more risk can mean more reward in the form of higher returns, risk is important for investing as too little risk can make any investment goal harder to achieve. Ultimately, true investing is about making your money work for you in a well thought out manner, while appropriately utilizing risk.
At the end of the day, it’s important to remember that few to none have become wealthy through investing in a short period of time. Some have gotten incredibly lucky and made millions of dollars in a matter of months, but that is so incredibly far from the norm that it’s akin to someone who made millions of dollars in a single night in Vegas. Allocating small portions of your portfolio to highly risky positions can pay off and is not necessarily a bad thing to do, but it’s important to know that part of your portfolio is a gamble, and not an investment.
Market Update for the Quarter Ending June 30, 2021
Positive June Caps Off Strong Quarter for Markets
Equity markets rallied in June, capping off a positive month and quarter for U.S. indices. The S&P 500 gained 2.33 percent in June and 8.55 percent for the quarter. The Nasdaq rose by 5.55 percent during the month and 9.68 percent for the quarter. The Dow Jones Industrial Average gained 0.02 percent in June and 5.08 percent for the quarter.
These strong results coincided with improved fundamentals. According to Bloomberg Intelligence, as of June 25, the expected second-quarter earnings growth rate for the S&P 500 is 59.2 percent. This follows a 45.8 percent year-over-year increase in earnings in the first quarter. The anticipated further growth is a positive sign for markets, as fundamentals ultimately drive long-term performance.
Technical factors were also supportive for markets. All three major U.S. indices remained well above their respective 200-day moving average throughout the period. This marks 12 straight months where the indices have ended above trend.
International markets also saw solid results for the quarter. The MSCI EAFE Index declined by 1.13 percent during the month but returned 5.17 percent for the quarter. The MSCI Emerging Markets Index saw a 0.21 percent increase in June that contributed to a 5.12 percent gain for the quarter. Both indices were well supported technically, spending the entire period above their respective trend lines.
Even fixed income had a strong second quarter, as declining long-term interest rates helped support fixed income markets. The 10-year U.S. Treasury yield ended the quarter at 1.45 percent. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.70 percent in June and 1.83 percent in the second quarter. High-yield fixed income also saw gains. The Bloomberg Barclays U.S. Corporate High Yield Bond Index increased by 1.34 percent in June and 2.74 percent during the quarter.
Pandemic’s Economic Impact Fades
Although the pandemic continues as an ongoing medical risk, from an economic and market perspective, the worst appears to be behind us. We made steady progress throughout the month and quarter in containing the spread of the coronavirus, with continued vaccine progress driving much of the improvement.
The big risk as we close out the first half of the year remains the introduction of more contagious versions of the virus, notably the Delta variant. As that spreads, especially in areas with lower vaccination rates, there is the potential for medical risks to rise in the future, but for the time being, they remain largely contained.
Economic Recovery Picks Up Steam
The progress on the medical front allowed for continued reopening efforts, and we finished the quarter with almost all of the country open again. This helped support a faster economic recovery, as we saw job growth accelerate in May after a lull in April. Layoffs declined in June while job openings continued to grow. Consumer confidence and spending also showed signs of improvement, with both now sitting near pre-pandemic levels. As you can see in Figure 1, the Conference Board Consumer Confidence Index hit a 16-month high in June.
Risks Remain Despite Progress
Despite the continued progress, there are still areas of concern. But even so, we ended the month with the medical news and the economy in the best place since the start of the pandemic. While the path forward looks bright, it also remains uncertain, which could mean we’ll see market volatility. Given that, a well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. If concerns remain, reach out to your advisor to discuss your financial plan.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
Moore Wealth is located at 50 Carrol Creek Way Ste 335, Frederick, MD 21701 and can be reached at 301.631.1207. Securities and Advisory Services offered through Commonwealth Financial Network ®, Member FINRA, SIPC, a Registered Investment Adviser, FINRA’s BrokerCheck. This communication is strictly intended for individuals residing in the states of CA, CO, DC, DE, FL, MD, MN, NC, NJ PA, TN, UT, VA, VT, WA, WV. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®.
© 2021 Commonwealth Financial Network®