Perspectives + Prospects

Market Week in Review

The U.S. stock market ended the week lower amid plummeting retail sales and Fed Chairman Jerome Powell describing the economy’s path as uncertain.  Consequent to Powell’s comments interest rates also moved moderately lower with the 10-year treasury yield dropping from 0.69% to 0.64%, meanwhile the 2-year treasury yield was unchanged at 0.16%.  The price of gold rose over 2.0% to $1,754 an ounce as poor economic data drives up the demand for the haven metal.  The price of crude oil had another positive week, rising over 7.0% to $29.76 a barrel, amid further production cuts of the oversupplied commodity.

Chart by Visualizer

Fasten Your Seat Belts

Warren Buffett famously said:  ”Forecasts usually tell us more of the forecaster than of the future.”  True as that may be, anyone who invests in the stock market is forecasting that the market will be higher at some point in the future than it is today, or he or she would not have invested in the first place.

David Kostin, the chief U.S. equity strategist at Goldman-Sachs, announced this past week that he has lowered his S&P 500 forecast to 3,000 for the end of 2020 from the previous 3,400 year-end estimate.  If correct, the S&P will finish 2020 with a gain of approximately 2%, which may seem like a good result to many, considering what has transpired so far.  But there’s a catch — Mr. Kostin is also predicting the S&P will plunge by 18% over the next 3 months, before bouncing back in the third and fourth quarters.

In this week’s The Market Commentator’s podcast (which you can find HERE), I discussed my impression of the trench warfare being waged on Wall Street as to what will happen next.  On one side of the field are the bulls, who are optimistic about the re-opening of the economy and the discovery of a medical solution to the pandemic.  On the other side, you have the bears who are concerned that loosening the social distancing restrictions will lead to a resurgence of the virus, which will in turn extend and deepen the recession.

Federal Reserve Chairman Jerome Powell’s statement on Wednesday gave support to the bear camp.  According to Powell, “While the economic response [so far] has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.”

I don’t claim to know which camp is right.  One thing I do believe is that higher stock prices raises the risk of a market decline.  If you are not comfortable accepting the increased risk, then it may make sense to reduce market risk by temporarily reducing the share of your portfolio that is allocated to equities.  If you are committed to maintain your equity investments come hell or high water, then standing pat may be best for you.  Either way, I suggest you fasten your seat belts: it could be a bumpy ride.

By Andrew J. Willms, President and CEO


Welcome to Trending, a column that focuses on investment-related topics that are – you guessed it – trending.

As the youngest member of The Milwaukee Company’s Investment Team, I am particularly interested in trending topics that are appealing to younger investors.  Saving for retirement, buying your first home, repaying college debt and paying for children’s educations, artificial intelligence, international investment news, and socially responsible investing are examples of the types of articles I will be addressing in this column.  If there’s any topic you want me to explore, or if you have any questions about an article, please feel free to reach out at [email protected].

In this week’s column I’d like to discuss the dismal job market for recent college graduates.  We’ve recently tweeted quite a bit about unprecedented developments in the labor market: 36 million new jobless claims since March is an eye-watering number.  In addition to the workers who lost jobs, recent grads will be among those hardest hit by the rapid economic downturn we’re currently experiencing.

Stories abound of college seniors who have had job offers rescinded, and the problem isn’t limited just to the United States.  Those who planned to work overseas, perhaps with the Peace Corps or with a private company, may find that their positions have disappeared entirely or that they’re indefinitely barred from entering the country where they planned to work.

This can have a long-term impact on people’s earning potential.  Research by Hannes Schwandt, a professor at Northwestern University, shows that graduates “who enter the labor market in bad economic times… earn less when they start but also persistently [earn less] in the years to come”.

Not that I’m in the business of giving advice, but if the job market remains unforgiving and if you don’t mind online classes, now might not be the worst time to consider graduate school.

By Matt Salm, Investment Analyst

Risky Behavior

It’s long been clear that an investor’s emotional state casts a long shadow on decisions, and not necessarily for the better. Behavioral risk is more relevant than ever this year, when economic and financial volatility have surged. As a result, we all need to double down on staying vigilant to prevent our emotions from leading us down dark alleys.

A new research paper reminds us that the stakes are high, perhaps higher than at any time in the last several generations. The authors of “The Importance of Staying Positive: The Impact of Emotions on Attitude to Risk” document a strong link between emotions and views on financial risk. For example, the study shows that positive emotions overall have a greater influence on risk tolerance compared with negative emotions.

One of the lessons: be aware of your emotional state when making financial decisions. Your attitude toward risk can be skewed, for good or ill, depending on how life’s been treating you in the days – or even hours – leading up to judgments about investments.

In a perfect world, all our decisions about money would be made in an emotionless state. In the real world, of course, decision-making is complicated.

The next-best thing: recognizing that behavioral risk is always lurking, which reminds us to act accordingly. Using commonsense rules for investing decisions, based on quantitative analysis, can help. Hard data, after all, never has a bad day.

Monitoring Deflation Risk

Consumer inflation plunged in April, according to the latest numbers from the U.S. Bureau of Labor Statistics. The 0.8% monthly decline – the biggest drop since 2008 – has led some to fear that deflation could be another consequence of the Covid-19 pandemic.

Lower prices are attractive from a consumption perspective, but at a time of deep recession and a sharp rise in sovereign debt levels, a fall in the general price level is a serious macroeconomic threat. Accordingly, The Federal Reserve would likely move monetary heaven and earth to prevent a sustained decline in prices, but in the current economic environment it’s becoming harder to rule out the possibility that deflation could gain traction.

Deflation is still a low risk, as evidenced by the St. Louis Federal Reserve’s recently rolled out deflation-probability tracker. The current reading is a low 4% probability for April, although that’s up from the virtually nil reading in March.

Although deflation is not an immediate threat, D-risk deserves to be on the short list of macro hazards to watch. You can start by keeping an eye on the monthly consumer price reports from the government (

Dialing Down Odds for a V-recovery

A sharp, quick bounce-back in the economy is on everyone’s wish list, but Federal Reserve Chairman Jerome Powell expects a slower recovery. In a speech to the Peterson Institute for International Economics on May 13, he said that an “extended period” of weak growth and stagnant incomes can’t be ruled out. “It will take some time to get back to where we were,” he predicted. “There is a sense, growing sense I think, that the recovery may come more slowly than we would like.”

In fact, U.S. recoveries following recessions tend to be sluggish affairs in an area that arguably matters most: jobs. Studying the path of private employment from the start of every U.S. recession since 1948 through the Great Recession shows that employment doesn’t return to the previous peak until more than two years later, on average.

Will the rebound in jobs arrive quicker this time? No one knows, but Powell’s inclined to err on the side of caution. That’s a reasonable benchmark until the incoming economic data offers a reason to think otherwise.

By James Picerno, Director of Analytics

The views expressed in this newsletter are the personal opinions of the articles’ authors. They do not purport to reflect the opinions or views of The Milwaukee Company. References to the authors job titles with The Milwaukee Company is not intended to suggest that The Milwaukee Company endorses the authors’ personal points of view.