A COVID-19 testing site in Houston

The Economy
Another 1.48 million people applied for unemployment for the first time last week, a slight decrease from the week before and the 14th straight week that more than 1 million people have filed for unemployment.
 
American workers continue to file for jobless claims at record numbers, due to the economic shutdown to slow the spread of the coronavirus. For comparative purposed, in February the weekly unemployment claims were approximately 200,000 per week. The previous record was 695,000 jobless claims, in 1982.
 
The total number of people claiming unemployment last week fell to 19.5 million, a drop of more than 750,000 from the week before. When including benefits for independent contract workers, over 30 million people claimed unemployment insurance of some type last week.
 
Some economists and Democratic politicians are concerned what will happen when the supplemental $600 unemployment bonus – created in March as part of the government’s effort to support the economy – expires at the end of July. While some politicians on the right have expressed concerns that the payments create an incentive for some to remain unemployed, a study by the Federal Reserve Bank of Chicago released this month of data for the period 2013-19 showed the opposite. People collecting unemployment benefits search for new employment more than twice as intensely as those who have exhausted their benefits.
 
The Markets
On Thursday, the Dow Jones Industrial Average closed up nearly 300 points, or 1.2%, at 25,745.  The broader S&P 500 index closed up 33 points, or 1.1%, at 3,084.
 
COVID-19 Numbers
Globally, over 9.5 million have been infected, and 485,000 have died, while in the US, over 2.4 million have contracted the virus, and nearly 123,000 have died. The US remains an outlier, with approximately 4% of the world’s population, but over 25% of the cases and deaths.

February 25: 0 deaths
March 25: 938 deaths
April 25: 53,755 deaths
May 25: 98,220 deaths
June 25: 124,355 deaths
 
The Public Health
The US recorded over 38,500 coronavirus cases on Thursday, the highest single-day total so far. While some of that reflects an increase in testing, the virus is spreading more rapidly than it was several weeks ago. Across much of Europe and Asia, by contrast, the situation is less dangerous.
 
Ashish Jha, director of the Harvard Global Health Institute, said yesterday that a spike this week in US cases of the novel coronavirus was caused by a rush to reopen the nation’s economy without proper safety measures in place.
 
In Texas, about 4,000 people are hospitalized with the virus, more than double the number at the beginning of the month. Houston’s Texas Medical Center – the largest medical complex in the world – reached 100% of normal operating capacity in its ICUs.
 
Shockingly, the number of Americans who have been infected with the novel coronavirus is likely 10 times higher than the 2.3 million confirmed cases, according to Robert Redfield, the head of the Centers for Disease Control and Prevention.
 
The larger estimate is based on blood samples collected nationwide that look for the presence of coronavirus antibodies. For every confirmed case of COVID-19, an additional ten people had antibodies. Antibody tests examine a person’s blood for indicators that the immune system has mounted a response to an infection. Redfield also estimated that 92-95% of the US population is still vulnerable to the virus.
 
Looking Forward
It appears all but certain that many states will be unable to control a surge in coronavirus cases and hospitalizations, the result of a desire to reopen before adequate safety precautions were in place and, perhaps more importantly the politicization of wearing facemasks.
 
So, what can be done? In all likelihood, another lock-down is politically untenable in most states, particularly when the White House continues to downplay the urgency of the situation. The most likely outcome is a surge of cases during the summer as businesses continue to open and people head outdoors, followed by a lull in the early fall and then another spike in the winter.
 
Like it or not, it seems we’ve missed our collective first opportunity to drive the R number below 1, and we will now have to try again.  Will we succeed? Only time will tell.
 
We remain available to assist you, your friends and loved ones during this extraordinary time.

Why Own Anything Other Than the S&P 500?
Since the end of the Great Recession, the best performing asset class has been US large cap stocks. In an echo of the 1990s, these “big company” stocks have to a certain extent defied logic – and gravity – by outperforming small company and value stocks.

Yet decades of peer-reviewed academic research have shown that (over long periods of time) both small cap and value stocks can be expected to produce higher returns than large cap growth-oriented stocks.

This has led some investors to question whether they should invest in anything other than US large cap stocks (i.e. the S&P 500), much less whether they should “tilt” their portfolios to include small cap and value companies.  After all, how long should one have to wait for the promised outperformance?  Isn’t some impatience warranted?

When we look at the data from the past decade-plus, what do we see?  Perhaps somewhat surprisingly, value stocks have delivered returns largely in line with their historical average – they haven’t disappointed on a stand-alone basis.  Rather, it’s been large cap growth stocks that have generated unusually robust returns. And much of the outperformance has come from a handful of stocks: Amazon, Apple, Facebook, Google, and Microsoft. 

Is it reasonable to assume that this trend will continue?

Well, one way to think about expected investment returns is that they reflect the cost of capital for companies.  Most investors would agree that investing in small or value companies is riskier than investing in large companies, and so they should have a higher cost of capital.  And investors in these riskier companies will demand a higher expected return.

So, the most reasonable assumption, however unlikely it may seem now, is that at some point values for large company stocks will correct (as they did in 2000-02) and small cap and value stocks will again show higher annualized returns.

Finally, it’s important to remember that the value and size risk premiums are not guaranteed to appear day in and day out, year in and year out.  If the premiums were consistent and predictable, they wouldn’t be “risk” premiums.

Our recommendation? Be patient, trust the science and research, and let us know if you have questions.

Keep the faith, be safe and stay healthy.

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