For our summer newsletter, we want to be brief with our economic overview. After all, with how fast the news develops around COVID-19 and how vast the spread of projections can be, this may very well be out of date by the time you receive it! Nevertheless, let us provide you with a set of reference point statistics to mark this historical time:
• The S&P 500 gained 20% in the second quarter, making it the fourth-best quarter since 1950. Of course, this follows a terrible first quarter, marking the largest quarter-to-quarter swing since 1932. The index is down about 4% year-to-date through June 30th.
• Analysts estimate that profits at blue-chip American companies fell 44% in the second quarter and are expected to continue to slide. However, many companies have stopped providing earnings guidance, citing the uncertainties of the pandemic.
• The Paycheck Protection Program was extended by five weeks and it is expected that additional unemployment benefits will be passed in July. While the United States added 4.8 million jobs in June, unemployment still stands at 11.1% after reaching an all-time high of 14.7% in April. We are pleased that many of our client-owned businesses were able to obtain PPP loans in order to maintain full employment during this downturn.
• Consumer spending makes up 70% of the United States economy. For perspective, a country like Germany sits at 56% while the world average is 63%. Thus, when you see that the United States personal saving rate jumped from 8% in January to 32% in April, you might initially think that this is good news: people are being more careful with their money. However, the fact is that the United States economy, more than others, needs the consumer to regain confidence to purchase luxury goods, cars, or even rescheduling elective medical procedures.
• The Federal Reserve is pumping an extraordinary amount of money into the economy, learning its lessons from 2008. They have declared that rates will remain near zero likely through 2022 and have the ability to inject $2.3 Trillion of money into the economy. With inflation at just 1.2% and the U.S. dollar currently holding steady, they are able to operate from a position of strength for now.
• Valuations have driven the United States’ price to earnings ratio up to almost 22 on the S&P 500 Index, which is caused by low interest rates and led by technology companies that are thriving during the pandemic (think Amazon, Zoom, Tesla). Meanwhile, valuations in Europe and Asia are much lower as they begin to re-open their economies, potentially providing opportunities in the short term.
All in all, we have been very pleased that most clients have stayed the course after a tough first quarter. In fact, many clients continue to proactively pay down and/or re-finance debt, make regular retirement account contributions to continue their dollar-cost-averaging strategies, or finally get around to updating their outdated estate planning documents. The second half of 2020 is sure to be volatile as we adapt to a new way of life and a divisive election is around the corner. Nevertheless, a long term view is of utmost importance during short term uncertainty, as is proactively accomplishing your own personal and financial goals and objectives.
If you would like a comprehensive review of your situation, please reach out to us to schedule an online meeting.
Paycheck Protection Plan Loan Disclosure
Deemed an essential business by Governor Baker, First National Corporation received a Paycheck Protection Plan loan through the Small Business Administration in April 2020 in order to maintain full employment and provide uninterrupted client services while implementing safeguards for the health and safety of our clients and employees during the declared National Emergency. The loan is expected to be forgiven as authorized under the CARES Act.
Upcoming Technology and Reporting Enhancements
Since 2006, we have generated quarterly performance reports for clients using the most widely-used portfolio management software program in the industry—Schwab’s PortfolioCenter. Those reports are either mailed to clients or uploaded to our cloud-based ShareFile system for clients to view or download. We are currently migrating to the latest version (recently purchased from Schwab by Tamarac/Envestnet) which will have new online reporting capabilities for clients, and enhanced visual appeal of the printed reports as well. Clients will be able to make ad hoc queries to review their allocations, performance, realized gains & losses, etc. and there will be a secure client vault that replaces the current ShareFile system. Lastly, we expect to have some integration (like single sign-on) with our Wealth Management System that many clients already use as part of their comprehensive financial planning. Look for further communications from us introducing the new client portals in the next couple of months, and be sure to reach out if you have any questions or concerns.
Required Form CRS (Client Relationship Summary)
Investment Advisors are one of the most highly regulated segments of the financial industry (for good measure). We are required to complete an exhaustive disclosure process with the Securities and Exchange Commission each year which results in what is called our ADV, available online for anyone to review at adviserinfo.sec.gov.
The filing is so comprehensive that we are also required to disseminate a plain language summary “brochure” of the ADV called the ADV Part 2, which is also available on the sec.gov website as well as our own website. In our first quarterly letter, we notified you that the updated version for 2020 was available for clients. This summary brochure is still 36 pages in length.
Under the latest regulations, we now need to provide a summary of the summary brochure called the ADV Part 3 or Form CRS (Client Relationship Summary). We have enclosed our first annual Form CRS which is just a 2-page summary of the prior 36 page summary. If you have any questions about the Form CRS (ADV Part 3), or either of other of our filings (ADV Part 1 or ADV Part 2), please do not hesitate to ask. Perhaps next year, we will be required to file an ADV Part 4 in which would be limited to a 140 character Tweetable summary of the other two summaries. In summary. . . :)
We hope you and your family find a way to enjoy this summer and that a treatment or vaccine soon becomes available in order for us to return to some type of normalcy in all of our lives.