September 2020 Commentary

As The Bulls Stampede – We Recommend Caution

Optimism

The stock market surges higher as the economy continues to expand and news relating to COVID19 diagnostics, therapies, and vaccines gives investors optimism.

Purchasing Managers’ Index “PMI” surveys indicate that both services and manufacturing sectors continue to expand through August.  Our note of caution is based on the markets’ high 21x price-to-earnings “P/E” ratio and the potential for a significant change in U.S. tax policy that would reduce corporate earnings and business investment.  We recommend clients reduce equity/stock allocation and raise cash to the higher end of one’s cash allocation range.

Possible Tax Policy Changes.   

The Tax Cuts and Jobs Act of 2017 included reducing corporate taxes from 35% to 21%, which increased corporate earnings and in our opinion was the catalyst for $1 trillion of capital returning to the U.S.  If corporate taxes are increased, as proposed, from 21% to 28%, we believe the change will create the incentive for companies to consider moving their headquarters outside the U.S to lower tax jurisdictions.  We estimate a 28% U.S. corporate tax rate would reduce S&P 500 earnings by 12-15% and may be a catalyst for the stock market to sell off by 15-25%.  Also being proposed is a capital gains tax increase from 20.0% to 39.6% for taxpayers earning more than $1 million per year.  While these taxpayers could “afford” the higher capital gains tax, it would inhibit capital from flowing to early stage, high growth companies requiring capital for growth. If business investment is constrained, so too will economic growth.

Richard S. Lawrence, CFA September 2, 2020

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES

9 Years and Counting

Lawrence Wealth Management is proud to announce that Rich Lawrence has been named a Five Star Professional Wealth Manager for the ninth consecutive year.

Founded in 2003, the Five Star award program is the largest and most widely published award program in North America, covering more than 45 major markets. Professionals recognized as award winners are published by Five Star Professional and its partners. Award winners cannot pay a fee to be included in the research or the final list of award recipients.

Beginning in 2012, Rich has been named a recipient of this prestigious award every year and 2020 marks his ninth year of this recognition. Learn more about the award and how Lawrence Wealth Management can help you by scheduling a consultation.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES

A Time for Caution is Here

A Resilient Stock Market

The stock market has exhibited resilience during the current economic malaise. The U.S. stock market is flat to down 8% on a year-to-date basis through July 30, 2020, depending upon the index used. This follows a strong 25-29% gain in 2019.  The stock market’s price-to-earnings “P/E” multiple is currently 19x and is materially higher than the 16x average.  While historically low interest rates justify higher than average P/E stock market ratios, this high valuation makes the market especially vulnerable to negative news, in our opinion.

We therefore advise clients to raise cash by reducing stock/equity exposure to the lower end of one’s ideal equity percentage range.

What’s Ahead

The global COVID-19 pandemic propelled our economy into a recession with depression-era economic contraction and unemployment numbers.  The Bureau of Economic Analysis “BEA” announced on July 30th that the economy contracted by 32.9% in the June 2020 quarter; in line with current expectations.  In May and June, the economy began to recover with consumer spending on the upswing and workers getting back to work.  In May and June 7.5 million jobs were added, after a horrendous decline of 20.8 million lost jobs in April.   Economists expect the economy to continue its recovery during the second half of 2020 and into 2021.  Economic uncertainties include the extent of the spread of COVID-19 and of course the development and deployment of therapeutics and vaccines.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES