The US economy appears to be reemerging from the depths of the crisis. Activity in manufacturing has moved into an expansion joining the already growing segments in services and construction. The turnaround has so far outpaced the rest of the world’s progress with exception to the quick change seen in China. Our economy may finally be able to stand on its own legs without any more stimulus programs.

Of course, soft spots do exist in the economy, leaving some type of role left for central bank activity. Consider the number of unemployed as one such example. A disproportionally large number of ongoing and new claims are still in the system. The unemployment situation has improved since May, but more time will be required before claims can return to normal conditions. In the meantime, unemployment is going to challenge expenditure growth in the economy.

The solvency of households was much better in this crisis compared to past events thanks to the transfer payments and mortgage deferments that swept through the system. Personal incomes actually grew in the crisis because of the transfer payments. Many households elected to save their income gains causing the national savings rate to nearly triple. Also, a piece of good news came out of the latest personal income report. That report showed a greater proportion of the income gains came on compensation gains opposed to transfer payments. A continuation of such growth could begin to unlock a lot of savings for consumption in subsequent periods.

Almost six months have passed since the first round of stimulus was put into the economy. That should be enough time to see the effects trickle through to aggregate demand. New demand coming on top of already low interest rates and current supply shortages could mean a pick up in the nation’s inflation rate. At least that is what government bond rates and US dollar currency markets are forecasting. Longer dated government rates have risen on greater inflation expectations and the US dollar has been depreciating against disinflationary currencies.

Inflation can also benefit corporate earnings and share prices for those businesses that are able to pass through price increases. Certainly, there are limits to these inflationary gains. Too much inflation within a short window of time can make new investment opportunities look too expensive. Since capital spending on investment is a lagging element in the economy, central policy will want to monitor the price situation carefully

in the years that are ahead.

The expansion of the stock market is critical at this junction even if some of the gains are coming out of monetary growth in the financial system. For one, people who see their wealth balances grow are more inclined to spend. Secondly, businesses working on the next phase of innovation are incentivized to take their equity public in order to obtain future growth in new markets. So far, the conversation has centered on nominal change, but real change is needed to improve the conditions for labor and capital. That is why having a robust stock market is an important motivational tool for the innovators of tomorrow.

Some of the US stock indexes have gone on to meet new all-time highs in what was a surprisingly fast recovery. That is a pretty good leading indicator that the economy is moving in the right direction. The stock market’s gains, however, are split between two types of groups. The share prices of companies with many intangible assets and little to no debt are the ones that are leading in this rally. Returns in the companies made up of tangible assets and debt are well behind the returns of the former group.

This new type of demand for stocks is one indication that the age of technology is accelerating. There is potential that this new age will produce the real change required to reinvigorate the economy’s real and sustainable growth rate. The age of high resource utilization to obtain growth may be coming to an end for the betterment of everyone as long as nobody gets left behind.

A N E W T I M E F O R C H A N G E

Market Review AUGUST 2020

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© Advisory Alpha. Registration with the SEC or state does not constitute an endorsement of the firm by regulators, nor does it indicate that the adviser has attained a particular level of skill or ability. This content is for informational purposes only and does not intend to make an offer or solicitation for sale or purchase of any securities. Investing involves risk, including the potential loss of principal. No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. All investment strategies involve risk and have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially affect the performance of your portfolio. There are no assurances that a portfolio will match or outperform any particular benchmark. The performance information presented in the asset category section of this report is based on equal-weighted averages of the following Morningstar Categories: US Stocks (US Fund Large Blend, US Fund Mid-Cap Blend, US Fund Small-Blend), Foreign Stocks (US Fund Foreign Large Blend, US Fund Foreign Small/Mid Blend, US Fund Diversified Emerging Mkts), US Bonds (US Fund Intermediate Government, US Fund Inflation-Protected Bond, US Fund Corporate Bond, US Fund High Yield Bond, US Fund Bank Loan), Foreign Bonds (US Fund World Bond, US Fund Emerging Markets Bond), Hard Assets (US Fund Commodities Precious Metals, US Fund Commodities Energy, US Fund Global Real Estate, US Fund Real Estate), Hybrid Assets (US Fund Convertibles, US Fund Preferred Stock). © 2020 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indices are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

US Stocks have made gains in the five consecutive months that precede the end of August. Large-caps obtained a new record high last month that moved the YTD category return to 5.8%. Mid- and small-caps have largely recovered along with large-caps, but their prices are still not back to where they started at the beginning of the year. Respective YTD returns in mid- and small-cap categories reside at -4.5% and -10.0%.

Foreign Bonds, in aggregate, moved higher in August. The YTD category return in emerging-market bonds finally turned positive last month to end August with a 1.2% YTD gain. World bonds put in a small and positive category return last month. The YTD category return for world bonds has now grown to 4.4%.

Foreign stocks are also in possession of consecutive monthly gains since equities bottomed in March. This grouping of stocks, however, is still in need of more time to recoup the losses that came out of the start of the year. Respective YTD losses in the category returns that represent large-caps and small-caps were -3.8% and -5.0% at the close of August. Emerging stocks are close to exiting their YTD losses following last month’s category return of 2.4%.

Hard Assets increased in August with more buying taking place in depressed assets. The monthly category returns in limited partnerships of energy and in real estate advanced in August. But their YTD losses that remain are still deep especially in limited partnerships. Category returns in precious metals seemed to level off in August. Yet, the YTD category return in precious metals finished in August at 41.9%.

US Bonds saw some additional and marginal gains in August. One of the better performing assets came out of inflation protected bonds. Inflation protected bonds returned 1.1% in August raising the YTD return to 8.2%. Asset buying took place during August in low quality categories that include high-yield bonds and bank loans. Those low-quality categories still hold small YTD losses. Category returns in treasuries and corporates took a backseat in August.

Hybrids gave out stock market-like returns in August. The YTD performance of the entire category has unrivaled the returns of non-hybrid asset classifications. Strength in the group is found in the YTD category return of convertible bonds, which was 20.8% at the end of August. Category returns in convertible bonds have correlated tightly with the high pace returns seen in the growth sectors of the stock market. The preferred stock category advanced 2.6% last month narrowing its YTD loss to -1.4%.

Asset Categories

Monthly

Year to Date

FOREIGN BONDS

US STOCKS

HARD ASSETS

FOREIGN STOCKS

HYBRIDS

US BONDS

US STOCKS

4 .82%

-2 .92%

FOREIGN STOCKS

4 .32%

-2 .88%

US BONDS

0 .49%

3.46%

FOREIGN BONDS

0 .76%

2.24%

HARD ASSETS

1 .55%

-3 .46%

HYBRIDS

4 .11%

9.69%

*DATA USED IS SOURCED FROM MORNINGSTAR®, DATE ENDING AUGUST 31, 2020.

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