Nicolet Wealth Management Market Update: Effects of unprecedented fiscal stimulus

Thank you for your continued confidence in Nicolet.  As the COVID-19 pandemic continues to create uncertainty in our lives, we will work hard to provide you with timely insights on economic conditions.

Market volatility and uncertainty remains elevated as an estimated 95% of the U.S. population is under instructions to stay at home through at least the end of April.  Several states, including Wisconsin, have extended previous stay-at-home orders until after Memorial Day.

In addition to negative health implications, the COVID-19 outbreak and subsequent social distancing is having an incredible impact on employment.  According to the US Department of Labor, US payroll declined for the first time in over a decade.  Roughly 22 million Americans, or 13.5% of the labor force has filed for unemployment in the last month.

Amidst record unemployment claims, falling industrial output, and reduced consumption, the economic contraction will be severe.  We are set to possibly experience the deepest post-WW II US recession compressed into the shortest period of time on record.  The monetary and fiscal policy response to date has been both prompt and aggressive.  The Fed has gone beyond previous measures as seen below:

  • $700bn+ in purchases of U.S. Treasury securities, mortgage-backed securities, CMBS, and agency MBS
  • $300bn in new financing to support the flow of credit to employers, consumers, and businesses
  • Reduced overnight interest rates to near 0%
  • Establishment of primary and secondary market corporate credit facilities to provide liquidity for new and outstanding corporate bonds
  • Establishment of Term Asset-Backed Securities Loan Facility to support credit to consumers and businesses
  • Established the Municipal Liquidity Facility to provide $500bn to state and local governments
  • Expanded Money Market Mutual Fund Liquidity Facility to purchase highly rated short-term debt from money market funds

The unprecedented size and scope of monetary policy and fiscal stimulus, aimed at stabilizing markets and filling the demand gaps caused by the shutdown of significant portions of the economy, has contributed to the stock market rebounding nearly 30% off the late March lows.  The market still remains down around 15% from the February highs, but has now likely begun to discount the expected economic recovery.

Additionally, the market is benefiting from an advantageous composition.  Not all sectors are created equal, and in general, those sectors that are most sensitive to a social distancing shutdown of the economy make up a smaller percentage of the market than they did 40 years ago.  For example, today energy and basic material companies comprise around 6% of the S&P 500 Equity Index versus over 30% in the past.  On the other hand, companies that are insulated from or are benefiting from social distancing, such as technology and communication companies comprise over 35% of the market today versus less than 15% in the past.

Another factor to consider is the size of companies in the various equity indices.  The median market capitalization of the S&P 500 Equity Index is over $20 billion.  In contrast, the median for the Russell 2000 Small Cap Index is $0.5 billion.  In general, larger companies are less impacted by social distancing than small companies are, and the year-to-date investment performance of the two indices reflects that as large companies are down -11% and small companies are down -26%.

Market volatility continues to create opportunity, and we continue to maintain our disciplined long-term approach.  If you would like to discuss your account in more detail, please contact us at your convenience.

Nicolet Wealth Management.

Investment and insurance products:

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Nicolet Wealth Management is a brand name that refers to Nicolet National Bank and certain of its departments and affiliates that provide investment advisory, trust, retirement planning and insurance services.

Nicolet Advisory Services, LLC, is an investment adviser, registered with the U.S. Securities and Exchange Commission, and an affiliate of Nicolet National Bank.  Nicolet Advisory Services, LLC recommends the brokerage and custodial services of TD Ameritrade, Inc., member FINRA/SIPC.  TD Ameritrade is not affiliated in any way with Nicolet National Bank or its affiliated companies.

Trust services are offered through Nicolet National Bank, a national bank with trust powers.  Trust services utilizes SEI Private Trust Company (SPTC) as its custody provider.  SPTC is not affiliated in any way with Nicolet National Bank or its affiliated companies.

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