Updates, Tips, & Finance News

Hi there—here is this week's update!

TL;DR - Too Long Didn't Read

-Risky debt vs. risky equity. Both are painting different pictures of the market.
-Large corporate layoffs will spell trouble for an economic recovery.
-Is the stock market rally still a rally if it’s just a few tech stocks?
-Timing the market is impossible. Read below what we’re doing.

Distressed Debt

The amount of distressed debt has started to spike over the last two weeks. A bond typically becomes distressed once the yield is 10% higher than US Treasury bonds.

This is concerning because the Fed has flooded the bond market with a record stimulus. This means that businesses should have a much easier time borrowing money and refinancing.

This isn’t the case for all businesses.

Even with the fed buying bonds and acting as the lender of last resort, we’re now seeing less demand for the riskiest debt from bond investors. This is causing yields to go up because bond investors demand to be compensated more for this risk. We’ve seen the biggest increases lately in airline, media, and entertainment.

This is directly contrasting the demand that retail investors have for risky stocks, especially ones that have filed for bankruptcy.

If you want to read more, here is an interesting article about the bankruptcies happening right now.

Employment Situation

Last week, we mentioned that we could see unemployment rates start to pick up for white-collar workers, which would create a significant headwind for our economy.

We’re starting to see the potential for layoffs in larger companies, which could create major economic damage. For example, United airlines warned that 36,000 employee jobs are at risk. Additionally, Wells Fargo announced that thousands of jobs are also at risk. Wells Fargo is the largest employer among US banks. If more companies like this begin to lay off workers, this could have a cascading effect on many more businesses.

Booming Stock Market

The COVID stock market rally has been highly concentrated in a few names within the tech sector. Below is an interesting screenshot of a chart illustrating this.

Removing tech from this rally shows just how little is driving this rally.

We saw the first crash highlight the first hit to the economy, where hospitality and retail companies were heavily affected.

We’ve already started to see more and more companies declare bankruptcy (here is a link to major bankruptcies that we sent last week). Once these companies declare bankruptcy, big-tech will not be immune.

As more and more businesses face bankruptcy, they won’t be buying products or services from the major tech players, and they certainly won’t have the budget to be spending on digital ads.

With so much of the rally focused on so few companies, it’s important to look at the economy and its future effect on big tech stocks.

About Market Timing & Our Summary

We have received a few questions from clients curious about why we have remained more risk-off and have not participated in the recent rally in stocks.

The reason is simple: we are not willing to gamble with your money.

Round is built to house the majority of your investable assets, and we do not make frivolous bets with our clients’ nest eggs. As your asset allocator, we manage a holistic portfolio that aims to provide capital preservation during risky times and growth when opportunities arise.

Themes take time to play out in the markets, and just because an investor had a good week or month does not mean that they will outperform over time. We are in a deep recession. The buyers of stocks at this stage are ill-informed, in our opinion.

We believe that the stock market may move sideways over the next few months and that there are only a few more percentage points of upside from here.

There is a considerable risk of the market crashing over 50% from this point, which happened in the Great Depression. This type of rally has happened before. The stock market rallied +46% in the middle of the Great Depression before crashing -83%. Had you bought into that rally, it would have taken you over 20 years to make your money back.

We’ve been shouting from the rooftops for months that it is not the time to be taking risks. However, this may take time to play out. Patience is important as an investor.

Ultimately, nobody can time the market perfectly; however, the smartest way to invest is to buy in when there is strong value and avoid unnecessary risk.

See you next week!

-Saul and The Round Team

Have $100,000 or more to invest? You may qualify for Round Private Client. Contact our team at privateclient@investround.com.

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