Market Commentary for the week of May 18, 2020

Reset

The past few weeks have seen a dramatic shift in the relationship between the financial markets and the economy at large.  One has been surging stronger (markets) while the other has objectively been getting much weaker.  The incredible synergy and confluence of the two that had developed over the last decade has steadily eroded to a dissonance that appears to have no parallel connection whatsoever.  It is unlikely, however, that the markets will sustain any enduring uptrend in the face of such overwhelmingly bad news.

Since the onset of the virus the markets dropped by nearly 30 percent from their highs in late February, followed by massive speculation and volatility which recovered, in near linear fashion, almost all of the losses, back towards those previous levels.  The whiplash, like the virus itself, is unprecedented and unnerving.  The fundamentals that underpinned the decade-long recovery are nowhere to be found

Indeed, traders and value investors determined that" the cheaper the better", and why not get in while the getting is good?  I happen to be more of a growth/earnings driven investor who prefers the prospects for determining investment success and capital gains be better laid out.

My wait might be interminable!!

The pattern of earnings derivation is likely to be changed forever by events on the ground.  Analysis is predicting a different kind of normal.  The negative impact of the virus is forcing businesses to employ new standards of governance and operation.  The key to surviving in the post-pandemic economy is to cater to whatever the consumer believes is safe, reliable, and necessary.

Right-sizing

Obviously, deep recessions can leave lasting unemployment damage in their wake.  Previously profitable companies will be threatened with bankruptcies, restructuring, or closings. To endure, they are now looking to adjust the number of employees they have on hand, as well as adopting compensation modification and flexible hours.  Idle manufacturing space costs money without producing any profit.  Shutting down physical space is now a matter of survival.  Decisions transcend specific sectors or geographic borders.  What once was “anecdotal experience" now becomes a larger pool of "statistical evidence"  which, in turn, then become the trends of our time.

The analysis of those new trends leaves a fresh rational order from which we draw tomorrow's standards and probabilities.  The flow of information defines the science of analytics, constantly changing shape and definition.  Those who dismiss innovative data are relegated to unsatisfactory portfolio outcomes.

Thus, that which is complex at first morphs into an orderly quantitative study that becomes quite logical, reliable, and predictable.  General observations become the foundation for reengineered sector weightings for the foreseeable future.

Those sectors which are destined for leadership are coming into focus today: internet technology, healthcare, biotech, pharmaceutical research, agriculture, ecology, transportation, and alternative energy.   We are seeing a new generation of conversation, imperatives, and leadership which reset the landscape dramatically.  Market confusion and turmoil will be good for entrepreneurship.  It is more possible than ever to challenge existing "models" of how to do business, compete, and win.

The science of economics itself is being redefined by the gears of commerce shifting into neutral as a result of the pandemic.  No longer dominated by discretionary cash and consumer demand, the rationale behind advertising and production quotas takes on new purpose.

There are so many variables and much uncertainty that a return to a "simpler time" is just not possible.  A more viable aspiration is to learn to give credit to all levels of the employment spectrum, no matter how "trivial".  We cannot predict the "other side" of the health and economic crisis.  My role as a portfolio manager, however, is to apply scientific metrics to arrive at an accurate depiction of that which aligns with my clients' subjective representations of their timeline, tolerances, and expectations for the future.

For the remainder of the year at a minimum, the financial environment is likely to be volatile and unrecognizable.  The best we can do at this juncture is to examine our own experience, and reflect  upon all that is fortunate about our lives...and to keep uppermost in our mind the misfortune of others, which is a far sadder subplot to the story. 

Market Commentary for the week of May 11, 2020

The ideal portfolio

It took less than three months of pandemic to bring everyone's expectations about what constitutes an “ideal” portfolio to a devastating halt.      I know this because I spend the preponderance of my time strategizing about how to match my client's expectations about their money with the realities that exist in the data.  But data and statistics cannot accurately portray the human anguish wrought by disease, fear, and economic instability.  In good times it is quite the herculean task to conjoin those concepts.  Now, it is next to impossible.    

We must accept that the shock of being knocked off balance, out of sync with our imagined plan, drains all the energy we have and makes it difficult to focus on tomorrow.

It is time to brace for the inevitable bad news about the future.  The recovery...financial, medical, social, and psychological...will be arduous with the very real possibility that things will get worse before they get better.

More noteworthy, however, is that the trauma of pandemic is affecting the global economy in ways which continue to magnify the inequities of money itself, far more so than we had understood before the crisis.  Those in danger of falling through the social safety net are now literally teetering on the edge of ruin; the wealthy are worried about not having their money run out.  Across all layers of the economic hierarchy the crisis is hitting with a vengeance, but with degrees of severity that expose the wealth gap like never before.

Well paid persons at the top of the scale can afford to worry about tele-working, discretionary dining choices, or which country home they will retreat to this summer.  At the bottom of the range, lower paid employees are hit mercilessly with food bills, medical expenses, commutation and health costs and concerns, and education for their children.  Finally, the truly indigent are left with no choices but to survive or perish.

The trademark of this epidemic is the indelible image of food lines, makeshift morgues, and overworked healthcare providers.  Their pain...our pain...is not likely to abate overnight, or to recover like a “rocket ship”.

Defining value

So what constitutes a proper investment response at this moment?  The answer depends upon the actual topic we are discussing and the capacity we have for imagining something different.  For almost every situation, including building wealth, there is always an aptitude to solve problems if we can recognize that the most critical element to solving a dilemma is how we use time.   The source of most mistakes and misery is our impatience over getting things done immediately.

“Why aren't we bottom-fishing for low(er) price stocks right now?”  “How much cash do we really need to hold on the sidelines?”  “Can't we be doing more?”  “Is doing nothing really doing anything?”   Imagine my phone calls...and imagine you making them!

Let us remember that any “ideal” is a constantly changing item.  To strive for the ideal is one thing; to achieve it , quite another.  Expectations, as noted above, do not often meld well with the realities of one's circumstance.  We become our own worst enemy when consumed by “what should” rather than “what is”.

“Just get it done.  Do it now!!”

One problem with that is that the goal line for perfection is constantly moving...and virtually never attainable.  The best one can do is to mitigate absolute financial tragedy by relying upon facts, process, and empathy.  There will be opportunities for investment in infrastructure, ecology, healthcare and biotech, water, food, education, finance, and energy which help contribute to the future welfare of mankind.  But leaping in amongst the sharks at this highly volatile and uncertain juncture without a plan is highly unadvisable.  Our "worth" is not in the preservation of yesterday's ideal, but in the ability to demand more of ourselves in the future.

One's highest aspiration for building wealth should not focus upon the Dow Jones or the national GDP but upon the dignity of work and an open access to capital that certifies opportunity  and respect  as the entry criteria for participation. 

Market Commentary for the week of May 4, 2020

Noble intentions

The erroneous belief that everyone is alike and everyone is affected equally by pandemics and financial crises is something I alluded to in last week's commentary.  In fact, these are outright mistruths.  Despite the nobility of believing the myth, there are many classes and castes that are being disproportionately savaged by the disease and disaffected, displaced, and mistreated by the economics.

The scourge is horrible, relentless, and borderless.  More disturbing to this author, though, is that there also exists a nexus of greed.  We have to get this next chance to remediate right or there may not be an effective financial renaissance.

The last decade was one of fantastic wealth building and economic recovery.  Stock valuations increased by thousands of percentage points; investment banking transacted myriad numbers of deals, creating lucrative and innovative industries in the process; and advances in medicine and technology revolutionized the globe.  And yet, we still have generations of homeless families, there is great hunger and poverty worldwide, populations are dislocated by war or drought, thousands are forgotten.  How is it that we are dumping milk into sewers, euthanizing cattle and poultry, letting crops rot in the field simply because the global agricultural distribution network is flawed? 

The painful human toll minus the wealth created is still a positive integer.  (PHT-WC >1)

Perhaps, when you see the suffering and anguish caused by the disease, you are thinking, "there but for the grace of destiny go I",  or ,"it isn't happening to me so I don't have to worry"?   Would you so blithely choose to surrender any responsibility to build a better future for mankind in lieu of your own personal aspirations?  There are no scorecards, no statistics kept on personal "batting averages"....so why bother, you might ask? 

Practical reality

Whether one can financially afford the luxury of personal indulgence should not be the issue.  Rather, we should declare...loudly....what we are prepared to do, to surrender or sacrifice, to overcome the health pandemic and the economic maelstrom we are confronting, and how we can be better neighbors to those less fortunate than ourselves.

Towards that end, we must be prepared to change our expectations about how and how fast things get done.  I said last week that we cannot measure investment returns in the future by traditional benchmarks used in the past.  This applies to all things we had previously expected to "get".  I remember one time when I was in high school my class attended assembly in the school auditorium.  Our proctor asked us as an exercise to sit in our seats quietly for the balance of the 20 minutes remaining in the session.  We were asked to think about anything, reflect upon our lives, our goals, meditate even.  But we were to be silent and not squirm around in our chairs.  Almost no one could do it.

Now we are being asked to reflect upon issues of greater import.  The pain, displacement, and distress that we are confronted by now is a monumental hurdle.  Sorting out our own meaning, our purpose, is a convulsive process.  It remains hard, to this day, to "sit still", to contemplate our meaning in life.  But it will be our facility to look at things in the long term as the difference-maker in our ability to overcome the moment.  You want your economy back, correct?  Well, unfortunately, getting giddy when the Dow Jones bounces back 300, 400, 500 points in a day as it did last week only clouds the fact that the road to recovery will be a long haul.  The virus knows no boundaries, neither a Wednesday from a Saturday, Florida from Iowa, rich from poor, Republican from Democrat.  It is neither a baseball fan nor a boating enthusiast.  It is ubiquitous and deadly.  As adults now, can we follow a request by medical experts to "stay at home", or to maintain social distancing?

The more things change, the more they stay the same.  We have seen this narrative before.

Presumably, the markets will recover and the virus will be defeated.  Market strategists like me will go on measuring recovery rates, identifying the "best buy" inflection points, and expounding upon theories of economics old and new.  Similarly, epidemiologists and scientists will quantify the patterns of spread of the disease and predict the probability of its future demise.  But calming our fears, and changing our mindset, will be an even bigger task.

Are we "in this together"?  The one thing we can acknowledge is that to be connected to one another we must share a "nobler representation", one which encompasses a vision of a new normal, and which accepts that one person's suffering is everyone's suffering.