Market Commentary for the week of July 27, 2020

Calm(er) waters

Markets took a pause last week from intense volatility and speculation...which was a good thing.  Like eating a gourmet meal, it is always smart to pause in between courses.

However the calm didn't change the fact that there is now, and will be down the line, a major reevaluation taking place in boardrooms, parliaments, and households regarding future expenditures and potential income.

Still struggling to gain capacity, the hospitality, travel and leisure, airline, and restaurant businesses are fighting for survival, while the stay-at-home industries (furniture, television, computer hardware, remodeling) are vastly improving.

All this means that the world has been forced to shift priorities because of the Covid virus and maybe, despite the drastic toll in lives and commerce, there can be a silver lining after all.  A preoccupation with "things" and tangible displays of accumulation had come to signify our daily existence.  Today, we are witnessing a revival of values-related investing and lifestyles.

The financial markets are rebounding in other ways as well.  The "trader's mindset", value driven activity following the market's crash in March, is now morphing into a growth and profit mindset.  The promise of continued low interest rates raises the hope that money can be invested towards infrastructure, healthcare, education, and energy.  I continue to root this market forward, believing that the underlying economic fundamentals that were strong enough to propel the economy 6 months ago can serve as the basis for the next leg upwards.

Still, the virus is not defeated nor really in a pause.  It is everywhere and quite lethal.  Pockets of outbreak here in the US and elsewhere around the world are caused, in part, by the ubiquitous nature of viruses, but also by a sense of complacency and boredom  by those who just wish this was all over...now!!  Until there are genuine palliative care and vaccine alternatives, the likelihood of uncertain and sloppy financial markets is still probable.

Government efforts to stimulate economic activity pales in comparison to any pronouncements from the scientific and medical community.  Thus, expectations for a straight-line, "rocket ship" type recovery, economically or medically, are misplaced until or unless those words of victory occur.  The next quarter, perhaps the next 6 months, will mostly be determined by advances in medical science.

Despite our rapt interest in what the CEO's might have to say, the real voices of motivation are the pharmacists, educators, doctors, and ethicists who are working tirelessly on our behalf.

Market Commentary for the week of July 13, 2020

Words matter

As the third quarter unfolds, we are gaining more clarity about what lies ahead for the financial/investment markets.  Without question, there will continue to be an abundance of "headline news"  that shapes the landscape versus a kind of "big picture" scenario.  We are six months into a global economic crisis that has sown discord and disruption.  Despite that uncertainty, we feel comfortable with our macro, top-down identifications, beginning with extremely accommodative monetary policy and a belief that underlying fundamentals...although a bit muddied at present...can rebuild.  Spending and demand will remain muted, but we see no indication of throwing in the towel just yet.

We know which sectors will thrive (pharmaceuticals, technology) and which will fight hard for survival (cyclicals, industrials).  The market is endeavoring to push through its volatility and generate profits for investors.  We caution, however, that indiscriminately chasing after expanding P/E ratios and oversized relative strength integers could lead to trouble.  Remember, all things are cyclical.  Thus, price peaks are likely to pull back at some point, particularly if earnings fall short of expectations.  Being macro-oriented might also help to eliminate some costly mistakes.  While the economy and the financial markets sometimes emulate each other, this is one instance in which the dichotomy must be understood.  The economic recovery dating back to the 2008 recession, for example, is still trying to gain traction globally but, obviously, current events surrounding the pandemic might hold greater influence in the short-term.

From a strictly empirical point of view, we have no problem acknowledging that the averages stand today about where they did at the beginning of the year, and have recovered extraordinarily well from their lows in February/March.  Lows so low and the recovery so good, in fact, that history records the last three months as the "best"  quarter in decades.

It might be time to refine the language we use when referring to current events......

Indeed, the markets soared over 20% last quarter owing in part to federal stimulus, low interest rates, viral controls, hopes for the future, and an indomitable spirit of "value speculation". (It is easy to multiply gains when bouncing from the basement of valuations.)  But is the word "best" an effective way to describe where we are now and from where we came?  Without parsing definitions, words, and perceptions, matter.

Ask any family touched by the death of a loved one, with depleted savings, inconvenienced by stay-at-home quarantine, or unemployed/laid off/furloughed if the last three months were their  “best”.  While the world was being threatened by a deadly pandemic, inexorable changes were occurring in attitudes, spending, lifestyles, and behavior.  We find ourselves today at the intersection of politics, money, and morality.

Similarly, we hear people asking to "go back"  to normalcy, send our children back  to school, bring the economy back.  Perhaps going backwards is not possible anymore.  A new normal is necessary and we need to get used to that.  Once again, ask anyone who is not an equity shareholder....and there are many....if the last three months were their best and you would probably get a different answer than the one Wall Street analysts are using.

It is time to find a fresh balance.....in investing and elsewhere....that creates an equilibrium in healthcare, social rights, politics, education, etc. so that everyone can benefit from their initiative and inspiration.  Wall Street and Main Street are just not that dissimilar, one hopes.

I think that when we call last quarter's market performance the “best", and limit the scope of our language and evaluation solely to the percentage return on the Dow Jones, that we need to step back and re-think how capitalism and vernacular all play a part in limiting or advancing the opportunity for the population as a whole.  In my mind Wall Street is not about a moment in time....the closing price on the S&P or a quarterly earnings report, for example.  Rather, it represents a marketplace in which capital is unleashed for the long term to identify problems and provide solutions for the betterment of society.

Consider a basket of needs today: poverty, hunger, pollution, water shortage, energy, transportation, infrastructure, education, healthcare.

The third quarter, alone, provides a panoply of buying opportunities for those so inclined.  

Market Commentary for the week of July 1, 2020

Paradise redefined

How ironic that in order to receive the blessings one must first go through hell.  And so it was last quarter as a plague of infection and social unrest was unleashed upon an unsuspecting public.  Hopefully the dawn ahead will be brighter than the dark night just passed.  But the truth is that we have a long way to go before finding an economic, social, and medical equilibrium.  We just don't know, really, how complex the situation is.  It is undeniable, however that the beliefs we held, the ideas of who we are, and the attitudes we subscribed to before this pandemic are clearly different in its aftermath.

I am struck by Wall Street's professional obsession with stock valuations and markets when, in fact, a more sizeable percentage of the population worldwide doesn't even participate in the stock market, and themselves are more concerned with economic survival, racial and social unrest, and personal health.  If you count yourself as one of "the lucky ones" then just look to your left or right to find someone who isn't.  The ruin of the last 3 months is vast.  No amount of wishing can make the recovery go "straight up".

Don’t get me wrong...the percentage gains from the bottom of the market are impressive.  It was hard not to get caught up in the stunning bounce back.  Not only did the market recover some heft, but those regions of the country most affected by the virus are now leading the way in medical recovery.  But, as most cycles do, changes are always evolving.  It is only by looking backwards  that we sometimes can gain the truest perspective of what might come in the future.  Above all, that which most affects the future trajectory of events will be our attitude about overcoming obstacles and our preparedness to have patience when they occur.

Markets

Last quarter our approach to dealing with the crisis and turbulence was to do no harm to portfolios by avoiding precipitously panic-driven decision making. Our view was that we had already made accommodations well in advance for any unforeseen events through prudent asset allocation assessments and strategic, top-down macro modeling.  Although we did make some adjustments for individual equity weightings and sector baskets, our overall strategy remained intact.   We were also frequently asked why we didn't "buy at the bottom"?  First, if you knew where and when the bottom was, we should exchange roles.  Secondly, we remained true to our statistical  models and forecasts.  This differed considerably from what we saw as convulsive selling and buying by many others.  If our metrics were consistent before the virus, they should remain consistent during and after, as well.

Identifying the economic risks of the pandemic is much different than knowing what to do next about them.  Once again, our reliance upon a consistent quantitative methodology and process is critical to successful portfolio outcomes.  Unless there was a seismic shift in our client's risk tolerances, there was/is no need to make wholesale changes.  "Value" purchasing and crisis buying is not consistent with the mandate given me by high net worth investors.  It is just not worth the risk of guessing wrong to be "proven" right in hindsight.

The landscape is becoming clearer now and changing slightly from our macro perceptions at the beginning of the year.  For one, economic success is not about quantity  of resources but about access to them.  Our challenges are as diverse as the physical landscape of the planet.  There are vast regions without food, water, housing, medical care, territorial security, social freedoms, and good government.  Thus, our investment palette is as broad as the problems before us, and potentially as profitable.  When I am asked for my specific projections for the Dow Jones, S&P, or any other benchmark my reply is to "widen your aperture of perspective"  and consider the human condition as your menu of opportunity for the long term.

Perhaps the technologies for these tasks have not yet been invented?  Our capital markets bankers and traders should have the foresight to know how to cultivate those creations.  History has shown us that following severe economic and social dislocations the vacuum is filled by entrepreneurs and new businesses.  The allure of being "in vogue" or "hot" should also be tempered by a solid moral compass.

Strategy

Our forecasts for US and global GDP must be adjusted downwards.  Without consumer demand, industrial investment, and sustained spending the revenues just aren't there to allow for the kind of profit growth we have forecasted earlier.  Airlines are cutting flights, schools are cutting curriculum, restaurants are cutting staffing, governments are cutting  programs and essential services.  As with everything connected to the financial markets, it always centers around return on investment and the bottom line.  Finding the resources to dispense precious technologies is the conundrum of the day.  Obviously, wealthy nations are at an advantage.  Perpetual desolation only exacerbates the problem for the poor or disaffected.  The staples of a healthy society, including housing, education, food, healthcare, social justice are sometimes taken for granted by those who have them, lusted after by those who do not.

The Covid crisis underscores the plight of the poor, disproportionately killing persons with pre-existing medical conditions or who have no access to quality healthcare.  Conventional thinking is being challenged by those whose grievances have been long ignored.  A company that uses science and innovation to develop efficient agriculture, alternative energy, bioscience, technology, educational tools, or banking and investment is one that can have a rising share price while also "doing good" for the community.

Failing to see the forest for the trees, having a minute-by-minute approach to the financial markets, is a recipe for volatility and crisis.  An obsession with "how much the Dow went up today?"  falls short of planning for exogenous influences which might heighten panic, or exuberance, and take portfolio values along with them.  It also loses the distinction between the stock markets and the broader economy.

Our job as money managers is not necessarily to mirror the daily path of the S&P but, rather, to preserve assets, grow wealth, and to lay out a plan for the next decade and beyond that brings order out of chaos.

In equivalent terms, knowing the closing price on the Dow Jones each day is really small stuff, indeed.

This quarter, more than any other in recent memory, it will be impactful not  to focus upon 24 hour news cycles.  I believe that the underpinnings for economic, political, and social reformation began nearly a decade ago after the last recession.  Their significance remains intact.  The effort is multi-sector, multi-cultural, multi-dimensional, and multi-year.  I believe profitability this quarter will come from pharmaceuticals, biotech, agriculture, and consumer cyclicals.

Building a cross section of resurgent businesses along with traditional "staples" is a powerful backdrop for portfolio growth.  The financial markets ended the quarter with the same type of volatility and trepidation with which they began the quarter....  several hundred point swings on a daily basis, all predicated upon politics, viral spread, and fear. The markets are positioned to continue their advance assuming no inevitability of a more radical viral wave or politically rhetorical interference. 

 

Suggested balanced account asset allocation, Q3, 2020

Equity:                35%

Fixed Income:  35%

Cash:                  30%