Impact
Extraordinary surges in equity prices
following the mid-March swoon in the markets have now created uncertainty about
how P/E levels and future profitability can effectively synchronize. This has resulted in an understandable
dialogue about value versus growth equities, and whether the pandemic has forever
and immeasurably influenced the direction of stocks in the short and long
term. Jobs data released last Thursday was
quite poor, with many millions of persons still displaced, furloughed, or laid
off altogether. Imagine, too, the
disappointment and exasperation of investors who, because interest rate levels
are so low, are forced into buying stocks with good dividends as their
surrogate for fixed income products. But
who is to say that that kind of "default" investing will persist,
given the high levels of anxiety which infuse the situation? All this only makes the job of portfolio
management that much more complex and compelling.
There is little doubt that the viral eruption
has become the single most determinative factor upon our decision making. The disease carries on with no abrupt end in
sight. Certainly, with second and third
waves spreading around the globe, it has become the vector of record upon the
financial markets, institutions, families across all/any borders and political
spectrums.
As a result, consumer and corporate
spending and costs have become disrupted.
Earnings patterns are more disjointed, while the volume of laggard
stocks continues to outpace winners.
With the exception of core industries (healthcare, technology, consumer
staples) declining demand for goods is eroding profits, revenues, and
hope. Markets, needless to say, are unsure
about which way to proceed.
The problem is trying to use science as a means of quantifying levels of emotion,
such as panic and fear, that
exists...a difficult thing to attempt to do.
The virus is no one's fault; it is not a measurable variable that we
have seen occurring with regularity in this century. There is not now, nor will there be soon, a
silver bullet panacea for the pandemic or for the market's unique world-weariness. We must re-think our reactions to, behavior
about, and norms concerning our way of life.
At the risk of exposing the underbelly of our vulnerabilities and
weaknesses, we must avoid falling victim to myths, untruths, and hysteria.
Our sciences exist not to placate
fear but help define it......knowledge is tested in the crucible of
crisis. We should not be beholden to tips
or hyperbole from our neighbors, our relatives, or friends. Rather, we must rely upon scientific methodology
and discipline to engrave our patterns of decision-making in order to create
the optimal outcome for our portfolios and our lives.
Empowerment
Given all that, we remain optimistic
about the tactical investment opportunities that exist...in healthcare, infrastructure, agriculture, technology, ecology, and
renewable energy.....for the immediate phase as well as decades ahead. The viral outbreak, if nothing else, allows
us to reset relative strength measurements closer to their mean averages, and
to reevaluate structural asset allocations that had become bloated, defective,
or antiquated during the prior year.
As I noted earlier, the swift
"linear contraction" in stock prices during the Spring removed a lot of
investors from the competition, but also rewarded those who stayed, or those
whose indecision caused them not to act, recognizing the reality that nothing changed fundamentally about the economy except for the ambush of a pandemic. What happens going forward will be a peculiar
blending of emotion, technical dynamics, and fundamental economic
analysis. As in any cycle, our key
metrics will focus upon companies that have accelerating earnings, superior price performance, and strong relative
strength integers. From amongst that
grouping will emerge sector rotation, promising trends, and a better
understanding of what the landscape will look like when the Covid is fully contained.
Using this backdrop, it is appropriate
to re-enter the "game”, slowly at first and mindful of any setback risks,
to reposition for a broadening of opportunity and a return to normalcy in
economic activity in the months ahead.
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