Some of you know investing is a passion of mine (and part of my former life) and here are some observations and my $0.02 based on conversation with friends.
Mr. market is certainly fascinating these days. It’s wild to see historically bad economic data reported as the stock market records historically near record weekly gains – and the overall disconnect. One rarely discussed point is that the record unemployment data doesn’t include the likely 10’s of millions who are taking a huge pay-cut. I suspect ‘the market’ will wake up to this soon.
Stimulus vs Economic Stop – Which Wins?
It will be intriguing to see how the unprecedented fiscal/monetary stimulus plays out vs. the equally unprecedented economic devastation. (Fun site – https://www.usdebtclock.org/world-debt-clock.html – note the USA Debt/GDP ratio is still far lower than some 1st-world countries).
The experts I respect most are generally staying on the sidelines (ie: they “have no idea what’s going to happen so they’ll just watch this play out”) – as the two primary factors driving the market – the unlimited stimulus vs full economic stop – both have no historical precedent.
-The ‘Bull’ case is mostly based on ‘don’t fight the fed’ (record-low interest rates, stimulus, etc) – usually a safe mantra to bet on. -‘Bear’ case is mostly based on under-appreciated long-term ramifications of the full economic stop. The brilliant economist, @elerianm, has cogent views on what happens after economic stops (hint – they are not optimistic). I highly recommend you listen.
Sidenote – Warren Buffet’s annual Berkshire shareholder meeting will be livestreamed free on Saturday – highly recommend you watch. I firmly believe that I learn more in 6 hours from listening to Buffet/Munger answering questions each year than I did during my 4-year ivy league education – https://finance.yahoo.com/brklivestream/.
Next 4-8 Weeks Are Critical:
If there are any false-starts to reopening (covid resurgence), it will not be good for anybody. I’m keeping a close eye on data from cities/countries that are re-opening (see Germany). Market Is Not The Economy & DJIA is not the market:It’s important to note that the top 5 companies of the S&P500 = 20% of its value (MSFT, AAPL, FB, GOOG, AMZN). The DJIA similarly consists of brand-name companies, with access to capital, that are currently thriving in the ‘new normal’ (cloud/tech, healthcare/pharma, etc). The Russell2k is a better ‘market’ indicator, which has substantially under-performed the ‘Market’.
Second Wave In Fall?
The medical experts seem to all agree that a covid resurgence in the fall is highly likely, and could be more devastating as it will coincide with the flu. This obviously would be disastrous and the market seems to be discounting this entirely at this point.
Consumer Demand Matters Most:
If/when consumer demand returns is what should drive the market’s next move in either direction. Many factors will impact this – duration of virus/fear, lockdowns, false-starts, progress of vaccines, and overall consumer confidence (ie: will I get/lose my job) are main ones. Every day that goes by makes it much harder for economy to recover from (ie: V-shape vs L-shape ‘recovery’). The next several weeks should be very telling. Medical X-Factor:A medical breakthrough is the x-factor that can change everything on a dime (today is great example with positive Remdesivir data).
Timing is always impossible to predict, but the next several weeks should reveal a critical catalyst in either direction – how safely/quickly we can reopen and if we can keep virus in check while re-opening.
Industries that will suffer long-term/irreparable damage due to covid/new-normal (malls, physical retailers, entertainment, travel/leisure, etc) seem toxic to me. Many companies in these spaces have been given a temporary lifeline due to the fed’s actions, but the ones with bad balance sheets are in trouble. I’m optimistic on companies/industries that should thrive in the new (post-covid) world (telemedicine, cloud, video/online-first model, gaming), especially ones with strong balance sheets.
-Not financial advice
The TLDR – the market may go up, or down, or stay the same
What do you think?