Like an Orc being washed away by the waters behind the dam after its destruction, markets shorts are finding it equally hard to find their footing.
While many market pundits keep talking down the economy and scream that the market is “overvalued” leading to crash comparisons to (you choose) 2000-2002 Tech Wreck or the 2008-2009 Financial crisis, the market continues its upward trend.
Should investors be fearful? We think not. This has the makings to the start of a truly historic bull run. It may end ugly when it ends, but that could be a long way off.
Let’s look first at the economy. Readers should be familiar with the work done at www.econpi.com as I referenced it many times in the past. Quick refresher, http://www.econpi.com does a nice graphic for where the economy is, and by looking at past graphs you can clearly see where the economy came from.
“It’s the Economy, Stupid” – James Carville
First, here is where the economy was prior to the Covid 19 outbreak:
The Red MOC – Mean of all the data coordinates and the Green LD – Leading Indicator plots are in the economic expansion quad.
The average for June:
Clearly in recession for both May and June.
And here is the first week of July:
We have moved into the recovery quad. This is a big incremental change in a week. While there is concern about the closing of the economy, most seem to agree that with masks and social distancing most businesses other than bars and fitness clubs will be opening, even if on a limited basis. Many pundits claim that business will take years to return to normal. I strongly disagree. The flood of consumers to beaches, restaurants and bars indicates to me a consumer that is desperate to return to their normal lives. The biggest exception I see is the airline and cruise industries.
“Don’t Fight the Fed”
Probably the one universal piece of advice to follow as an investor. This is from Fed Chair Powell,
“The Federal Reserve is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy… The Fed will continue to use these powers forcefully, proactively, and aggressively until we’re confident that the nation is solidly on the road to recovery.” (Congressional Testimony on 6/30/20)
How forceful? The Fed has already announced the creation of facilities to buy corporate bonds, asset backed securities, ETFs and now they have directed Blackrock to buy individual securities for the Federal Reserve account. None of which is allowed by Fed charter. And thus the above reference to the dam breaking. The Fed has literally unlimited resources to print money with the apparent adoption by this administrations of Modern Monetary Theory. There is no theoretical limit to money printing until the economy reaches full employment again. The dam has literally broken.
But let’s hear it from someone else, hedge fund billionaire and owner of the Milwaukee Bucks Marc Lasry in a Market Watch interview,
‘I know you’re not supposed to say this, but it’s a once-in-a-lifetime opportunity. You’re not going to see this again: Where you’ve actually got an economy that’s fine, and you’ve got a Fed pumping trillions of dollars in.’
Negatives? As always there are concerns, and the prudent investor needs to remain wary. Expect volatility especially over the next couple of weeks as earnings are announced for the second quarter.
The market is building up fuel like a California Forest waiting on a lightning strike to set it off. The lightning for the market? Hopefully a treatment or vaccine for Covid 19 that is actually available to the public.
How volatile the market is over the next six months is anyone’s guess. Between constant Covid 19 news, the election, riots, and protests daily gyrations could be severe. I personally think the biggest test will be if schools open and remain open in the fall. No schools and no football will be a huge psychological blow. If you have cash on hand now we strongly suggest picking and choosing several entry points over the next few months. No one can predict the short term, but the longer term outlook is looking very bullish.
Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore CFP ® is an Investment Advisor Representative of 401 Advisor, LLC. They are also registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees, or affiliates.
Past performance is no guarantee of future results. All investing involves risk. Investments mentioned are not meant to be specific buy or sell recommendations without being taken in the context of an investors’ entire portfolio or investment objectives. Consult an investment professional before investing.
And be sure to check out Jim’s new podcast: https://podcasts.apple.com/us/podcast/401-advisor/id1511923745
Please email either of us with your questions and we will address them on future podcasts.