What The Stock Market Is Telling US

Let me say this before we talk about what the stock market might be saying.  Nobody knows.  That's correct.  What we have are a bunch of market participants, pundits and news organizations trying to use experience and precedent to lay out a scenario they believe is possible in the coming months.   Remember this though whenever you hear or see something.  It's all a guess or a wish.  The reason I say it's possibly a wish is because some investors need the markets to go in a certain direction.  If for example you missed this rally because you were afraid that stocks had much farther to fall, then maybe you want it lower.  Conversely if you're long stocks maybe you wish for markets to keep going up.  In any event nobody knows what's going to occur because nobody's been here before.  Keep that in mind as you read further.

The US printed today another 2 million lost jobs in April, more than 40 million job losses in the last 10 weeks.   GDP fell 5% in the first quarter.  It's likely the 2nd quarter print will be equally depressed.   Yet, stocks bottomed in March and have been on a rocket ride higher ever since.  The S&P 500 {although very distorted by only a few names} is only 5% off of its lows as of this writing.  The average stock isn't as lucky, being down about 13%, but still given these kind of economic prospects, you could imagine them down double those amounts.   

There seems to be two prevailing schools of thought right now and I won't go into the reasoning behind each in the interest of time.  If you're bullish you think we're in the midst of a "V" shaped recovery.  You think the economy has seen its worst and we're on the long road to recovery.  You don't care about earnings right now, perhaps out several years, and you're more concerned about job metrics, numbers of hospitalizations and new Covid-19 cases than basic economic statistics.   Besides interest rates are at historic lows.  Bears think this is nothing but a rally in a bear market.  At some point the crushing economic numbers intrude even into the stock market's bubble and a new downward cycle begins.

I lean more towards the bullish camp right now because I think we're learning to adapt to this new pandemic world.  However, I also think there could be times this year when the markets hit another rough patch, especially around the elections.  Based on what I've seen and what we currently understand about the virus, I think there is a higher probability that we've seen the market lows for this cycle.  I'll emphasize though the "based on what we currently know" part.

The one thing I do know is if you were absolutely certain the end was nigh back in the winter when stocks cratered then you've been handed a gift given this recovery.  Most major indices we track are now back to where they were in the fall of last year.  If you're in that bearish frame of mind then now is the time to review your asset allocation, either with me or with somebody else.  

However, if you're in that frame of mind, remember if you bet that way and sold in the spring then you so far bet against the American economy and lost.  Indices, even the worst performing ones, are up double digits since March.  Stocks will continue to be volatile and we all need to steel ourselves to the higher probability of some negative headline knocking some froth off of this rally.  But historically betting longer-term against our economy has been a losers bet and likely will be in the future as long as we have a dynamic capitalistic system.

Just remember, nobody knows for sure.

Back early next week.

*Long ETF’s related to the S&P 500 in both client and personal accounts.

Memorial Day.

Thermopylae:

Honor to those who in the life they lead
define and guard a Thermopylae.
Never betraying what is right,
consistent and just in all they do
but showing pity also, and compassion;
generous when they are rich, and when they are poor,
still generous in small ways,
still helping as much as they can;
always speaking the truth,
yet without hating those who lie.

And even more honor is due to them
when they foresee (as many do foresee)
that in the end Ephialtis will make his appearance,
that the Medes will break through after all. 

{C.P. Cavafy, "Collected Poems".  Translated by Edmund Keeley and Philip Sherrard.  Edited by George Savidis.  Revised Edition.  Princeton University Press, 1992.}  Poem can be found here.

About the Battle of Thermopylae see here.  The movie and comic book "300" is loosely based upon the events surrounding this event.  The Medes are an ancient Iranian people that we think of today as Persians.  Ephialtis is the Greek whom tradition states betrayed his people to the Medes by showing them the goat path around Thermopylae allowing them to defeat the Greek armies.

Dedicated to those that stand on the walls and guard the hot gates in service of their country.  We especially remember those that were wounded  and those who gave the last full measure of their devotion while doing so.  This year we will add all those first responders, scientists, medical staff, doctors, nurses and anybody else that's been fighting this battle, working to keep us safe

God bless.

Memorial Day Weekend

Traditionally when we lived in River Forest we would fly two American flags between this day and the 4th of July.  We haven't figured out the logistics of how to do this at our condo yet so we'll put up a post of the old house  to honor Memorial Day.  

The flag you see off to the side of the old "Global HQ" was carried by my brother-in-law who flew Harrier jets for the Marines in Afghanistan. We honor his service as well as the services of all prior family members and all others who have served in our armed forces.   

As always we want to honor these folks, both past and present on both sides of our families, for their service to the United States of America.  I have tried to include both immediate and extended family members, but will apologize in advance for any inaccuracies or exclusions.  Please note that any mistakes were inadvertent:

The Honor Roll  includes:

Cornelius Murray {Revolutionary War-Pennsylvania}
James Gignilliat {Revolutionary War-South Carolina}

Capt. {Brevet} William H. Murray {Civil War-Co. K. 19th Indiana Volunteer Regiment}

Col. William Orr {Civil War-19th Indiana Volunteer Regiment}

Donn P. Murray, MD {WWI}

Brig. Gen. Leigh R. Gignilliat {WWI, Supt. Culver Military Academy, 1910-1939}

Fredrick R. Hazard Jr. {WWI & WWII}
Paul C. Gignilliat {U.S. Navy}

C.M. Hazard {U.S Army}

Richard J. English {U.S. Army-Reserve}

Lt. Col.  Michael Franzak {USMC (Ret.)-Afghanistan-Distinguished Flying Cross}

God Speed and God Bless to you all!

Happy Memorial Day everybody!

Summer Hours

We'll kick off our summer hours for this blog starting next week.  Monday of course is Memorial Day, the traditional start to summer.  Hard to say what summer is going to look like this year.  Irregardless, here the weather's supposed to finally warm up  and thoughts turn to the great outdoors.  We'll post twice a week from now until the fall, usually Tuesday and Thursday.   We're going to try and reserve the weekends for family. Rest assured we'll break in if events warrant.  I hope everybody in this country can have a memorable summer this year.  God knows we've earned it.  

Back sometime next week.

But What If? {Introduction}

Conventional wisdom {CW from now on} is groupthink.  It's the collective assumptions we all make about certain things, events or ideas.  CW when looking at the future is often wrong, largely because it is fighting the last war.  By that I mean it is taking the collective experience of some event or past idea and projecting it out into the future.  today we're going to start another new series and we'll call it "But What If?"  Here we'll examen conventional wisdom and throw out some other scenarios and then add at the end our projected probability of that scenario turning out to be what actually occurs.  Here goes and remember this is a work in progress.

Economic recovery:

CW says it will take us years to undo the damage the virus has inflicted on our economy.  Most estimates I've seen say it will be 2022 before we get back to where we were at the end of 2019.  But what if instead through a combination of science and best practices we have a much better understanding of how to live with the virus by next fall?  And what if because of that knowledge unemployed people are rehired at a much faster rate than currently expected?  And what if people begin to feel comfortable and safe start to venture out again?  Most importantly, what if when they go outside they begin to spend money again?  There's currently something like 4.8 trillion dollars sitting on the sidelines either looking to be invested or to be spent.  The conventional wisdom in many quarters was at the end of World War II we'd resume the Great Depression.  The thinking then was that all those demobilized soldiers and reduced defense spending would wipe out a lot of the economic gains made during the war.  Indeed, the US did experience a short recession in 1946-1947.  But then a combination of all that money saved during the war, defense applications turned to civilian usage and the GI bill turned the economy around.  It also didn't hurt that those GIs came home and started families.  What if we see some combination of that in the months ahead.  If so then economic growth could resume at a much faster speed than many currently think.

Projected probability of this being a likely outcome.  50-60%.

A 2nd wave:

CW says we'll see a 2nd wave of the virus in the fall as we all head back indoors similar to what was experienced in 1918.  But what if that same combination of science and best practices blunts outbreaks of the disease to isolated and manageable pockets next winter?  Science and public health has advanced quite a bit since 1918.  What if by next winter Covid-19 is a manageable event similar to influenza?

Projected probability of this being a likely outcome.  40-50%.

So this is a start on tackling conventional wisdom.  I'd say that while this may be the CW in the press and amongst the pundit class one does need to consider the possibility that Mr. Market has already said this is a higher probability event than most think given its recent actions.

The Undiscovered Horizon {Data}

We are slowly turning the tide against Covid-19.  Three data points support that conclusion.  First the number of deaths is declining.  On a moving average basis, mortality is down over 30% in the past month.




Hospitalizations have also declined significantly.  My guess is the treatment regime has changed in many places as well now that we know more about how the virus operates.



Testing has also improved dramatically.  It's much easier to get a test today around Chicago today than it was even a few weeks ago.  

Now I'm not saying this war is over by a long shot and it remains to be seen what happens now that we're tentatively moving out from lock downs.  I do know we understand so much more about the virus today than back at the beginning of the year and that knowledge is helping us to fight back.  We're also establishing treatments and protocols for what to do as we emerge that makes me think it will be harder for the virus to establish as strong a foothold in the coming months.

Source of the data is the excellent twitter feed of Charlie Bilello.

Back Thursday.

Aftershocks And Changed Behavior

So I've been thinking about some of the aftershocks and changed behavior that might come out of this mess as we emerge from lockdown.  I'll give you a few today and update this list on occasion.

I know somebody who got a haircut about a week ago.  They went to their hair stylist's home and she cut it in her home salon.  Turns out she's been cutting hair at home for years.  Both people wore masks, washed hands etc.  I know the cost of the haircut was about half of what they pay in the salon.  How many barbers or stylists are never going back to their old shops again unless they own them.  Particularly since if they've been cutting hair on the side these past two months they're not giving somebody a cut of what they make and have maybe built up more of a clientele.  Same with nail salons, personal trainers etc.

I'll bet colleges reopen in the fall because they need the revenue and more importantly they can then avoid the question of why a student is paying probably $25-50,000 for the same education they can easily receive via the online programs of other universities.  How many students though after having three months of online learning under their belts end up deciding that's just as good as sitting in a lecture hall, especially if it saves you huge amounts of tuition?  How many parents are going to ask the same question?  How many colleges are going to end up going out of business because of this?  It was already hard to be a small liberal arts college in a rural setting.  This is likely to make that worse.  What happens to the economies of those small towns if students don't come back in the fall?  What happens to the economies of many smaller cities that rely on big-time college sports for revenue?  They may play those sports in the fall but fans are unlikely to be in the seats.  That's going to hurt a place like South Bend, Indiana if Notre Dame has no fans in the stands this fall for football.

Well telemedicine hasten the extinction of the primary care doctor?  Does the current crisis help or hurt the argument for universal health insurance in the US?

Will people go out shopping again once this is all over.  I think yes because somebody like me can't easily buy clothes online and I like to take a look at bigger ticket items before I buy them.  Also I don't like to shop.  Many, including my bride don't feel that way and love online shopping.  Hard to say.

Will those changes you're seeing in the grocery store be permanent?  Will they be applied to other retailers?

Will consumers be willing to give up more of their privacy in exchange for freedom to move about in a world where lockdowns are ending but the virus lingers around?  Will they be willing for example to permit their movements to be followed and their vital signs such as temperature monitored by the government in exchange for the ability to go to bars, restaurants or travel freely again?  I think yes to this question but I know many who extremely disagree with me.

Anyway these are my thoughts.  What are you seeing out there?

Why Markets Have Rallied

I have been asked over and over why the stock market has rallied in the face of pretty grim news.  Here's my quick reasons why:

Markets will rally off their lows usually when the economic news is at its worst.  That's why we've seen the massive move higher off the bottoms from late March on.  

Investors are looking through 2020 earnings and maybe even the first half of 2021 at this point.  What they will want to seeing the coming months is the economic data becoming less worse.

Don't fight the Fed.  The Federal Reserve is injecting massive amounts of liquidity into the system.  Investors believe the Fed has their back.

Historically low interest rates make stocks look more attractive.

The major market indices make the current stock market situation perhaps look better than it is.  That's because larger, market cap weighted companies make up the lions share how these are constituted.  When you look at broader based and equally weighted indices and ETFs, you'll find these still on average 12-18% lower for the year.  These broader based indices capture parts of the market beyond technology and health care which have been the big winners in 2020.  They also paint a truer picture of the damage inflicted on the economy.

Back Friday.

Three Charts For Your Consideration

One of our main thoughts as we come out on the other side of our national lockdown is the horde of cash that's been piling up since we've been locked up.  Not only does that reflect people that have quit spending because they're worried about the future or their jobs, but it also shows that when you're locked down you really can't go out and spend much money.  This is what we said back on April 14, 2020:

"We are rightly focusing on the sick and those suffering enormous economic hardship right now. As a society, it says much of us that so many are stepping up and trying to do their share. But what isn’t being talked about much is all the people who still have a job and are still receiving a paycheck. We’re also not focusing on the millions that are still getting Social Security checks or other economic payments like a pension. This is hundreds of billions of dollars sitting on the sideline that at some point will get put back into the economy on things besides groceries and medical supplies. Once people regain some confidence in their own financial situation and stop worrying about close contact with other people, there is a higher probability that the demand side of the economy will pick up substantially and perhaps quicker than many expect. Now, I don’t have any expectation that things will return to where they were overnight, but I do think it’s reasonable to think that sometime this summer we will start to see economic growth. If it looks like we’re getting a handle on the disease, growth could accelerate as confidence returns."

Now we're starting to see some of the evidence of the extraordinary amount cash that's being stored into the system.  The first chart below from the twitter feed of Jason Goepfert that shows the unprecedented amount of money investors stuffed into money market mutual funds back in March.  That's nearly $700 billion dollars that was parked on the sidelines in one month.  I'd assume April will show another big money market build as well.  

Along with all that cash being stored in money markets is the a savings rate that at nearly 14% dwarfs any previous record.  This chart and the next can be linked to an article over at the website Zerohedge here.

Finally note below the pay down of credit lines by households through March.  The savings rate as well as credit  pay down likely continued in April.

This is money folks looking for a home.  Whether it's going to be invested or spent, it represents real dollars that can be put to work once people can get back out in the world and they feel safe to do so.

Back Tuesday.

Post & Comment {Some Quick Thoughts}

Some quick thoughts:

We're now in that 45-60 day window that I think will be critical for getting the economy back on track.   States are beginning to open things up a bit and businesses are starting to develop best practices on how to make customers feel safe.  You can see this already in grocery stores, at least around here; masks are required, limited amount of people in the stores, limits on certain items and aisles are one way now.  Expect other businesses and institutions to spend the next few months on what they need to do as well.  A client of mine is the president of her condo association and she's telling me they're trying to figure out the best way to open their pool this summer, if at all.

Big government is coming back.  Just like 9/11 gave us the TSA, expect to see expanded government services for health care and disease prevention.

Your taxes, my taxes and corporate taxes are going to go up to pay for all of this.

Sooner or later there's going to have to be a plan to deal with all of this debt that governments at all levels are issuing to pay for all of this.  States in particular are going to need help.  Many, and not just Illinois, are dealing with busted governmental pensions. 

Still think the economy will bounce back faster than most people in the financial press are expecting. I'm not saying we're going to see economic levels anywhere near where they were at the end of 2019, but I think we're going to see a sharp bounce back in the coming months.  Investors are underestimating the demand side that's been building out there.

I don't think we'll see a vaccine for at least two years, or at least one that's widely available until then.  I expect therapeutic treatment of the virus to radically improve in the next six months.  If I'm going to eventually contract Covid-19 then I think I'd rather that be next fall or winter when they have a better idea of how to treat me if I get sick.

I think the major market indices are going to be locked in a trading range between now and the election.  Right now I don't really have a good read on what that range might exactly be but broad guesses would say perhaps 2-5% upside from here through early fall to 6-10% downside possible.  Again remember these are guesses.  If you're not a client of mine and you act on this information then you're on your own.  I would say, again, that given the move we've seen off the bottom now is a good time to review your asset allocation strategy and risk criteria if you haven't done that already.  Better yet, hire Lumen Capital Management, LLC and let us help you with that!

Back Friday.

Go Read

I  have always been a big fan of Dr. Ed Yardeni's work on bigger picture economic forces that impact stock prices.  He has two recent columns on the new economic realities that I think you should go read.  See below:

Yardeni:  "The Twilight Zone: Where Is Everybody?"

Yardeni: "Fed Trying To Contain Zombie Apocalypse It Created."

Also go read over at the Blackrock Blog, "Five Ways The World Could Change."

Back most likely Wednesday.  

Some Quick Thoughts

Here are some things I've either been seeing or thinking about recently.

First the markets.  Back in March when things were rapidly falling a part I had clients,  friends, family and acquaintances ask me if they should sell.  Some even advocated going completely to cash.  If you want my thoughts on that back then, skip below and read any of my March columns.  I'll summarize for you and say that I wasn't keen on that idea.  Now though markets have clawed back a substantial portion of those losses in a relatively short period of time.  Given what's occurred and given where we are in the market year, now would be a good time to review your portfolio allocations.  None of my longer-term views have changed but if you were worried or nervous back in March then April gave you a gift to review and reallocate assets.  Not saying I know what's going to come next or that the markets are going to go down.  I am saying that investors are in a much better position to reallocate assets now that prices have appreciated to some extent then they might have been back in March.

Panic is not a strategy but then neither is having no strategy for what you might want to do when the markets recover.

While I think it's going to take some time for us to get back on our feet, my guess is the pundits are going to be surprised when things get going a bit quicker in the coming months than they're estimating right now.  There's a lot of pent up demand out there.

Speaking of demand I think most of us are resigned that it's gong to take some time for us to get on top of this disease.  However, humans adapt, look how quickly we're adapting to masks and new rules in grocery stores.  The real key for how quickly things come back on line is going to be giving people confidence they can go do things again with a lower probability of catching the virus.  There are ways you can play golf and tennis that lower the probability of catching Covid.  Grocery stores are developing methods to lower that same probability.  As other businesses do the same thing then the public will feel more confident about going out and spending money.

Back Monday.