A Thought On Current Times.

Nobody could have imagined what this year would bring forth when we turned the page from 2019 to this new decade.  We have likely gone through the most trying period in our history that most Americans can remember.  We have seen horrible examples of human nature while at the same time some of the noblest.  At times the mob has ruled.  At the same time peaceful protesters have exercised their constitutional right to be heard.  Many have sacrificed so much fighting this pandemic while others have taken advantage of it to sow discord.  

Through it all people of good faith have looked through the darkness and tried to picture a possible better tomorrow.  Many have tried, just as Abraham Lincoln did when he was sworn in at his first inaugural, to appeal to "the better angels of our nature".   Many things stand out for me from what we've seen in the past month but one of the lasting images comes from watching video of an event where a mob had moved in to beat a policeman and a group of protestors formed a chain of protection around him.  The protestors were men, women, white and black.  Amongst many things they were out there protesting police brutality, yet they stopped to protect this fallen man.  That's "the better angels of our nature" on display.  Lincoln wanted and was determined to keep the American Union together.  I have often wondered if he would have been so persistent in that goal if he'd been told as he was being sworn in what the cost would be.  But persist he did through a long and catastrophic Civil War and here we are today.

Back in December I wrote a post for this blog called "The Press is Bunk!  Thoughts on Political Discord".  The basic argument of that piece was that there is more that unites us as a nation than the press and popular culture would have you believe.  I have been asked by more than a few if I still believe that {I do} while some have challenged my beliefs.  Here's my response.  

There were parts of that article that I cut for a variety of reasons, length being a principle concern.  Below I'll insert what I left out back then.

"And we are good at fighting.  You could argue that it’s bred into our DNA.  The country was birthed in revolution and we’ve experienced or known how to use violence ever since. We know how to throw a punch or fling venom with words.  That was as true in 1789 as in 2019.  Divided we may be over events and times but we are also bound together by some very powerful words.

If America has any gift to the world it is in these words found in our Declaration of Independence:  “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”  Today we argue about many things too exhaustive to mention but nearly every level of social strife we’ve seen in the past two hundred plus years have been citizens demanding us to uphold these words.    Sadly, we often have not lived up to those ideals.  For we are imperfect creatures.  We are unlikely to ever achieve that perfect shining city on a hill which John Winthrop first spoke of and Ronald Reagan made famous.   But the genius of America is that history has shown we try.  For every force that would try to negate the Declaration, there will always be those that point to it and demand we put paid to what those words mean.  Good men and women have died protecting our rights to have what these words say are ours, while many have suffered over the years clamoring that we live up to the ideals these words enshrine.  That is as true today as it was in the past."

It is my Midwestern roots that cause me to be a long-term optimist and bull on our American experiment.  While these times have been trying I find comfort in that we have seen far worse than this and made it through.  I believe we will do so again and will emerge a better people for it.  

Somebody else who thought that way was Robert Kennedy who while running for President in 1968 had to look out onto a crowd in Indianapolis on April 4th, 1968, and announce that Martin Luther King had been killed.  Many that had come to see him were African-American.  Kennedy himself would be dead in just over two months time, but on that night he delivered a speech that holds as true today as when he delivered it in 1968.  I will post what he said in a supplemental post under this one given the length of this piece.

I don't do politics on this blog as I've said many times.  I do comment on the American spirit from time to time.  While things have been tough, I'll repeat my long term optimism.  God bless to you all and God bless to this country.  Stay healthy and safe and have a wonderful holiday.

I won't be back posting till sometime after the 4th of July holiday.

Robert Kennedy in Indianapolis

This is what Robert Kennedy said that night.  {With my highlights}

Ladies and Gentlemen, 

I'm only going to talk to you just for a minute or so this evening, because I have some -- some very sad news for all of you -- Could you lower those signs, please? -- I have some very sad news for all of you, and, I think, sad news for all of our fellow citizens, and people who love peace all over the world; and that is that Martin Luther King was shot and was killed tonight in Memphis, Tennessee.

Martin Luther King dedicated his life to love and to justice between fellow human beings. He died in the cause of that effort. In this difficult day, in this difficult time for the United States, it's perhaps well to ask what kind of a nation we are and what direction we want to move in. For those of you who are black -- considering the evidence evidently is that there were white people who were responsible -- you can be filled with bitterness, and with hatred, and a desire for revenge.

We can move in that direction as a country, in greater polarization -- black people amongst blacks, and white amongst whites, filled with hatred toward one another. Or we can make an effort, as Martin Luther King did, to understand, and to comprehend, and replace that violence, that stain of bloodshed that has spread across our land, with an effort to understand, compassion, and love.

For those of you who are black and are tempted to fill with -- be filled with hatred and mistrust of the injustice of such an act, against all white people, I would only say that I can also feel in my own heart the same kind of feeling. I had a member of my family killed, but he was killed by a white man.

But we have to make an effort in the United States. We have to make an effort to understand, to get beyond, or go beyond these rather difficult times.

My favorite poem, my -- my favorite poet was Aeschylus. And he once wrote:

Even in our sleep, pain which cannot forget
falls drop by drop upon the heart,
until, in our own despair,
against our will,
comes wisdom
through the awful grace of God.

What we need in the United States is not division; what we need in the United States is not hatred; what we need in the United States is not violence and lawlessness, but is love, and wisdom, and compassion toward one another; and a feeling of justice toward those who still suffer within our country, whether they be white or whether they be black.

So I ask you tonight to return home, to say a prayer for the family of Martin Luther King -- yeah, it's true -- but more importantly to say a prayer for our own country, which all of us love -- a prayer for understanding and that compassion of which I spoke.

We can do well in this country. We will have difficult times. We've had difficult times in the past, but we -- and we will have difficult times in the future. It is not the end of violence; it is not the end of lawlessness; and it's not the end of disorder.

But the vast majority of white people and the vast majority of black people in this country want to live together, want to improve the quality of our life, and want justice for all human beings that abide in our land.

And let's dedicate ourselves to what the Greeks wrote so many years ago: to tame the savageness of man and make gentle the life of this world. Let us dedicate ourselves to that, and say a prayer for our country and for our people.

Thank you very much.

Here's a link to the speech.

Post & Comment {06.26.20}

This is a section of posts where I respond in brief comments to something I've seen in the news or online.  I've highlighted the headline note or post.

To stay in a city or to leave?

You're a young couple or a couple that's started to have kids or are thinking about kids.  Maybe you always thought you'd stay in that large metropolitan city where you've been since perhaps college.  You've loved everything about it, the restaurants, nightlife, culture sports etc.  How much do you love it now that you've basically been locked up for a few months.  How much do you love it if your city burned during the protests?  I can't answer that but I'm guessing the suburbs are starting to at least look a bit more attractive to you now then they did at Christmas.

On the increase in Covid cases.  

In our last post I talked about the rise in Covid cases.  I've scoured data trying to find out any demographic patterns but either that data doesn't exist or I don't know where to find it.  Here's my thinking though.  What data we're seeing is an increase in cases among younger people, say 18-30.  What we're not seeing is how sick that cohort is becoming.  If for the most part they're asymptomatic or show slight signs of the disease then maybe we're better off from a social and economic standpoint letting them go out and develop herd immunity to the virus.  That's assuming there is immunity to the thing.  If they're landing in the ICU then we need a new plan.  You won't be able to lock people up again.  What I do know is that slowly we're adapting to this new reality and that's going to be reflected in economic numbers going forward.

On the election. 

The odds for the President to be reelected have become substantially worse.  I believe when the history of this period is written we'll discover that the President likely lost folks in the middle when he pulled that photo op in front of a church, forcibly having security clear a path along the way.  Again this isn't a political statement but an observation.  I'm bumping up my probability calculation that the President isn't even the Republican nominee to 15-20%.  In case folks think that's a huge change it still means 80-85% likelihood he IS the nominee so I'm not sure that's any big deal.  

Go read: 

Go read "America is Facing Five Epic Crises all at Once".

Back early next week.  Posting will be light going forward until after the 4th of July holiday.

A Quick Thought

We ought to know pretty soon whether there's been an uptick in Covid cases resulting from the protests and unrest we've seen over the past few weeks.  By my math we're well into the 14 day cycle now where we should be seeing increased case loads, especially among younger people.  If we don't see a noticeable increase in areas where there's been unrest it would be stronger proof that the virus doesn't travel well outdoors.

On another note there has been much reporting on cases spiking in reopened states, particularly California, Arizona, Texas and Florida.  We are seeing data that cases are spiking amongst younger people.  However, we're not seeing data on how sick these younger people are.  That's going to be important.  I would think that if what we're seeing in younger people is the equivalent of the flu then it will be politically much easier to keep opening up the economy.  Becomes more problematic if all of a sudden we see a lot of younger people in the ICU.

It's all about the viral load people.

Time will tell.

Ammunition For The Bears

Here's some ammunition for the bears amongst you.  Above is a chart of the S&P 500's ETF SPY.   What you see here is the ETF has made a series of lower highs since the initial decline back in the spring.  Further you see where this rising trend line off of the March lows is looking to intersect with that declining line.  One of these trendiness is going to get broken in the next few weeks.  Those that follow these sorts of things for a living would likely say that based on the pattern of this chart, there's a higher probability of this being resolved in a negative manner. There's support on this chart 5-8% lower so again the folks that follow these things would look to those levels as to where SPY could initially trade down to.

The thing is I could send you 20 more charts that look like similar to SPY, which is why I'm bringing this to your attention.  If your bullish, at least in the short-term you probably don't want to see that lower line breached.  However, just because a pattern exists and just because that pattern is negative doesn't mean it must occur.   This pattern could resolve itself to the upside or be invalidated by sideways meandering for a period of time.  I bring it to your attention just so you know what's out there.  I'll also gently remind you of something I said in early June about being able to sleep with your asset allocation, especially given all that's occurred and in a traditional period coming up of seasonal weakness.

A 5-8% pullback in the context of the move we've seen in the past few months wouldn't shouldn't be unexpected.  There's been an enormous amount of money made by those that bought into the bottomming process and it's reasonable to expect some folks might be interested in taking profits at some point.  Pullbacks are part of the process.  We know one will eventually happen.  We just don't know when it will come, how deep it will be or its duration.  Planning for a decline makes it easier to accept when it occurs.

Back later this week.

Equity Sector Performance

Three sectors in the market this year have fought back to positive returns.  They are the technology, communications services and consumer discretionary sectors.  Everything else is in the red.  Looking at the three sectors that are up helps us understand why most major market indices are either near breakeven or positive for 2020.  An index like the S&P 500 is a market capitalization weighted index.    That's simple math.  To figure out market capitalization you calculate a company's current share price and multiply by outstanding shares.  Stocks that do better see their market capitalization go up and their weighting in the index increase.  

Technology has been the world's fair for most of the last decade so it's no surprise that some of our largest tech or tech related names now dominate the index. The current Top 5 names in the SP 500 are all technology stocks.  They are  Microsoft, (MSFT), Apple, (AAPL), Amazon (AMZN), Facebook (FB) and Google (GOOGL).  These companies are about 20% of the S&P 500.  

Conversely, energy has been in the dog house for much of the last decade and its total market cap in the S&P 500 is now I think less than 4%.

Market Cap indices are really a case of the rich getting richer. 

Back early next week.

Chart Link:  Capital Spectator: "Communications, Discretionary Sectors Post 2020 Gains."  

*Long ETFs related to the S&P 500, technology, health care, real estate, industrials, financials in both client and personal accounts.  Certain accounts also own ETFs related to energy. MSFT, AAPL, AMZN, FB and GOOGL are underlying components in ETFs we hold for clients and in personal accounts.  

Nobody Knows: Thoughts On Future Developments

By Christopher R. English, President of Lumen Capital Management, LLC

Back in early March, I wrote a post for this blog titled Nobody Knows. The key takeaway of that post was that while nobody could know for sure what would happen in the coming months, investors could make some educated guesses on how certain things might pan out. Since a lot is still up in the air and much change has happened in the past 3 months, we’re going to revisit that format today.

Market Thoughts

As of this writing, markets have substantially recovered from where they landed back in the spring. Major U.S. indices have even flirted with being positive for the year this past week. However, that is largely due to how they're constituted. Stocks with the largest market capitalizations make up the lion's share of the index and can distort how the majority of the underlying names perform. A more representative index of individual names shows that the average stock is still likely down double digits for the year. Still, that is significantly better than what we were seeing at the end of March. Even though I believed that markets had a high probability of recovering, never in my wildest dreams would I have imagined we'd have recovered so fully or quickly. This is especially true given the events of the past month.  

First, a caveat: nobody knows what happens next. The folks you see talking so authoritatively on TV are in the dark the same as all the rest of us. We've experienced so much already that previously, even just six months ago, would have seemed improbable. What I do know is that if you were convinced the world was coming to an end back in the spring, then you've been handed a gift beyond your wildest dreams. 

While nobody knows what happens in the coming months for stocks, we can look ahead and infer a few things. We know that while corporate America has been given a hall pass in regards to earnings for at least the rest of this year, second-quarter earnings and economic data are not going to be pretty for the next few months. We are also in the weakest time of the year, seasonally speaking. Even in normal years, stocks tend to struggle in the summer and early fall months. While the economy seems to be reopening and economic growth has started to pick up, we are a ways from where we were at the end of 2019. The pandemic hasn't gone away and there's also an election in November. What this combination of factors means for the markets is anyone’s guess, but I think there is a higher probability that volatility will return at some point before the end of the year. 

That means that now is a very good time for us to take a look at your asset allocation and make sure you're in a solid situation that allows you to sleep better at night knowing we’ve addressed potential market weakness. Hopefully by the end of the year, we will have better clarity regarding future economic growth and vaccine development. For many, these events will be seen in a positive light, even if the coming months hold more uncertainty.

Now For COVID-19

We still have much to learn about COVID-19, and unfortunately, nobody knows the trajectory this pandemic will take—and some fear a second wave. I think the probability of that is lower, because I think we are understanding more about COVID-19 every day, including how to prevent it and how to treat those that contract the virus. Primarily, though, I don't think we're going to get a second wave because I don't believe the first wave has ever gone away. We'll know more about whether I'm correct or not in a few weeks given the openings we've seen around the country and the protests that have generated large crowds. We do know there's no appetite among the public for a return to the lockdowns. People were willing to do this once, but even then, compliance was spotty in different parts of the country. We're going to have to learn to live and adapt to COVID-19. That means costs for businesses are going up and there's more friction in the system today than there was a few months ago. It takes longer to do certain things in many parts of the country. There's no zipping into and out of a grocery store in some parts of Chicago right now. Stores have capacity restrictions, which means increased lines and waiting at times. These types of changes drive up costs and bring about delays. We're all still adapting to this current way of life.  But, we are adapting and learning to live with the virus.  That may be as important to the economy as ultimately finding a vaccine.

Don’t Forget About The Election

Another thing we can only guess at is what our politics will look like six months out. What we can infer is a higher probability that American policies will take a turn to the left after November given the current recessionary environment and political backdrop. That likely means more governmental oversight and regulations for businesses. It also means taxes are likely to go up after 2020, and not just for those considered wealthy. How markets react to this is hard to judge. Both have traditionally and historically been seen as negative for equities, but that may not necessarily be the case this time given how much the markets have changed in the past 10 years. Time will tell. 

Finally, nobody knows for sure who will be the next president, but we can infer that President Trump has not helped himself among independent voters given his handling of the pandemic and the protests around the country. He is now behind, in some cases badly, in key swing states which he needs to win this fall. Of course, we still have many months before the election and things can change, but President Trump is going to need a new strategy and likely some luck to be reelected in November at this point. This is not meant to be a political statement. Rather, it is a bow to reality. Whether this makes you happy or sad is not the point. It is a simple observation and only relevant in terms of how the markets react to the political situation. Many would expect markets to perform better if the president is reelected. However, Joe Biden is a known commodity to the investment community, so it is certainly possible that he would be viewed positively for stocks.

Don’t Give Up Hope!

While nobody knows what the next few months will bring, I am still in the camp that there are many longer-term positive economic developments that nobody is really focusing on right now that could be supportive of higher prices in the next few years. I also think there's the potential for some extremely positive social policies to be enacted that over time could be seen as market-friendly. Irrespective of what the next few months might bring, my longer-term positive view remains unchanged. If you want to touch base to make sure your portfolio is set up to handle whatever comes your way, please don’t hesitate to reach out at 312.953.8825 or email us at lumencapital@hotmail.com. Stay safe. Stay healthy.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

Go Read

We're starting to see analysis come out on what the lockdowns around the country accomplished.  Here's an article critical of what recently occurred.  I find it interesting because The Guardian is a leans to the left most of the time.  Go read at The Guardian: "We Often Accuse the Right of Distorting Science But the Left Changed the Coronavirus Narrative Overnight"

Bloomberg:com: "The Stock Market Has Almost Always Ignored the Economy"

"....{T}he stock market is not a barometer of the country’s health — politically, socially or even economically. Its sole function, as wonky as it may sound, is to quickly, accurately and unemotionally tabulate investors’ consensus view about the health and prospects of publicly traded companies. In that regard, the market has ably done its job throughout this crisis, regardless of opinions about the outcome."  

2020 Stock market by the numbers as of last week.

The market is taking it on the chin today.  I'll have something to say about that next week.
  

Nobody Knows {Part II}

Back in early March I wrote a post for this blog titled "Nobody Knows".  The basic premise of that message was that while nobody could know for sure what would happen, investors could make some pretty decent educated guesses on how certain things might pan out.  {For the record my educated guesses turned out to be pretty close to the mark.}  I'm going to return to that format today.

As of this writing markets have nearly recovered all their losses for the year and the major US indices are now positive for 2020.    While I thought back in the spring that markets had a high probability of recovering, never in my wildest dreams would I have imagined we'd be basically flat for the year.  This is especially true given what we've experienced in the past month.  Nobody knows what happens next.  That's the honest to God truth.  We're in such uncharted waters.  We've seen so much happen that six months ago would have seemed improbable and through the worst of this stocks are basically flat for the year.  I can give you a bullish and bearish case for the next six months and have no idea which is the more likely outcome.  What I do know is that if you were convinced the world was coming to an end back in the spring then you've been handed a gift beyond your wildest dreams.   I am not an advocate of being 100% in cash {studies back me up on this} but if you ever wanted an opportunity to unload all or a large chunk of your portfolio then now is a better time to think about doing that then back in the darkest days of the pandemic panic.  

While nobody knows what happens next for stocks we can look ahead and infer a few things.  First we are smack dab in the seasonally weakest time of the year.  Even in normal years stocks have a tendency to struggle in the summer and early fall months.  While the economy seems to be reopening and economic growth has started to pick up, we are a far ways from where we were at the end of 2019.  The pandemic hasn't gone away and there's also an election in November.  While nobody knows what this mixture will mean for the markets, now is an excellent time to review your asset allocation and make sure you're comfortable with your exposure in case things turn a bit rocky going forward.  

Nobody knows the trajectory of the pandemic.  Some fear a second wave.  I think that's a lower probability because I think we're learning more about Covid-19 every day, how to prevent it and how to treat those that get the virus.  Primarily though I don't think we're going to get a second wave because I don't believe the first wave has ever gone away.  We'll know more about whether I'm correct or not about that in a few weeks given the openings we've seen around the country and the protests that have generated large crowds.

Finally nobody knows what the government  will look like six months out.  What we can infer is that American politics will take a turn to the left after November given the current recessionary environment and political backdrop.  That likely means more governmental oversight and regulations for business.  It also means taxes are likely to go up after 2020.  How markets react to this is hard to judge.  Both have traditionally been seen as negative for equities.  That may not necessarily be the case this time given how much the markets have changed in the past ten years, but that has been the historic reality.

Finally nobody knows for sure who will be the next President but we can infer that President Trump has not helped himself amongst independent voters given his handling of the pandemic and the protests around the country.  He is now behind, in some cases badly, in key swing states he needs to win this fall.  Of course there are many months before the election and things can change, but the President is going to need a new strategy and likely some luck to be reelected in November at this point.  

Back later this week.

Go Read

I get asked all the time why the stock market has performed so well after it's schmeissing last winter given all the bad news.  For at least one answer to that question go read "Why Mr. Market Ignores a World in Turmoil" over at the Wall Street Journal. {Paywall}.  It provides the best explanation I've seen yet for the likely reasons investors have been shrugging off the turmoil.  I'd also point out the likelihood that at some point the markets start focusing on the coming elections here and those calm waters might not be so complacent in the coming months.

Speaking of the elections, back on March 25th I said this:  

"I think the probability is also rising that Mr. Trump might not even be the Republican nominee.  My thinking on this is if it looks by June that the President is headed for a landslide loss he might just bow out.  I'm not sure his ego is such that it could handle that sort of thing and might opt on taking a pass to avoid that humiliation.  Probably a long shot and not trying to make a political point.  Just looking at the facts."

I was commenting back then on what I thought would be the political backlash to the Administration's handling of the Covid pandemic and not the President's responses to the events of the past week.  His handling of the protests and riots have likely not garnered him much support except with his political base and articles are starting to appear about dire polling numbers for him in key swing states.  While I still think it's a long shot that he's not the Republican nominee for President this fall, I'd say those odds are a bit lower today than they would have been even a few weeks ago.  Again not trying to make a political point.  Just commenting on the events we've seen.

Back next week.

A Few Longer-Term Implications

I have given some thought to what I think some of the longer-term economic implications may be going forward.  These thoughts are offered with no political commentary intended.  We deal only with money and investments on this blog.  There are many other places for you to go if you need to get a political fix or need to post your opinions.  Here goes.

The urban chic that many cities have cultivated and consciously tried to develop have likely taken a significant hit from both the pandemic and the events of the past week.  Balancing all the cultural and entertainment opportunities that cities have to offer versus being locked up for weeks on end in tiny apartments or condos during a quarantine and then watching your neighborhood being vandalized and looted is likely going to weigh big on young people in the coming months.  This is especially true and  millennials and get-Xers start to have families or those with children find them reaching school age.

For good or ill many will have a hard time unseeing some of what has occurred this past week.

Taxes and expenses are going up next year, likely both individuals and corporations.  States and municipalities have seen their expenses soar and their revenues down significantly.

The Federal Reserve is going to continue injecting or maintaining liquidity in the system for an indefinite period of time.  There will be probably two more stimulus packages, de facto universal income.  Those becoming too negative on the market need to remember that fighting the Fed on monetary policy has never been much of a winning strategy.

Initially I thought the President might receive a bounce on his reelection chances given the violence over the weekend.  I think he will now run on a law and order campaign, deemphasizing somewhat the economy.  However, I think some of his actions these past few days may have deflated whatever bounce he may have initially received from this.

Back later in the week.

I Am Amazed

I am amazed that the markets aren't under more pressure this am given the events of the past weekend.  Chicago looks in part like a war zone.  Hopefully some good and lasting change will come from all of this.

Back tomorrow.