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.