Nobody Knows: Part 3

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

Amid a lot of confusing headlines and general chaos, here’s another head-scratching inconsistency to consider: the S&P 500* finished the first half of 2020 down about 5% while the average stock in the value line composite lost about 14%. This discrepancy needs to be explained.

What The Numbers Mean

Stocks with the largest market capitalization make up the lion's share of most major market indices. Their weighting in these indices will often paint a distorted picture of how the majority of the underlying companies perform. For example, this year through June 30th, the top 10 stocks in the S&P 500 were up nearly 10% and comprised nearly a third of its market capitalization. The top 50 S&P 500 companies gained 2.4% while collectively the next 450 names were down nearly 13%. The median collective return for every company in the index was a decline of 11% through June. Simply put the winners have been carrying the losers more broadly this year than in the past. However, the collective market returns are not out of line with a typical market pullback, especially after a strong prior year for stocks.  

Of course, 2020 has been unlike any other time in my 30-plus years in this business. At the end of March, I believed that markets had a high probability of recovering, but never in my wildest dreams did I imagine we'd recover so fully or quickly. Back in early March, I wrote a post over at the Lumen Blog titled “Nobody Knows.” The key takeaway was that while nobody knew for sure what would happen in the coming months, investors could make some educated guesses based on past experiences, some of which we highlighted. Since a lot is still up in the air, we’re going to revisit that discussion.

Nobody Knows What The Markets Will Do

First, nobody knows what comes next for the markets. The investment pundits are in the dark the same as all the rest of us. We've experienced so much that previously, even just six months ago, would have seemed improbable. What we know is the pandemic has given corporate America a hall pass regarding earnings for at least the rest of this year. We are also in the seasonally weakest time as 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, the pandemic hasn't gone away. And then there's also the election in November. What this combination of factors means for the markets is anyone’s guess. My highest probability scenario is that we see an increase of volatility up through the elections but that markets recover in anticipation of a better 2021. But as we’ve learned this year, there are many possibilities.

What I do know is that if you were convinced the world was coming to an end back in the spring, you've been handed a gift beyond your wildest dreams with this rally. 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.

Nobody Knows What Will Happen With Covid-19

Second, nobody knows the trajectory the pandemic will take. We still have much to learn about COVID-19 and some fear a second wave. I think the probability of that is lower because we are understanding more about the disease 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 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 the virus. 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 - there's no zipping in 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. Adaptation may be as important to the economy as ultimately finding a vaccine.

Nobody Knows The Future Political Landscape

Third, nobody knows exactly 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. 

Nobody Knows Who Our President Will Be For The Next Four Years

Finally, nobody knows for sure who will be the next president, but we can infer that in 2020, President Trump has not helped himself among independent voters. He is now behind, in some cases badly, in the swing states he needs to win this fall. Of course, we still have many months before the election and things can change, but President Trump is likely 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.

What We Do Know 

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. 

Nobody could have imagined what this year would bring when we turned the page from 2019 to this new decade. I saw a quip a few weeks ago about wanting to return 2020 as a defective product and I think few would argue with that sentiment. We are going through a very trying period where we’ve seen both horrible examples of human nature and noble examples of human nature. 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 better tomorrow. Many have tried, just as Abraham Lincoln did when he was sworn in at his first inauguration, to appeal to "the better angels of our nature.” Many things stand out for me from what we've seen in the recent past, but one of the lasting images comes from watching a 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 and women, white and black. Amongst many things, they were out there protesting police brutality, yet they stopped to protect this fallen officer. That's an example of 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 letter to you 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 original article that I cut for a variety of reasons, length being a principal concern.  Below I'll insert what I left out back then.

“If America has any gift to the world, it is in these words found in the preamble to the 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 internal debate and conflict we’ve seen in the past two hundred plus years have been from Americans demanding we uphold these words. Sadly, we often have not fully lived up to those ideals, for humans are flawed beings. As such, we are unlikely to ever achieve that perfected shining city on a hill of 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. That means in fits and starts we advance. Perhaps that advance isn’t as fast or complete as some would like, but advance we have. Good men and women have died protecting our rights to have what these words say is 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 perhaps my small-town 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. That is not only good for society but it’s good for markets as well.

Somebody else who thought similarly was Robert Kennedy who, while running for President in 1968, had to look out onto a crowd in Indianapolis on April 4th of that year and announce that Martin Luther King had been killed. Most that came to see him speak that night were African American. Kennedy himself would be dead in just over two months’ time, but on that night in Indianapolis, he delivered a speech that holds as true today as when he delivered it in 1968. That address is even more remarkable because it was largely improvised. I am attaching that speech with this letter and you can read it if you’d like.  

As I’ve said many times, I don't do politics on this blog. I do comment on the American spirit from time to time. While things have been tough, I'll repeat my long-term optimism. As always, I am here for you. Give me a call at 312.953.8825 or email us at lumencapital@hotmail.com. Stay safe. Stay healthy. Stay positive. 

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.

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

Robert Kennedy Addresses a Crowd in Indianapolis, April 4th, 1968.

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. (1)

____________

(1)  https://www.americanrhetoric.com/speeches/rfkonmlkdeath.html