A. When Does The Bear Market Rally End ?
This has got to be the most hated bear market rally. No one bought enough at the bottom and everyone wants this market lower before eventually heading back higher.
Will it ?
It might seem counterintuitive for investors to bid up equities when earnings are not only collapsing, but are set to remain depressed below pre-pandemic levels for a considerable period. But there are precedents for this behavior.
Historically, US equity market recoveries from crisis conditions have begun with marked multiple expansions.
This should not be surprising, given that the Federal Reserve tends to respond to crises by easing policy, and all else being equal, easier policy should equate to higher multiples. As a result, Fed-driven multiple expansion should at least partially offset the effect of earnings compression to help support stock prices.
And this time around, with the Fed adopting a “whatever it takes” approach to liquidity provision, the effect is likely to be pronounced.
As the Fed flooded the system with liquidity, yields fell and short term spreads quickly narrowed. This decline in yields should increase the scope for equity multiple expansion, as the shift in relative valuations encourages capital to flow from bonds to equities and the perception of near term default risk abates, boosting equity investors’ confidence.
While there might be another down leg in the US equity market, there are some good reasons to believe that the rally of the last three weeks is not as unreasonable as it might at first seem.
Also worth checking out this CNBC article from May 2009, talking about the disbelief in the Bear Market Rally then…….
Regardless, I think a lot of nuance is lost when we talk about millions of people being unemployed yet the market being close to it’s highs, which you can see in these two charts.
The Top 5 stocks in the S&P 500 matter more than ever, and they have outperformed most of the market. You can see the individual returns of each of the 500 stocks here.
Another way to think about this is the massive underperformance of small cap stocks versus large cap. The Russell 2000 fell close to its Jan/Feb 2016 lows.
B. The Financialization of The Economy
If we can all agree that it is FED and policy action holding the market together, than you have to step back and take a broad view over the last three decades.
Since the 90’s, politics have essentially delivered on the popular demand. Every time there was a dislocation, the state has grown larger and more intrusive.
This has had the impact of making the US dependent and reliant on asset price appreciation to drive household net worth. This was the financialization of the US economy.
It’s probably been obvious for a number of years that unless private sector productivity growth improves, it will be increasingly the responsibility of the public sector to generate the types of growth rates that societies at large find acceptable.
We are likely to see three new themes as the back bone of the economic landscape:
1. Universal basic income
2. Increased government involvement in and spending on healthcare
3. Increased spending on infrastructure (think automation, robots, facilities....)
What do you think ?
What else do you think we will see ?
Related to the discussion on what comes next, another issue that comes up in conversations is whether all this govt. spending is or will be inflationary.
While a part of me sees central bank printing and thinks inflation is likely, another part of me thinks deflation is more obvious because:
1. Strong government policies mean that decades of excess will not be cleared and disinflationary pressures will remain.
2. Excess capacity and decreased pricing power of labour and corporates.
3. Any rise in rates will itself destroy demand and so take us back to disinflation.
What do you think ?
Related to the question on inflation vs deflation is portfolio construction. How do we construct robust portfolios in a world where there is no risk free asset ? More on that another time.
And while Gold may not appreciate for inflationary reasons, it can still act as an appreciating currency where other currencies are being competitively depreciated.
C. Being Busy
“One of the symptoms of an approaching nervous breakdown is the belief that one’s work is terribly important.” -
- Bertrand Russell, The Conquest of Happiness
I feel like I am busier than ever. Some of this is the markets, some of this is other factors. Maybe because there is little else to do but work.
I saw this picture a few days ago and it made me think if I am using my time well.
How am I going to come out better from this lockdown ?
That took me back to a book I read in late 2018 - Essentialism by Greg McKeown.
If you find yourself juggling too many balls, being pulled in all directions and saying 'yes' more often than you should, then it will help you. It will help by simplifying your life and allow you to focus on the vital few things that matter versus the trivial many.
It really helped me then to think about the things that don't matter at all, and the things that have 1000x importance. I went back to it to see if I could overcome the feeling of being overwhelmed, especially now when there is no natural barrier between work and family, between the outside and the inside.
Three tools helped:
A) Apply zero-based budgeting to my time - If I could only do three things today (the essentials), what would they be ? Having a system that ensures that the essential gets done, while building a buffer for unexpected events. Scheduling the essentials on my calendar helps a lot.
B) Find and focus on removing obstacles for me and for others, to ensure the essential is executed. This can be managing my energy levels or just aside my workout clothes the night before so I can workout first thing in the am…..
C) Get rid of soft commitments. Pausing for 5 seconds and asking myself is this essential? All those webinars & research papers can probably go :-)
I hope you are managing your time better than me.
D. A Few Things Worth Checking Out:
1. My friend Feisal who runs Qineticare (the only Family Health Office for UHNW families) is doing great webinars on embracing change and improving your well being.
2. Billionaire Chamath Palihapitiya (ex -FB and currently Social Capital) on How to Invest in This Crisis.
3. Howard Marks is co-chairman and co-founder of Oaktree Capital Management. This is his latest, and I think it poses some smart questions. Here’s one standout line, variously attributed: “Capitalism without bankruptcy is like Catholicism without hell.” He was also on my friend Harry Stebbings amazing podcast on March 30th.
4. Calpers Missed a $1 Billion Payday by Scrapping Market Hedge.
5. Barry Diller, Chairman of IAC was on CNBC discussing the economy and business.
6. Dan Primark published an “Exclusive: Mary Meeker's coronavirus trends report” for Axios. Mary Meeker is known for her annual “Internet Trend Reports”. This coronavirus special is very tech centric and focuses more on the anti-fragility of the US than on the weaknesses COVID19 has exposed. It sees this crisis as being a new dawn for the country:
“While we have trepidations about what the coming months and quarters may have in store, for the long-term, we remain in the ‘darkest before dawn’ camp. We have been trained not to underestimate America’s global advantages, her spirit and optimism...and ability to rapidly innovate and help make the world a better place.
What if?
What if Covid-19 serves as a common enemy that unites and serves as a forcing function to:
1) Modernize and improve government / healthcare / education driving lower cost and more efficiency
2) Improve coordination between government and business for the good of citizens
3) Help people find jobs (and training) best suited to their skills and lifestyles
4) Promote more considered consumption
5) Get back to basics including staying closer to home
6) Bolster family connectedness / seriousness of purpose / community / faith?
None of what we are going through is comfortable, or fair. And while things will likely get worse before they get better, has America, perhaps, just gotten the wake-up call it needed to get to a better place?"
7. If you decide to take a course, Harvard university is offering 67 courses for free, and if you aren’t a Harvard fan, then here are 450 Ivy League courses too.
E. A Few Quotes I’m Thinking About:
“What is that you plan to do with your wild and precious life.”
- Mary Oliver
“In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted.”
- Bertrand Russell
What are you going to question ?
Thanks for all your insightful comments as always
As usual, thanks a lot for putting this together. Always a pleasure to read this weekly letter.
Best,
TG