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Happy New Year!  It’s 2021, which means it’s more shocking that you’re still physically writing checks than it is that you’re still writing 2020 on them. 

Our outlook for 2021 is a positive one.  The inertia created by fiscal and monetary authorities, combined with well-founded optimism and pent-up demand could create a very strong US economy (especially in the back half of 2021).  In our opinion, it’s not a year to be cautious, it’s a year to think less and let the massive trends set in place over the last 9 months of 2020 show themselves through the corporate earnings and stock market performance of 2021.

We’re going to take a mulligan on the first week of 2021 and pretend that still belongs in 2020, but as always, there are always a few potential headwinds which could change our minds along the way.

1. COVID – This one doesn’t need too much explaining, but I think everyone agrees that we’re not out the woods yet.  There is enough uncertainty to go around with this one, but I will urge people that everything we KNOW, is already built into the market (potential uptick in cases, future potential lockdowns, etc.).  The market rarely discounts the same risk twice, so it’s going to have to be something from left field to have an outsized impact in our opinion.
2. Interest Rates – The Federal Reserve could not have been clearer during 2020.  They will not raise interest rates until inflation starts to move.  This is the playbook from the 1950s, and it’s much better for the Fed to be one step behind than one step ahead (their tools work better fighting inflation, not deflation).  We believe the market is pricing in a Federal Reserve who will let the market run hot (whether they do or not will be another story), but a potential story shaping up for 2021 is whether or not the tantrums will begin if the Fed begins to signal that tapering/raising interests is getting closer in coming years.  
3. Inflation – If the Fed is successful and there is a sustainable increase in the price of commodities, the average consumer may start feeling a little pressure at the grocery store and the filling station.  This may cause the consumer to pull the purse strings back a bit.  The strength of the American spender has been the solid footing needed to jettison to all-time highs, so any change here could be noteworthy.

Now the fun stuff.

Themes We Like Going Into 2021

Disclaimer:  It’s not lost on us that the allure of taking a shot on a few concentrated bets is enjoyable.  In our minds, if this is what it takes to allow the majority of your assets to work their magic over time in low-cost index funds, that’s a small price to pay for “staying the course” with some added garlic.  But my compliance department tells me that I can’t make a recommendation to purchase individual names without assessing the suitability of each person’s individual situation. Sounds logical to me and I would rather be safe than sorry.  

So here are some themes that might be of interest (if you want to know the individual names, don’t hesitate to give us a call).

• • • • Telemedicine/Healthcare Technology –  We believe the proliferation of telemedicine is the next logical stopgap to try and halt the rising cost of healthcare.  If Warren Buffett, Jamie Dimon, and Jeff Bezos’ joint venture to lower the cost of healthcare folded after three years, good luck to Congress.  Lower co-pays, quicker access for non life threatening issues, and potential decrease of emergency room usage are all major societal benefits.    
      • Lasting effects of COVID – To go along with the first theme, we believe some of the digital transformation which has occurred over the previous year will be here to stay, long after the virus is contained (whenever that is).  One of our themes from last year was eSignatures, which is a great example of this, but other parts of our COVID-infused life will remain.  Think more about work from anywhere vs. work from home…
      • State Tax Generators – The individual states have been in a fiscal mess for most of the last 20 years and with pension deficits continuing to climb across the country, there are only two ways to put more money in the state’s coffers.  Decrease expenses (at a time where 10 million Americans are unemployed and countless others are struggling) or increase revenue.  How does a state increase revenue?  More taxes.  Here’s where state sales tax revenue on cannabis and online gambling come in.  This trend has already been very hot in 2020, and for us, we believe it is likely to continue in 2021.
      • eSports –  This one is going to be tough for the older crowd, but in 2020 more screen time from virtual learning became the gateway to video games rather than additional curiosity about their school subjects (who knew?).  According to Twitch, the average user spends 95 minutes per day watching live gaming (yes, watching other people play video games). This is longer than the daily time spent on the typical social network. Instagram claims that its younger users average 32 minutes a day on its app, while the average mobile viewing session on YouTube is just over 40 minutes.  As parents of younger children, we don’t see these numbers decreasing anytime soon.
      • Frontier Tech –  In a low growth (low interest rate?) environment, the growth that does exist, typically garners a much higher price than when the entire economy is growing robustly.  As investors start to search for the next e-commerce or electric vehicle manufacturer, we believe there are pockets and individual names throughout the emerging world that offer a decent change to gain exit velocity and become sustainable and true market leaders in their respective countries.   

As with all individual stocks, they are a gamble, but we’re still going to be watching how each sector performs to possibly become part of our overall client models moving forward.

Looking forward to a great 2021!

– Adam

Good riddance to 2020.  A year we won’t soon forget, but one we are glad to put in the rear view mirror.

The first and last posts of each year are always my favorite.  It’s fun to look back on what we thought was going to happen and be astonished at how different reality looks versus our predictions (which are destined to be wrong).  So let’s jump into it.  A few points from our post at the end of 2019 are in italics below.

• Over the past 70 years (since 1950), the S&P 500’s yearly performance has been above 20% 18 times.  In the year following those 20%+ gains, the market has been higher 15 times (83.3%) with an average return the following year of 11.2%.
  • As of the last week of the year, the SPY (the ETF proxy for the S&P 500) is up about 15%, without including dividends.  Looks like history will look back and see we’re now up 16 out of the last 19 years following a 20% year.  The takeaways for us continue to be that strength begets strength, and history as a guide for the future remains a solid tool for planning.

• We love not getting too smart about this market.  This market has been more resilient than anyone expected, and until that changes, the trend remains our friend.  “It’s expensive.” “It can’t keep going up forever.” “Eventually we WILL have a recession.”  All these things and many more are true.  But the economy and the year-to-year stock market changes have very little to do with each other.
  • Boy, does this one sound familiar?  This one could have been written last week, but after a year in which we saw the Dow Jones dip below 19k, and is likely finish to the year over 30K, it appears we are right back where we started.  The same tailwinds we had at the end of 2019 remain, and with the Federal Reserve and US government working in tandem (better late than never) to stimulate the economy and hopefully get the vast majority of the 10 million unemployed Americans back to work, there is reason for optimism.  This belief has been the fuel pushing equity prices to all-time highs, and possibly much higher for 2021 (but we will discuss our view for 2021 in the next post).

•    Themes to watch in 2020 – eSignatures, Biotechnology, 5G Technology, Digital Payments, Cannabis, Master Limited Partnerships
  • Second Level Capital went 5 for 6 this year with theme selections, with 4 of the individual stocks rising over 100% this year.  The energy sector remains the rented mule of the equity markets, although oil prices appear to have stabilized for the time being.  And what was the downside of watching a few individual names skyrocket 100%+ this year?  You had to watch 5 out of the 6 decline by over 50% during the March low (ouch).

This year was a huge test, which you passed with flying colors.  We’d rather not do that again, but we know better.  History tells us that during the next 10-20 years, our guess is something similar will happen another 2-3 times.  No matter which box you check on a client account form telling us your “risk tolerance”, no one really knows how they will react until they find themselves in a 2020 situation.

While we’ve learned a lot about ourselves this year, my own personal resolution for 2021 will be to help more people.  The middle class in this country is being pulled into oblivion, and it’s going to be the job of every American to lend a hand to his or her neighbor, whether they are in immediate trouble or not.  Next time, it might be you.  The old saying goes that a recession is when your neighbor loses his job, a depression is when you lose yours.  For 10 million Americans, they are living in depression right now.

Lastly, we’d like to say thank you.  The overwhelming majority of our clients trusted in us enough to stick with the program through the worst monthly decline of our lifetime.  I’d like to believe your resolve was due, in part, to the trust we strive everyday to build and keep.  Investing is simple, but never easy.

From the bottom of our hearts, thank you for reading, listening, and putting your faith in us.  Our promise remains to keep your investing advice individual and tailored to your specific needs.  We are amazed and grateful that our business continues to grow and if there is any way we can help others (whether it be financial advice or otherwise), we would love the opportunity.

Here’s to hoping 2021 is at least a little calmer than 2020.

– Adam

Our September 24th post entitled, When It Comes Time to Buy, You Won’t Want To“, we viewed the small dip that was occurring as a healthy pullback as well as detailed a couple reasons why it was a good buying opportunity (even going as far as mentioning 3600 as a possible year-end price for the S&P 500).

As we sit today, since 9/24, the Dow Jones and the S&P 500 are both up almost 12%, while the sentiment in the marketplace has completely flipped since prior to the general election.  Obviously with the prospects of highly effective vaccines coming in Q1 or Q2 of 2021, as well as the most accommodating financial conditions of the past decade, there is great reason for optimism.  Per Evercore ISI, in a survey of 303 institutional investors, 63% now believe the next 10% move in stocks will be up.

According to the AAII Sentiment Survey in mid-November, bulls had reached the highest percentage since January of 2018 (56%)

An oft quoted measure from previous blog posts is the CNN Fear and Greed index.  The index was 25 just before the election.  Today it’s 91.

When conditions look as though the stock market can only go in one direction, we start to get this feeling like things aren’t “too hot or too cold”.  This gives rise to the “Goldilocks” moniker.  From a financial standpoint, the base case appears to be

• A Biden Presidency
• A Republican Senate (Divided Congress)
• No Massive Spending to Spook the Bond Markets
• No Major Tax Hikes
• A Ton of Liquidity and Near Zero Interest Rates from the Fed
• Effective Vaccines
• Return to Normalcy for Government

We are here to bring you back to earth.  We don’t think the next great depression is starting, but to ignore the sentiment froth in the marketplace right now would be a mistake.   If you’re looking to devote additional capital we would be very skeptical at this point.  If you’re thinking of additional capital needs over the next several months, we feel now would be a decent time to take advantage of the recent run-up, until fear starts to come back into the market.

As always, if you are curious about how this information affects your individual situation, please give us a call.

Be safe, be thankful, and be well,

Adam

“The stock market hates uncertainty”.

Probably one of my most hated stock market axioms.  Everyone hates uncertainty but it exists at all times whether you believe it or not (like science).  If it’s clear to you what’s going to happen next, please give me a call.  I’ve been waiting almost 15 years now, and have yet to see it. 

As I told a client yesterday, the most fascinating thing to me about this particular stock market is that even if you told me the outcome of the election, I’m not sure you could make money off the information.  What this tells me is that the uncertainty surrounding the economy is multi-faceted, and in my opinion the virus trumps all (no pun intended).  When you find yourself in an emergency, whatever must be done eventually, should be undertaken immediately.  The unfortunate part about treatment and vaccines is that they are months away at BEST.  The stock market (and humanity) will cheer when the positive data is released, but this will just be step one in the eventual process of getting America back on its feet.  At present 7 million people are out of work.  This number will not go down in a substantial way until people FEEL it is safe to return and employers know they can protect their workers, vaccine or not.

For me, there are several checkpoints here that will lead to less uncertainty and this is what I’m watching:

1. Election decision – I truly believe that the market will not care as long as the decision by the country is clear and accepted (but even that is in question these days)
2. Vaccine and Treatment Data –  Regeneron and Gilead will likely both have emergency use authorization in the coming days/weeks ahead for their respective drugs.  To me, the Regeneron data appears to be more exciting because of its seeming ability to reduce the mortality risk.  There are still issues with the production capacity of this particular cocktail, but if it works, they will find a way.
3. Fiscal Stimulus –  The agreement on both sides of the aisle that the American people need some help to bridge the gap during the virus is clear.  The lack of an agreement by this time, after acting so quickly and swiftly earlier this year, is disheartening, to say the least.  The inability for our government to compromise on something so pivotal to the literal and figurative health of our country speaks volumes about the dysfunction currently existing in DC.  While I understand the political calculus, I find myself growing even more cynical about our current state of affairs.  I choose to blame everyone.  Others may feel differently.  So be it.  

So how does this relate to you and your money?  I find the task of trying to navigate this particular market a fool’s errand.  But luckily there is another option…do nothing.  In this month’s edition of The 10th Man, by Jared Dillian, he outlines what I find to be the most pragmatic and simple explanation for how to accurately view what’s in front of us and how to prepare.  I would urge everyone to give it a read.

The 10th Man

The only thing I think I know for certain right now is that everyone is sick of this election cycle and hopefully things will get better after it’s over…but no one really knows that for sure either.

– Adam

As we wrote in our late July post entitled Amber Light (link),

“The purpose of this note is not to alarm anyone.  There is a lot of data that suggests in 12-24 months we could be 20%-25% higher than where we are right now.  We just feel that the market is stretched and is due for a much needed pullback.  The pullback could be sharp and swift and just don’t want anyone to be unprepared.” – July 28th, 2020

In our opinion, we are getting the much needed and healthy pullback we were looking for, and are much happier to put new capital to work at these price levels, with the ever-present knowledge to be on guard for something more substantial.

Here are a couple of additional reasons why we feel the next 12 months might surprise us to the upside (3600 on the S&P 500 is not out of the question this year, regardless of what happens in November).

1. Strength Begets Strength

The S&P 500 has had an historic run from the March lows and prior to last week had spent over 100 days above its 50-day moving average (a rolling average of the previous 50 trading days).  According to Ryan Detrick of LPL Research, since 1950 there have been 15 previous instances of this occurrence.  On average, the S&P 500 is up 8% over the next 12 months, while being positive 73% of the time.

2. It’s Just That Time of the Year

Election seasonality has followed its traditional peaks and valleys very closely for the past few months, and kicked in almost perfectly at the beginning of September.  If the seasonal calendar remains accurate, the seasonal low (the best time to buy) come in the first week of October.

3. Same Story Different Day?

During the advance from March 2020, the S&P 500 has experienced 4 separate pullback between 6-10%.  This latest pullback as of today’s intraday low is -10.55%.  In hindsight, each of those previous pullbacks was a good buying opportunity.  Will it be different this time?  Perhaps, but being aware of history and following its guide has stood the test of time rather than assuming things will be “different time time”.

If you’re a long-time reader of our posts, you know that we encourage reading and education as much as possible, so I’d like to take a moment to urge those of your looking to increase your knowledge of investing to check out the most recent book by Morgan Housel, The Psychology of Money.  For my money, Morgan is the best writer (of any age) in the financial space, and I’ll leave you today with a quote from Morgan to always keep in the back of your mind…

“All good investing comes down to surviving an inevitable chain of short-term setbacks and disappointments in order to enjoy long-term progress and compounding.”

A special hat tip to Walter Deemer for the title of this month’s post as well.  Please stay safe and be well.

Adam

 

It’s been a heck of the month for the stock market.  The SPY (the symbol that tracks the S&P 500) has been down…*checks notes*…a total of THREE whole days this month. That is serious strength.  But naturally, the higher the market flies, the more worried some people get about holding onto their gains. I’d like to think it’s because of our expert instruction over the years, but it’s possible it just has more to do with innate human nature. Regardless, with little to worry about in terms of price and portfolio values, people naturally gravitate to the next glaring uncertainty: the 2020 election.

Also, it’s been quite a month for me personally (my wife got COVID…don’t worry, she’s on the mend), and I’m currently in the process of teaching a five and eight year old how to 1) sit still 2) work a Chromebook and 3) be patient. From my basement quarantine, it’s going about as well as you might imagine.

So, for this month’s blog post, I have decided to cheat a bit. Mike Antonelli of Baird Private Wealth Management has already done the homework and I would simply ask you to click on the link below.

Investing in an Election Year

We hope everyone is staying safe and healthy, and hopefully look forward to a strong end of the quarter in September.

-Adam

 

Although this month’s blog post sounds more like a beer preference, we would like it to be a bit of a cautionary tale.  As I was discussing the current market environment with a colleague on Twitter, he mentioned that recent market action reminded him of a note he sent to his clients in the mid-1980s entitled, Amber Light.  In a former life, he was the CEO of Prudential Equity Group, and while nothing had happened to force any portfolio changes for his clients, he felt there was enough anecdotal evidence to suggest market sentiment was getting closer to reaching stretched levels (he also happened to be right).

In our opinion, the stock market has been flashing a yellow light for several weeks now, and while ANY market indicators must be confirmed with price (better to be reactive than predictive), we now feel some of these indicators have turned more of an “amber” color (between yellow and red).

1. The first indicator is the Citigroup Panic/Euphoria Model.  If you are an avid business journal reader, you may recognize this chart that comes out in Barron’s each week.  The first time the market had reached the euphoria level was in January of this year and was certainly a cautionary tale, but as you can see we have been squarely in the euphoric region for over two months.  There are no holy grail indicators in this business, but rather each one is the piece of the larger sentiment puzzle, which we attempt to decipher during each market cycle. 

2. The second piece of the puzzle is the top-heavy nature of today’s market.  There is always clear leadership in the stock market and the larger companies will always have an outsized effect on market returns, but if the broader market refuses to participate in the rally, this concentrated growth tends to roll over.  The top 5 stocks in the S&P 500 make up more than 20% of the index for the first time in 40 years. (Chart: Goldman Sachs Global Investment Research)

3. According to Ryan Detrick of LPL, there has never been a year in which the S&P 500 has been down 30% at any point in the year and finished the year positive.  Will 2020 be the first?  While there is a first time for everything (not unlike the entire year so far), we hesitate when our minds wander toward “this time is different”.

4. The Nasdaq’s 20-day moving average has gone up 75 days in a row.  This is the 6th longest streak ever and each of the five previous streaks led to pullback in the NASDAQ and S&P 500 over the next month. (Per Jason Goepfert at SentimenTrader).

5. Below is the 10-day average of the Put/Call Ratio.  This chart shows how many people are betting on the market moving lower relative to those betting that it will continue going higher.  The two previous lows on this chart were in late January 2020 as well as right before the 1869 point down day in the Dow Jones, less than two months ago.  (H/T to Helene Meisler of realmoney.com for the chart).

What does this mean?

For long-term investors?  Not much.  Until the primary trend for the major averages turns down, each pullback should be considered a buying opportunity, and for truly long-term investors, the market going lower in the short-term may actually be a net positive.

For those investors waiting to deploy cash that has been on the sidelines for one reason or another?  I believe that you will get your chance in the coming days/weeks.

For short-term traders?  Now is not the time to jump in with both feet, and those of you with individual trading accounts outside of your holdings with us, I would keep a very close eye on the markets for a tonal change.

The purpose of this note is not to alarm anyone.  There is a lot of data that suggests in 12-24 months we could be 20%-25% higher than where we are right now.  We just feel that the market is stretched and is due for a much needed pullback.  The pullback could be sharp and swift and just don’t want anyone to be unprepared.

As always, Brad and I hope everyone is staying healthy, and we are here if you need anything.

– Adam

Hello everyone, Adam here.

I’ve struggled to find a good topic for June’s post given how methodical (and unloved) the rise in the stock market has been over the past several months.  Since April 1st, the S&P 500 rose almost 31% over the next 68 calendar days.  Since then, it’s settled in nicely around 3000, which is not just an important psychological number for investors, it is also an important level technically speaking with the 200-day moving average currently sitting at 3021.

The tug of war in the marketplace continues and my honest thought is the market trades relatively sideways for another 3-4 months until more clarity exists around the two main issues.  I’d like to focus on consensus thinking and how the future may differ from the current “most likely” scenarios.

1. COVID-19 – My general read at the moment is that a vaccine or a treatment is months away at best, and, at the moment, there appears to be a “second wave” of positive cases and increasing hospitalizations.  The market has priced in a bit of this “second wave” fear, but it remains to be seen if it is a temporary development, or if the worst is still in front of us.
2. Presidential Election –  When it comes to predicting the future, the only real pieces of information I use come from Las Vegas.  Until I read something otherwise, the best handicappers of world events continue to reside in the desert.  At present, Joe Biden remains a small favorite, but by no means has anything been decided.  We have a long way to go until November, but I haven’t seen the markets really react one way or another just yet.  Generally, this starts to present itself much more clearly as we approach October and final decisions are made for positioning prior to election day.

As it relates to the stock market, I see risk/reward metrics slightly skewed to the upside (not the downside).  If the virus continues to get worse, the playbook will look similar to what we saw in the Northeast US, including strict lockdowns.  This will cause pockets of economic activity to come to a screeching halt, but I believe (as we saw in March), the continued coordinated fiscal and monetary policy solutions will float the economy for a bit longer (extension of unemployment assistance, zero interest rate policy, corporate and municipal bond programs, etc).

From a numbers standpoint, since World War II the S&P has been up 15% or more in a quarter 8 times.  According to Ryan Detrick of LPL, in all 8 instances the market was higher the next quarter, with the AVERAGE gain over the next quarter being 9.5%.  Not so coincidentally, the S&P 500 has about 10% more to gain from this price level to get back to where it was in late February (where the fear began).

Two potential positive catalysts are a viable vaccine/treatment, or a move back toward the incumbent candidate winning the presidency.  I don’t know what could happen, or why it could happen, but I just know that it CAN happen.  In my opinion, we should be on the lookout for GOOD news being the surprise here, not more of what we’re seeing on the evening news and social media.  This lends me to believe that pullbacks should continue to be bought aggressively until major price levels are breached (2850 area on the S&P 500 is BIG one if we make it there).

As always, we will reach out with Q2 performance numbers in the next week or so (spoiler alert: they are better than Q1).  Have a fantastic shortened holiday week, and please be safe over the weekend!

– Adam

The strength of the rally has been truly something to behold. The backstop from the Federal Reserve coupled with positive news on the virus front (flattening of the curve, hospitals not being overrun, treatment possibilities) has ignited a powder keg over the last 6 weeks. And while there is precedent for going back to test the lows again (2008), this has no longer become our base case.  This is currently the largest bear market bounce since 1950 (31% and counting for the S&P 500, per Ryan Detrick of LPL Research), so it begs the question, “Are we still in a bear market?” (I have no idea, by the way).

First, let’s take a look at what’s happening and not what we think is going to happen. Volatility remains and while I don’t think we’re going to all-time highs on the S&P 500 tomorrow, the pessimism regarding the future of America was as high as it’s ever been.  Those negative feelings have started to fade as stock market prices have risen, and I’m suddenly reminded that there is “nothing like price to change sentiment” – Helene Meisler (and it’s her birthday today!).  Coupled with a massive amount of people who flocked to cash over the last 6 weeks (per Bank of America/Merrill Lynch), this could be setting up for an even more epic rally.  For perspective, 7 times as much cash was raised in March, as compared to when President Trump was elected in 2016.

“The market is caught between two titanic forces: The Fed’s liquidity tsunami and the unknowable shape of the economic recovery. Thus far, the market has staged a normal rebound from the shock decline, and normal expectations (where I am) would be some sort of test of the March lows (although not necessarily a deep one) at some point. The BIG question is whether or not this environment is “normal'”.” – Walter Deemer.

The S&P 500 is down 9.6% year-to-date. The Nasdaq 100 is UP 5% year-to-date.  But it’s not just technology that has been outperforming.  Individual mega cap names (the biggest companies) in healthcare, retail, and pharma have all traded at or within 1% of their all-time highs over the past month.

Today’s stock market environment is exactly why we don’t try and time the market.  It’s too hard.  It’s why professional traders hold positions for days or weeks instead of years.  It’s why we’re spouting statistics about being close to fully invested at all times, in order to not miss out on the few days that really make a difference on the way back up (80% of the entire advance from the bottom has been in 4 trading days).  It’s why going to 100% cash is not investing.  Getting back into the market is always more difficult than selling your portfolio.

We rebalanced most client portfolios in late March and early April according to our methodology, and those positions have risen substantially. This maneuvering should allow your portfolios to return to high watermarks before the overall indexes. That’s its job.  Please remember that the market’s job is to frustrate the maximum amount of participants at all times.  From my own anecdotal data, the majority of individual investors are still bearish (although I have been getting some calls to “nibble” on some individual stocks).

From our previous posts and client communications we outlined the 2880-2900 area as our line in the sand if the market was going to turn.  Since April 9th (over a month) the S&P 500 is up less than 4%.  This adds to our feeling regarding the market being in a tug-of-war.

We still believe that the market will turn lower from this price range, but make no mistake, if the S&P 500 substantially takes out the high of last week (2955) on a weekly closing basis, we would expect the stronger sectors (Tech, Healthcare, Biotech, Communication Services, Semiconductors) to take out their all-time highs and we would turn bullish in the short term. 

This is a change in tone from recent posts, and if you’re sitting on the sidelines, you better have a plan in place if the market doesn’t give you another bite at the apple.  The way to make money trading in the stock market is simple, and Howard Marks says it best, “you have to be a contrarian, and you have to be right”.  The problem right now is that the sentiment picture isn’t at an extreme, so judging which way the wind is blowing remains difficult.

Regardless, for those of your with assets you’re waiting to deploy, we will be reaching out individually to make sure everyone is on the same page. 

Lastly, none of this matters without your health, so please stay safe, and I hope to see everyone in the very near future.

– Adam

The title of this blog post comes from the 1990s HBO docudrama starring Matthew Modine as epidemiologist Don Francis.  It is based on the true story of the CDC as they first came into contact with the HIV virus in the early 1980s.  It happened to be one of my father’s favorite movies, so it became one of my favorite movies (funny how that works).  If you have a chance (and I know you do), see if you can find the movie and give it a watch.

In the movie, the mantra of the CDC when dealing with this previously unknown type of virus was simple, “What do we think? What do we know? What can we prove?”

I use this method often when analyzing markets. Let’s go through the exercise together.

• What Do We Think?
  • We think that life on the other side of Coronavirus will look different than it did before.
  • We think small businesses will not return to the same importance for the overall economy and large corporations will become even larger.   Essentially everyone will be spending money at the same four places (Grocery Store, Online/Retailer, Healthcare, Technology).
  • We think that we will be ushering in an increasingly digital workplace and world.  This had already been happening and perhaps this will just speed up the process.
  • We think the stock market is disconnected from reality since it’s not properly reflecting an economy working at roughly 50% (if the stock market reflects the economy, why aren’t stocks down 50%??).

All of these items sound pretty logical.  But the market doesn’t care what anyone thinks, including me.  It’s truly irrelevant, and even if we were lucky enough to predict exactly how the economy would look in five years, would you be able to profit from it?  “The stock market is a second level thinking mechanism (there’s that phrase again!). While most of us see the world for what it is, the stock market is always trying to see the world for what it might become.” – Cullen Roche

Based on what large institutions think, they buy companies that they believe will profit the most in the coming weeks/months/years.  Are they right?  Even they don’t know that one…

“If you’re confused or upset by the stock market action, just sit with it. Let it marinade on you. Learn to be comfortable being confused and uncomfortable. That’s way more productive than desperately searching for logic. There is no logic. Start there, and be free of the need to understand.” – Tom Canfield

• What Do We Know?
  • We know there are 152 million American workers.  We know 22 million of them lost their jobs in some capacity over the last month.  That number is likely to move above 25 million, but we won’t know until tomorrow.
  • We know that central banks and governments throughout the world have intervened in an unprecedented way to try and avoid/alleviate a recession or even a depression (full employment is one of the two Federal Reserve mandates).
  • We know March was the most volatile month for the S&P 500…ever.
  • We know that sentiment reached pessimistic levels not seen since the global financial crisis. 

• What Can We Prove?
  
  • We can’t prove much about the future, so we look to the past to show us what’s happened in previous periods similar to this one.
  • The S&P 500 has gained 15.5% in the last two weeks.  According to Ryan Detrick of LPL Research, since World War II, the S&P 500 has gained more than 12% in a two week span three different times: October 1974, August 1982, and March 2009.  One year later the S&P 500 was up 22.9%, 37.3%, and 51.7%, respectively.
  • The market remains highly bifurcated into big winners and losers.  Over the past 12 months, the largest companies (S&P 100) are up 2%, while the smallest companies (S&P 600) are down 24%.
  • On one particular day last week the Nasdaq 100 (technology sector) was up over 1% while the S&P 500 was down more than 1%…since 1985, this has NEVER happened.  – Jason Goepfert

“The only thing I have a strong conviction about right now, is that nobody should have a strong conviction about anything right now.” – Walter Deemer

There are many reasons to believe that the market will pause for a bit at this price level.   As we outlined in an email to clients at the end of March, the furthest rally for the S&P 500 we were prepared for was 2880-2900.  The intraday high price last Friday was 2879.22.  Close enough.  While we are still in the “retest the lows” camp, we must admit that if we are to deviate substantially above the 2900 level, the likelihood of a “V” recovery increases.

There is more volatility to come, so please don’t get complacent and think everything has been solved.  We still believe this will be a months/years long process for main street to get back on its feet.  But that doesn’t have to mean anything as it relates to the stock market.  Also, don’t delve down the rabbit hole of pessimism either.  It’s a convenient rocking chair, which gives you something to do for awhile, but doesn’t get you anywhere.