Eagle, CO
I really enjoy writing these - normally.
I have been dreading this one for a few days now – and putting it off day after day hoping there will be something good and logically sensible to discuss. No such luck. Things just seem to get more and more disconnected.
Most folks I talk with these days ask me about the massive disconnect between the economy and the stock market, or between “Wall St.” and “Main St.” if you like.
Before I jump into all that madness, let me just say that the month of May was one of the best ever for our Appreciation Strategy. We beat our benchmarks across the board all with around 30% of the strategy in cash, on average. Our stock picks did phenomenally well, more than doubling the market return on average.
The Income Strategy didn’t fare as well because most income investors have stayed pretty cautious about the market given the situation with the economy and the magnitude of the recent drop. When the market was down a little over 3% for the month on May 13th, income was down less than half as much though, so I am pleased with that given the primary objective of the strategy to “lose less than the market when it is down.”
You see, when markets crash hard like they did in late February and most of March, the first people to come back to the market to buy stocks are the most aggressive, risk seeking investors. Those investors are not interested in buying dividend stocks – they want high growth. Further, dividend payments have been getting slashed everywhere you look. It appears that no dividends are safe from the axe. If you are an income investor the last thing you want to do is buy a stock for the dividend only to see it reduced or even terminated shortly after.
But now that the market has recovered so much of what it lost during the drop, income investors are starting to feel more comfortable with stocks. Further, the Federal Reserve is forcing these people to consider stocks because there is no yield to be found in bonds or cash. Rates are charging their way toward negative on a nominal basis. Which is dumbfounding and probably irresponsible in the long run.
This morning, the monthly jobs numbers came out and the market loved them. The weekly unemployment reports over the past 4 weeks showed an average of 2.5 Million new unemployment claims per week – 2.5 Million x 4 weeks = 10 Million for the month. But, the monthly numbers (which are subject to revision) came in showing that the economy somehow added 2.5 Million jobs in May.
In a word: nonsense.
For example, the Bureau of Labor Statistics (BLS) added to the footnotes for May 2020:
“In the establishment survey, workers who are paid by their employer for all or any part of the pay period including the 12th of the month are counted as employed, even if they were not actually at their jobs.”
It is pretty easy to put up big numbers when you are choosing not to count people who are “unemployed.” And the market just shoots higher on the headline. Very few people read the footnotes.
So, back to the disconnect between Wall St. and Main St.
As I mentioned in my last post, this disconnect isn’t new – it is just under the magnifying glass right now. For many years, income inequality has been on the rise. I have talked about it more than once in these blogs. Many of you reading this note will not have direct personal experience with this – although I am sure you have friends and even family that does.
Going back to my January blog, I noted that it used to take less than 20 hours of work for the average employee to buy one share of the S&P 500. Today, based on average wages, that same employee would have to work more than 125 hours to buy one share of the S&P 500. Leading up to the financial crisis, this peaked at only 80 hours. So, since the financial crisis, it has only gotten more and more difficult for the average person to participate in any of the growth in the stock market.
Which leads me to the recent situation with rioting, looting, protesting and generally the bad behavior exhibited by US citizens of all walks of life.
How is anyone surprised by any of this? Sickened, upset, angry, sad… sure…. but surprised?
I, for one, am not surprised.
People have been locked in their homes for 2 months and millions have lost their jobs. Even though they are being compensated by the government at rates never seen before – there is no sense of purpose in an unemployment check. Humans need more than surviving a pandemic in isolation.
I am appalled by the behavior I have seen on too many videos over the past week, as I am sure you are. I have opinions, as I am sure you do. But, after much consideration I have decided to leave it there for now.
One thing that is worth consideration given the videos we are seeing is our exposure to property & casualty insurance companies. They are the only positions we hold without any stops and we have described them as the “world’s best business” more than once – but even they probably didn’t plan on riots of this scale across this many cities all at once. They also definitely didn’t plan on so few drivers on the roads for the past 2 months. Hopefully you even got a small break or refund on your auto policy!
Like everything else in the market these days, the insurance stocks are doing the opposite of what I would expect given the situation by rallying even more than the market over the past several days. So, we’ll keep our eye on the situation but as one of my favorite clients likes to say:
“I’ve never found panic to be useful.”
One other way to look at the disconnect between Wall St. and Main St. is that the market is forward looking. It is a leading indicator of economic activity, not the other way around. The market saw the coming unemployment and economic slowdown and proceeded to drop farther and faster than ever before in the history of the world. That seems to fit the current employment situation.
But now, the market can’t seem to go down much or for long. And there are plenty of reasons to be optimistic that there is more room to run to the upside – 6 Trillion reasons actually.
Plus, many people fear the economic situation right now and have pulled their money from equity funds. Which means if they come back to the market, they will push it even higher – and we already know that the FED is pushing them in that direction with artificially low interest rates.
To be clear, I am fundamentally very, very skeptical of this market rally. But technically, all signs point to more gains.
As always, thank you very much for reading!
Until next time, take care of yourself and your people. And be kind. The world currently has an overabundance of hostility and could really use your kindness and love.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
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