Month: October 2020

“When we make the unfamiliar familiar, make the unknown known, make the uncomfortable comfortable…we can then expect the unexpected” – James K. Glassman 

The writer of the article in Friday, October 30^th’s Wall Street Journal was clearly mystified. Even the headline for the article was mystifying. “Pandemic Brings New Restrictions on Restaurants and Retailers as Demand is Rising”. The article went onto include the following passages. “Surge in U.S. Coronavirus cases comes as more people are dining out and stores struggle to find workers ahead of holidays. Outback Steak House’s president says the chain hasn’t seen a drop in dining demand since Covid-19 case counts started climbing again this fall.”

Most commentaries on the outlook for the economy are as chilly as the looming Winter weather. Following are some quotes from someone who is generally considered to be an economic optimist. “Challenging times abound”, “stimulus tailwinds are fading, and economic growth appears likely to slow down until more stimulus is passed and/or a vaccine is widely distributed.” Most American’s believe in their ability to pursue what they believe to be reasonable precautions to safeguard their health and that of others but Americans want their lives back and it’s a pretty good wager that happens because, as the above quotes from the Wall Street Journal indicate, it is already happening.

How badly was our economy damaged due to the public policy response to the pandemic? In the second quarter of this year the reported decline was 34.3% but that was a one-quarter figure annualized. Americans could be forgiven for being under the impression that our economy had shrunk by a full third in three months. For some clarity, it may be helpful to look at the size of the US economy over the prior three quarters for a more accurate measure of where we were and where we are. At the end of 2019 US GDP was at 21.73 trillion, at the end of 2020’s 1^st quarter 21.54 trillion, 2^nd quarter 19.41 trillion (a decline of 2.04 trillion or 9.5%) and at the end of the 3^rd 21.16 trillion (an increase of 1.64 trillion or 8.4%). So that leaves us down $570 billion through the end of the 3^rd quarter of this year or 2.6% so if the 4^th quarter number is one-third of the 3^rd quarters we’ll be back to where we started the year.

Friday’s Wall Street Journal also included the cheery headline “Market ends worst month since March”. How bad was it you ask? Well, the venerable Dow Jones Industrial Average was down 4.53% for the month and is down 5.38% for the year. The S&P 500 fell 2.66% but is still positive 2.77% for the year. Something curious though happened in October’s market. Mid-cap stocks were UP 2.17% and Small Cap stocks 2.58%. This looks more like a sector rotation than a flight to safety. US Treasury yields were up modestly but high yield bond yields declined. Europe was down 5.62% but Asia was up 4.81% perhaps providing evidence that it may not be the pandemic that is driving markets so much as market’s fear of how public authorities will choose to respond to it. Emerging markets were up 2.04% and Frontier Markets, which are the highest risk equity markets on Earth, were up 4.19%. For 60% equity/40% fixed income portfolios returns were a negative 1 ¾% leaving portfolio returns year to date positive though barely so.

Christmas is coming. The best is yet to come! And yes Virginia, and for you who live in other states, there will be a pandemic pause!

Mark H. Tekamp October 31, 2020

“Don’t try hard to explain, but try hard to prove it.” – Abhiyanda B

Observers of the market have long been divided between those who believe the stock market is a mirror reflecting the image of the state of the economic and financial environment to the world, the fundamentalists, and those who believe the market ultimately contains within itself its own explanation of market movements, the technicians. Fundamentalists speak in intelligible terms about economic growth, increases in corporate profits etc. Technicians speak a language of their own employing phrases such as daily moving averages, support and resistance and other such esoteric terms.

September was a month that market technicians live for. In late April, almost one month to the day from the market low in March, the S&P 500 broke above the average level of its past fifty trading days and while coming close to trading below that level in late June it passed that particular test and the market continued onwards and upwards reaching its high for the year on September 2^nd. From that point, the market experienced its most notable decline in the past six months falling 9.6% by the market close on the 23^rd. The market then recovered modestly by almost 4%, sufficient to lift the market back to, guess what, its nearly exact fifty day moving average. Technicians view this as “the classic sign of a coiling market” meaning that in the very near future the market will likely reveal its trend for the next several months by either successfully clearing that level which is referred to as “resistance” (akin to a ceiling) after which the market likely continues to move higher and that level transforms itself into a “floor”, a level below which the market is unlikely to decline below, or the market will decline further and that level will become a “ceiling” for the market while it works its way lower. Pretty exciting stuff, right?

Back in the real world of earth, sun and sky the economy continues to mend quite nicely. The “glass half empty” crowd pointed to the non- farm payrolls increase of 661,000 for September as a disappointment but furloughed public school teachers, the numbers for whom appear in the public payrolls figure, obscured the good news of an 859,000 increase in private sector payrolls, a BETTER than expected number representing a 54% recovery of those jobs lost due to the COVID shutdown. The ISM manufacturing index number released on October 1^st also offers evidence of a continuing strong economic recovery. The “half empty” crowd will counter that unemployment benefits are about to terminate and the likely absence of a COVID virus vaccine this year. Nonetheless, the balance of evidence reveals that the V-shaped recovery lives and will get stronger before it doesn’t.

Market participants get to choose their headlines. September was the weakest for that month in almost ten years with the S&P declining 3.80%. Nonetheless, the S&P was up 8.93% for the 3^rd quarter and with its following a strong 2^nd quarter, the market has experienced its best two-quarter performance since 2009. The smart trade for the month with perfect hindsight would have been to sell one’s winners and add the proceeds to one’s losers, excepting the woebegone energy sector which wouldn’t have any news if it weren’t for bad. S&P growth stocks were down 4.7%, twice value’s 2.40%, though growth is up 20.6% for the year while value is down 11.40%. Foreign developed and emerging markets also outperformed, falling back “only” 2.20% though both are negative for the year 5.24% and 1.97% respectively. Bonds did their job by returning approximately 1.50% for the month offsetting the 3.30% negative equity return leaving the typical 60 equity 40 fixed income portfolio -1.78% for the month and positive 3.80% for the year.

Mark H. Tekamp October 3, 2020