Printing money and FOMO (Fear Of Missing Out) has really boosted the market, but high unemployment and a diminished consumption cannot just be wished away. A lot has been made of the fact the market is back to where it was in early March. More relevant to me is that the prices are where it was back in late October when we had historically low unemployment and a market, sorry, an economy, firing on all eight cylinders. The market valuations, to be at the same price, are significantly higher today. What we have is the euphoric, lighter fluid effect.
We’re not seeing a V-shaped recovery in the economy. We are fortunate we’re avoiding the “L.” It appears the predicted “Nike swoosh” is what is actually happening. And yet by Labor Day GDP, will still be two-thirds of what it was pre-Covid, and unemployment will be in double digits. It would probably take to the middle of this decade to get back to full employment. The next story in the press is going to be largely focused around state and local governments. They’re going to need help, and they’ll probably get some help. That’s important because those are often well-paid jobs and they are large employers within the economy.
The good part of that help is that it will reduce some of the risks that is embedded in munis that still exists within the Municipal Bond market. That’ll also mean more long-term debt for the nation. Those who de-risked in March, given the enormous uncertainty that we’ve never been here before – of shutting down a global economy – should be wondering “what next?” It’s tempting to pile back in all at once. That’s a risky strategy because valuations are quite high. Bear markets typically retest the lows. 60% of the time of the last 92 years they had found new lows, but even if they don’t this very much looks like a bear market rally. There is a saying “Sell in May and go away,” and it reflects that good times for a market’s in the first six months or five months of the year. Not always, but typically. Storm season for markets tends to be August, September, October.
Now I’m not forecasting we’ll see a repeat of the ferocity of the bear market back in March. It’s very unlikely. But with economic support to the extent that exists now, pretty much unwinding in the July, August, September timeframe – just one month before that storm season really hits – would not be at all surprising to see that retest later this year. Now to me a major risk indicator is the number of new investors in the market since mid-March: literally millions. These little investors have only seen an updraft. When the lighter fluid of government dollars ends, the reality check is that both the economy and the debt looking forward is not pretty, along with the multi-year nature of dealing with the coronavirus and the social distancing and all that impact that that will likely have. If we’re lucky, we will have a vaccination next year. At some point a return to risk-appropriate pricing will signal a true risk on environment. So those who have de-risked, we intend to again increase equity exposure by no more than 10% in the second week of June. Dollar-cost averaging carefully while risk and uncertainty is still high. If and when a significant correction occurs then a rapid redeployment is then appropriate. We will have a clearer picture of the future, and everyone will know now what a 21st Century pandemic looks like to both the global economy and the markets. But remember this, eventually all roads must converge. And markets need to reconnect with economic fundamentals. We wish you the best of economic and market success, and caution you to continue to handle with care. Thank you.