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Third Quarter 2020 Market Commentary

Wow, what a quarter! During this period we saw a bankrupt company issue half a billion dollars in new equity. If that can happen it makes you wonder where else the hype and government intervention has caused some overvaluation. 

As I began writing this note the markets were within a stone’s throw of their all-time highs even as unemployment remained near record highs. A few days later the market plummeted and continues to fluctuate somewhat wildly depending upon the latest news on COVID cases, when and how we might reopen businesses and what the latest political figure mentions in a tweet.  

An overly simplistic view of the market but somewhat accurate nonetheless is that:
People go to work, they get paid, then they go shopping. If people are not going to work and getting paid, they eventually do not go shopping and that is not a good thing for the economy.

Some things we are watching closely are the employment numbers and the adjustments that come a month or so later. Housing starts and prices are positive for now as rates encourage those who were waiting to buy now and others who are able to buy and have decided that smaller apartment is too small to shelter in place also use this as an opportune time to buy. Consumer spending experienced an uptick as online shopping increased with increased time on people’s hands and as government checks were cashed but consumer sentiment remains suppressed. As we watch all the numbers as they are released it is important to think through how these numbers are calculated and when the data was taken verses when it was reported. 

The ever-optimistic stock market seems confident that the economy will re-emerge stronger than ever after the pandemic. We agree that things will get better but remain cautious about some shut down consequences that have not yet filtered through the economy as well as the potential impacts of a further resurgence of the virus as we enter the traditional flu season. In any event, these unprecedented events have led and are leading to massive change in the way that we, as a society, operate. This creates new opportunities despite the carnage that most tend to focus on. 

  • Second Wave
  • What Not to Do
  • The Good News

Second Wave:
Last month I spoke about the potential of a second wave. I was referring to not as much about an increase in COVID-19 cases but a second wave of impact on the economy as small things that simply did not happen as they usually do have their impact later down the line. We may or may not have noticed it, but food prices have risen across the country for many reasons. Some of which include; the shutdown of meat packaging plants, the fact that migrant workers did not migrate as usual this year so planting and harvesting of some crops was not as robust, cost increases for food processing plants, safe shipping and many more. Increased food prices have an outsized impact on those in lower income brackets who were also among the first to be furloughed or laid off. These are also the members of our society that tend to spend more of their cash when they have it while those in higher income tax brackets are more likely to save a portion of that income. 

Another new wave we are beginning to see is that higher paid employees are beginning to receive their notices of furlough or are being laid off now. As the Paycheck Protection Program loans run dry, businesses are again facing their only choice which is to reduce payroll even further. While these folks do tend to save a bit more than the lower income bracket, they also spend more in total dollars. This is also the bracket that is most likely to take the family out for dinner or go on a family vacation as the economy begins to open. As fear begins to set in with these folks I predict they will quickly move to cut back on those vacations and trips to the restaurant adding insult to injury with the eateries that have been able to reopen. These folks also tend to have bigger mortgages and car payments all of which will likely contribute to a second wave of pain for the banking industry.

What Not to Do
Etched deeply into the recesses of my memory is the time myself and some friends were driving to a camping trip. We were driving through Iowa in the foothills where Illinois, Wisconsin and Iowa all join together. It was that time of evening when the mountains and the road started to melt together as the sky turns darker. As I rounded a curve on the mountain road two small lights seemed to come barreling towards my truck. It was not the lights coming towards me, but rather my truck that was barreling toward them. To my right there was a woefully inadequate guardrail and to my left oncoming traffic. I engaged the brakes locking up the wheels skidding then pumping the brakes again and again. This went on for what seemed like several minutes but was probably only seconds.  

As you may have guessed I had come upon a large deer. Here is the thing about deer. They tend to freeze in the face of headlights. They do not adapt to the situation. I managed to slow down enough to not damage my truck too badly and more importantly not damage the occupants of the truck. The deer, unfortunately, still paid for not adapting with his life.

What I’m trying to express here is don’t stand like a deer in headlights while all of this is going on. ADAPT! If you hold bonds with fixed income that is a good thing and you may do well to hold on to them. If you think you need to purchase new fixed income bonds with yields near zero think twice or three times about that conventional wisdom. Each situation is different so please do not read this and go tell anyone that I said never to buy fixed income again. This still depends upon your personal situation. I am simply saying that if you are not looking at bonds differently than you have in the past you may not be appropriately invested for your specific situation. We are always available to help analyze your situation and give you some guidance. 

The cost of doing nothing and not adapting in this market could prove to be catastrophic to your portfolio. 

Opportunities Abound!
THE GOOD NEWS! Yes, there is good news! There is an economic school of thought called creative destruction. It is the idea that if an old window gets broken, a new window is purchased that likely has better technology, is sealed better and possibly has energy savings built into it. This purchase of the new window creates a job for the people who made it, for the suppliers that created the materials and for the shippers who shipped it, all while saving energy in the long run. 

Among all the destruction that we see now, new industries are being born and are growing. The introduction of new innovations are speeding up in nearly every industry as the world seeks to adapt. Call me a hopeless patriot but there is simply no other country on this planet more innovative than the U.S. We have our issues, but we are a melting pot of opportunity that begets innovation like no other place on earth. When you know where and how to look you can find these opportunities.  

Beware of some of the high flyers and the hyped-up valuations of some businesses and sectors. And, beware of automatic rebalancing in this market. Make sure you are not following some of the same old advice that worked 10 or 20 years ago. Be alert to the many opportunities that are being uncovered nearly every day but make sure you look below the surface of what you read in the news or the hype you see on TV. The real opportunities more often lie just below the surface of what can be easily seen. 

If you are looking for a second opinion or you have questions about any of my notes above schedule a call with us by clicking here.