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How can the market ignore all the bad things we see - MMM Week 18

I had no idea 18 weeks ago we would still not know for sure how severe the Coronavirus pandemic would be. NBA players last week began preparing to resume their season which was temporarily suspended in mid-March. Major League Baseball teams are using a different approach and are preparing for their own shortened season. Each city, county, and state seems to have their own ideas on what is the best way to handle this confusing virus. At the same time a spike in cases, hospitalizations, and deaths across the south has brought on delayed openings, threats of widespread shutdowns in various cities and states, along with renewed politicization of those policies.

Then there is the stock market. After two weeks of full-fledged panic, the S&P 500 has barely looked back. Everything is seen as a positive. Bad economic news means more stimulus. Good economic news means the economy will get back to normal. Nothing seems to derail stocks.

via GIPHY

For the past 18 weeks I think I've talked to more clients and advisors than I did in the 18 months before the pandemic began. The number one question is, "how can the market ignore all the bad things I see happening to individuals and businesses in my community?" I can list the academic reasons (market is a forward looking mechanism, risk premiums are low thanks to the Fed, the CARES Act put so much money into bank accounts that has yet to be spent, bond yields are low, and "there is no alternative" (TINA). The real answer is more people are buying than selling stocks right now.

Just six stocks represent over 25% of the S&P 500. The stocks leading the market higher - FAANGM (Facebook, Apple, Amazon, Netflix, Google, and Microsoft) all have had increased popularity the past 18 weeks. Whether or not this correlates into enough earnings growth to justify the huge increases in their stock prices is something I'm glad I don't have to do anymore. We'll start seeing earnings this week and will know whether or not investors even care about earnings right now or if they are still looking forward to 2021.

I'm not going to question the rally. We're very close to being fully invested in all of our models, which means as the market goes up, we're making money. The difference is, when (not if) the trends reverse, just like in late February we'll be ready.

Some of the things investors are ignoring right now that will become an issue in the future include:

  • At least 25% of the job losses are likely permanent
  • The earnings from the "new" jobs the last few months have been been significantly lower
  • Municipalities will be forced to cut services severely due to massive drops in tax revenue
  • Consumers have been scarred and are not likely to spend as freely as they did pre-COVID19
  • Bankruptcies and business closures will continue to be a drag on employment, consumer spending, and bank earnings

Essentially, we need to be afraid of the "95% economy"

The 95% Economy
The economic data continues to show signs of improvement while the number of Coronavirus cases and now the daily death numbers begin to rise again. This has led to some states to slow or even reverse their re-opening plans. Scientists are learning more and more about the virus, yet it seems half of…

We also have to realize we are in the middle of the worst phase of the social cycle. We are going to see a lot of things change in the years ahead that the market will need to price in.

A Divided Economy
The stock market is capable of ignoring a lot of things. Since the economy began to re-open it has made a huge move higher. This is despite the fact the STRUCTURAL damage done by the economic shutdown has pushed the weak businesses and consumers over the ledge. This was bound to happen during the ne…

Normally I post a whole lot more on a Monday. As I think most of you are, I'm drained. I'm tired of not knowing what next week, next month, or even next year will look like. I'm tired of everything being political. I'm tired of all the bad news, but I'm also tired of people who have not suffered believing there is no suffering in our country.

There are lots of biases we all are likely needing to overcome. Cody did a great job summarizing those here:

How our brains are adapting to COVID-19
I am a big history nerd who enjoys thinking of how things were back in time and how people may have lived through certain events and why. The thing about history is it’s impossible to accurately view the proper response to these things because we know what the outcome is. Through the lens of the p…

I don't know how this will all end, but I do know that our behavioral approach where we apply our data-driven engineered approach has us set-up to handle anything the markets will throw our way. Part of this approach includes working with advisors who structure a customized financial plan and cash flow strategy. Without those components in place and without understanding all of the intricacies of the various investments, you're left guessing or using your own opinions to make close to impossible decisions.

Just Guessing
Being a data driven, scientifically-minded investment manager, we’ve always been uncomfortable making decisions that did not have a solid basis. Our study of behavioral finance and market history, as well as nearly three decades of experience managing money tells us our brains often can play tricks …

You don't have to guess when you work with SEM. You also have the opporutnity to make a real impact in our country via our Cornerstone Models.

Cornerstone Impact Update - Addressing Our Country’s Problems
In just the last month, so much has changed in our country. States started opening up again after the COVID-19 shutdown. Protests and riots after the death of George Floyd (which stemmed from decades of violence and oppression.) Our country is divided. People can’t seem to share their opinions witho…

If you're interested in learning more, let me know in the comments section.

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New Kent, VA
Jeff joined SEM in October 1998. Outside of SEM, Jeff is part of the worship team at LifePointe Community Church where he plays the keyboard and bass guitar. He also leads a small group Bible study.