Hope everyone had a great long weekend! I’ve been up in the Okanagan for a few weeks with the family enjoying the lake life. Markets co-operating over this last month have given me an excuse to drop my commentary back down to monthly. It is all about the economics and has nothing to do with me being out on the lake and golf course through July! Will keep the updates at a monthly frequency for now as part of my “new normal” unless the volatility gets crazy again.
Markets went down, then up, now sideways. There are bulls and there are bears. I feel like I could almost just end my market update right there. Markets crashed when we got blindsided by COVID 19, then came roaring back on the realization that it wasn’t the end of the world and that governments were willing to throw as much money at the problem as necessary to keep the economy afloat. Now we seem to be sitting in a holding pattern of range bound trading waiting to see what the remainder of the year brings.
Numbers in the US are terrible economically in terms of the hit to GDP and job losses, but they aren’t as bad as predicted so investors right now are relatively happy. It is a very Canadian mentality. Canada’s COVID response has been average at best and Trudeau is going through his third ethics probe, but Canadians are pretty content these days as every person I talk to is just grateful that they aren’t American! It is such a weird time in that while there is definitely real loss out there, there are also lots of winners. The guy who runs the marina where we are staying in Kelowna was telling me that his average day right now is better than the long weekend days from last summer. My landscaper can’t squeeze in a small project for me until the fall as he is getting run off his feet by all the work he has. My daughter signed up for an online summer class in lieu of looking for work and she is quite happy to have a free summer and collect her student COVID cheque every month. Spending habits haven’t really changed too much as even the unemployed don’t really expect it to last. The first thing Maddie does when she gets her cheque every month is go shopping!
It is not just anecdotal evidence that things aren’t all bad either. Big tech stocks are trading at all time highs as they have fully capitalized on an accelerated transition to ecommerce and virtual work life. The amount of money Amazon made last quarter was ridiculous. They beat analyst estimates by 9 billion dollars. With the amount of money being thrown around as stimulus these days I kind of feel people have lost some perspective on how big a number a billion is. A million seconds is 12 days, a billion seconds is thirty-one years. When a company outperforms expectations by 9 billion dollars, it should be trading at an all time high! In the meantime, Apple is also at record valuations and Microsoft is currently buying TikTok with the pocket change Bill Gates found in his couch. Big tech has clearly been a big winner as businesses rapidly pushed to digitally transform themselves and shopping moved further on-line. I actually don’t believe there is much of a dislocation between these companies and current valuations – Microsoft, Apple, Amazon, Shopify and others have capitalized on opportunities that COVID provided and are legitimately making a killing.
I do believe that the booming IT sector is masking how bad things are for almost every other market sector. Travel, energy, service sectors are getting crushed and numbers are way down for banking, utilities and industrials as well. When you take tech out of the mix the disconnect between where stocks are versus where the economy in general is at is almost jarring. In these cases what we are trying to look at is not what these companies are making now, but whether or not they will survive the short term and get back to where they were pre-COVID. The value of a company is always eventually going to follow the success of its business model. Opportunities present themselves when there’s a dislocation between the stock price and future value (revenues/cash flow).
Markets are forward looking. They don’t actually mirror where the economy is, they are a reflection on where they think things are going. Right now, the markets have taken the hit from the terrible economic numbers from the second quarter and have assumed that those are as bad as things are going to get. They believe that the hard-economic data will improve third quarter this year as the economy continues to reopen and will improve again by the fourth. Markets are assuming that COVID-19 will not be an issue next year. Hundreds of companies worldwide working on developing treatments and vaccines, lots of positive results in trials from more than a few major pharmaceuticals and news that way more people already carry antibodies for the virus than was presumed, means that there is a group think that COVID will be a thing of the past by next year. The third major theme being counted on is that governments will continue to spend money as long as necessary to bridge the gap until the economy can function on its own. All these assumptions are currently priced into the market already, thus the “V” shaped recovery in stocks. While all three are reasonable expectations, it does leave markets in a very vulnerable position if any one of those assertions doesn’t hold up. The big disconnect comes from the fact that it is not earnings or growth that is driving markets, it is hope. The longer that the narrative holds up, the more comfortable that people will get, but in these early stages it is fragile. Up at the lake where we are, at dusk there are a ton of bats that come out. One night when I was there alone with my youngest son, Jordan, a bat flew into our living room. Jordan literally shrieked as he flew out of the room. I tried cajoling him into coming back to help me shoo the bat back out, but he wasn’t having it initially. Eventually, after realizing that I wasn’t dead yet, the first thing that he did was slowly point his camera around the corner so he could verify by video that the bat wasn’t actually attacking me (or at least be able to take a picture if it was!). It took quite a while and a few false starts for him to build up to actually stepping into the room and helping! I kind of think of us as in that bat scoping stage of the market where we are tentatively warming up to the idea that things might be ok, but still ready to jump at any sign they are not! With an ugly looking US election, civil unrest, and escalating economic tensions between the US and China further complicating the outlook it makes the short term prognosis for markets just about impossible to predict.
The good news is that if we are clear on our objectives, investing is simple. If we need income, we build for that and judge the portfolio by it meeting our spending needs. If we need the money in the short term, we swallow our greed and fear of missing out and we park the funds somewhere safe. If we don’t need the money for a few years we look through short term headlines and we diversify and overweight the secular themes we have strong conviction in and we build for growth. I am both optimistically and pessimistically of the opinion that buying good companies in the current environment will prove fruitful over the next five years. Optimistically I am a believer in the resiliency and adaptability of companies and individuals to innovate, create and push boundaries. The cynic in me simply acknowledges the inherent greed in all of us. Money is really cheap right now. It is punishing savers and markets will strengthen simply on the lack of alternatives capable of providing the return and yield that investors need to reach their goals.
Hope you squeeze as much as possible out of this last month of summer. Happy to answer any questions you might have on markets in general or your portfolios specifically. Stay positive, stay safe and stay disciplined!
Jeremy
leave a comment