Gill Capital Partners Mid-May Update
We hope all of our friends, clients, and partners remain healthy and safe as various parts of our communities attempt to re-open. Before heading into the weekend, we wanted to send an overview of this week’s happenings in the world of economics and finance. But first, a bit of humor…
Funny/Interesting Quote/Joke of the Day
On coronavirus response emails - “Oh great, I was wondering how every corporation I’ve ever given my email to was handling COVID-19.”
And…
“I have decided that if Shakespeare can write King Lear while in self-isolation, I am going to write a novel about a man who goes into self-isolation and achieves absolutely nothing because he has three children.”
The Great Disconnect
The most common question we are getting these days is how the stock market can continue to rally in the face of such bad economic news. We are calling this “the great disconnect.” We’re referring to the disconnect between market performance and economic fundamentals. In the face of the worst fundamentals we have seen in our careers, the stock market (S&P 500) sits a mere 16% off of its all-time high reached in February, and is down only 11% for the year. How can this be? We offer a few explanations:
Liquidity – The Federal Reserve, along with the U.S. Treasury, unleashed a war chest of liquidity in March and April in the form of direct payments to individuals and businesses, asset purchases, credit lines, guarantees, and other tools aimed at preventing a credit crisis. They acted swiftly and forcefully, and, at least for now, they can say, “mission accomplished.” All of that liquidity has to go somewhere, and to a certain degree it went into asset price inflation.
Optimism/Hope – The feeling of despair from March led to a sense optimism and hope that we are past the peak of the virus, that there will be some return to normalcy in the not-too-distant future, and that the world’s greatest scientific minds will develop a vaccine or a cure.
FOMO (Fear Of Missing Out) – The fear of missing out has, to some degree, brought buyers into the market chasing returns. FOMO has overshadowed FOAW (Fear Of All That Is Wrong), at least for the time being.
So how long can this disconnect last? We do not know. Prices can remain disconnected from fundamentals for protracted periods of time. Eventually the two will converge; either stock prices come down to meet fundamentals, or fundamentals begin to improve and catch up to stock valuations. Caution is certainly warranted here given the disparity and the backdrop. We are concerned that the outlook for improving fundamentals may be overly optimistic and that stocks have gotten a bit ahead of themselves, and now may not be the time to be overly bold.
What are we thinking now and what are we doing within portfolios?
Looking Beyond COVID-19 – While many are focused on trying to understand when we will go back to “normal,” we believe the more important question is what that new “normal” will look like. There is a good chance that our way of life will be permanently altered due to COVID-19, and so too will our investment outlook. As a firm, we try to look beyond this pandemic to imagine what the new world looks like. Times like this usher in massive changes and innovation for businesses, consumers, and societies. Strong, nimble companies with good margins and low leverage should be able to weather the recession rather well, though not unscathed. On the other hand, weaker companies with tighter margins and higher leverage will encounter serious issues, and some will not survive. On the surface, it appears that we may emerge into a world with less consumption, higher unemployment, tighter margins, and higher corporate expenses. There will be new winners and new opportunities for well positioned investors.
Active Management Shines – Much of the time, actively managed investments (generally in the form of mutual funds) have a difficult time outperforming passively managed investment products like index funds or ETF’s (Exchange Traded Funds). However, in times like this, active management can shine. A good manager can sift through the noise, perform fundamental analysis on individual companies or sectors, and pick winning companies. We are using this opportunity to overweight our unique and highly skilled active managers to take advantage of this environment.
Rebalancing – We have been hard at work over the past month rebalancing portfolios. Rebalancing is basic blocking and tackling for the investment management business and ensures that portfolios remain in alignment.
Enjoy your weekend, stay safe, and enjoy deleting all those spam emails.
Two Reminders - Virtual Client Education Event & Giving Back
Gill Capital Partners will host a virtual Zoom Premier Event with a very special guest, Greg Valliere, Chief U.S. Policy Strategist at AGF Investments, on Wednesday, May 20th at 11:00 am (MDT). Greg will offer a non-partisan look at the upcoming presidential and congressional elections, how the coronavirus will impact the election, and how developments in Washington may affect investors.
Please RSVP to the email invitation we sent you, or let us know if you need us to resend you the invitation.
The Gill Capital Partners Gives Back campaign is in full swing. Remember to submit your charitable contributions to us by May 31st for a matching contribution.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.