“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” John Stuart Mill (1828)

“I am not an optimist. That makes me sound naïve.  I am a very serious possibilist.  It means someone who neither hopes without reason, nor fears without reason, someone who constantly resists the overdramatic worldview.” Hans Rosling

A seeming whirlwind of events makes it difficult to neatly summarize the forces shaping third quarter results in a few paragraphs, yet the market (as measured by the MSCI All Country World Index) rebounded off second quarter lows, rose a remarkable 8.1% in the third quarter and is now up 1.7% for the year.  An unfettered global pandemic, severe economic recession, pivotal U.S. election, plus natural threats (think California wildfires and Gulf storms), have rightly placed concern front and center in investors’ minds.  Evolutionary scientists suggest that humans are hard-wired to look for danger and the familiar fight-or-flight response has been fundamental to our survival. When someone says, “watch out,” we tend to react more strongly than if someone says things are good or getting better. 

But, paradoxically, can things be getting worse and better at the same time?  As investors, the answer appears to be yes – here are several examples:  1) The widely discussed K-shaped recovery splits growth unevenly among sectors and income levels.  Even while unemployment remains stubbornly high in parts of the economy, numerous companies and their employees have been prime beneficiaries of new trends.  2) Yields are stuck to a floor set by the Federal Reserve leaving bond investors stymied by a lack of opportunity, which may now extend through the end of 2023.  However, very low yields (10-year Treasury at 0.69%) have driven a stock market rebound that has created high valuations and a buoyant IPO market.  3) Conventional energy producers’ stocks have declined almost 50% this year.  ExxonMobil was once the world’s largest company, but now the world’s largest producer of renewable energy from solar and wind, NextEra, recently surpassed it in market value, heralding a potential changing of the guard. 

The short-term outlook is clouded with challenges, and the market’s creative tension between the bears and the bulls may not be resolved anytime soon.  Skepticism is a healthy impulse when it comes to investing, but, as John Stuart Mill points out, it is worth acknowledging our evolutionary tendency to be gripped by the negative.  Optimism is also a necessary pre-condition for successful investing – as change and innovation alter current trends and lead to a brighter future.  At this stage, investors should maintain a healthy, but not overly dramatic skepticism in the near-term, yet remain optimistic about opportunities that will emerge in the future.

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The views expressed represent the opinion of Veritable. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Veritable believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Veritable’s view as of the time of these statements.

Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.

Past performance is not indicative of future results. An investor should not assume that the future performance of any specific investment or investment strategy would be profitable or equal to past performance levels. All investment strategies have the potential for volatile returns and loss of capital.

Treasuries were virtually unchanged in September, as yields moved within a narrow range during the month despite equity market weakness, marginal credit spread widening, and a slight decrease in inflation expectations. The month began with a…

Treasury yields rose over the past month in a bear steepening fashion as intermediate and longer-term rates increased more than short-term yields, reversing July’s rally. Higher inflation expectations, optimism for a Covid-19 vaccine, and a formal shift in Fed policy objectives all contributed to the move…

A Disconnect between Main Street and Wall Street

It wasn’t that long ago, one quarter in fact, when concerns about the coronavirus and the disruptions it might cause triggered a 34% peak to trough decline in the S&P 500 Index. Those concerns became reality in the second quarter as the Atlanta Fed forecasted an annualized quarterly real GDP growth of -35.5% and the number of unemployed jumped to 17.8 million.  Yet stocks have staged an historic rally.  The Dow enjoyed its best quarter since 1987 (+17.8%), while the tech heavy NASDAQ returned +30.6%, its best quarter since 2001. The big question on investors’ minds is what can explain the market rally when lives and livelihoods remain disrupted, and the path of the economy’s reopening remains murky.  We offer several explanations for this apparent disconnect between Main Street and Wall Street below. 

It’s an Illusion:  The financial economy and the real economy aren’t as unlinked as certain stock indices suggest.  Rather, a handful of mega-cap stocks (such as Amazon, Netflix, Microsoft and Apple, which are up +56.4%, +47.4%, +30.8% and +24.0%, respectively, in the first half) were able to benefit from the environment.  However, when one looks beyond those names, the equally-weighted S&P 500 returned     -11.7%; and Mid Caps (-13.7%), Small Caps (-14.1%), and International (-10.2%) stocks all posted double-digit losses as well.  Most stocks reflect common perceptions about the real economy and certain sectors like travel have been pummeled. 

The Federal Reserve:  The Federal Reserve has pulled out all of the stops to prevent something bad from turning into something catastrophic.  Their response this time around has been faster and more extensive than anything in history.  In fact, the coronavirus has accelerated a new paradigm of coordinated monetary and fiscal policy in which central banks are printing money to finance large deficits and spark spending.  In the end, the Fed’s actions will promote recoveries on both Wall Street and Main Street…the trading of electronic securities just happens a lot more quickly than the flow of goods and services.

Corporations Reacted Swiftly:  When faced with 2020 revenue declines of $4.8 trillion, corporations acted quickly to cut expenses including payrolls and expenditures on intermediate goods.  While investors applauded these short-term measures to preserve profits and mitigate losses, these actions shifted the burden to Main Street.  The question now is whether belt tightening and lower incomes on Main Street will impact corporate profits.

Where does this leave us?  The market’s reaction to the pandemic is perhaps not as distorted as it appears, but we can’t ignore a decade plus of exceptional returns driven by interest rate and tax rate reductions that have their natural limits.  Eventually, Main Street and Wall Street will have to reconnect.  According to super-investor Ray Dalio of Bridgewater Associates, we may have volatile and inadequate returns from stocks and bonds for some time to come.  He advises investors to immunize their known liabilities and diversify well in competitive countries and across asset classes and currencies.

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The views expressed represent the opinion of Veritable. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Veritable believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Veritable’s view as of the time of these statements.

Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.

Past performance is not indicative of future results. An investor should not assume that the future performance of any specific investment or investment strategy would be profitable or equal to past performance levels. All investment strategies have the potential for volatile returns and loss of capital.