As COVID-19 developments and the path of global economic recovery remain key points of concern and uncertainty for businesses and investors, financial markets continue to look ahead and currently indicate a better than expected future. Global markets continued to advance during the third quarter of 2020, driven by supportive monetary and fiscal policies, positive vaccine and anti-viral treatment developments, improving economic data, and so on. A number of stock indices, such as the S&P 500, have rallied back to near pre-Covid levels. This can certainly feel like a disconnect from the real economy, where many businesses are either shutting down or operating only at partial capacity.
There is a reason for the disconnect. Despite the remarkable rally on the surface (i.e. at the index level), the recovery has been extremely uneven underneath the hood (i.e. at the sector level). The rally has been led mostly by the Technology sector (driven by large, mega-capitalization growth stocks and work-from-home related stocks), while the economically sensitive sectors, such as Industrials, Financials, and Energy are still lagging in the recovery. Because larger companies carry a bigger weight in the index, the big technology stocks were able to pull the overall index along as they advanced. To use a sports analogy, it’s like the situation where a superstar basketball player can carry the entire team and deliver a victory. However, this type of narrow leadership and heavy reliance on a superstar sector (or group of technology stocks) increases concentration risk and is likely not sustainable. Hence, it is important to see a sustained rotation in the form of capital reallocation back into the economically sensitive sectors to signal a sustainable economic recovery going forward.
Given that major financial markets are near pre-Covid levels again, where could we go from here? As is often the case, some investors will be bullish (positive), while others will be bearish (negative) on the markets. The beauty of the markets is that they have something for everyone, in the sense that it is easy to find evidence to support our viewpoint and confirm our biases if we are not careful.
The bulls will point to:
- Don’t fight the Fed (massive monetary stimulus from central banks)
- Additional government fiscal stimulus is coming (between $1.6 and $2.4 trillion is expected in the U.S.)
- Positive vaccine and anti-viral treatment developments (multiple vaccines are in their final phase 3 trials)
- Improving economic data with actual data beating expectations (we are past the economic trough)
- Sentiment surveys show that investor sentiment is still bearish (often a contrarian indicator at extremes)
The bears will point to:
- COVID-19 is still here with increasing cases and deaths; a second wave could be coming in the fall or winter
- Vaccine efficacy and distribution challenges; people’s level of willingness to take the vaccine
- Stock valuations are stretched with narrow leadership and excessive speculation in technology stocks
- Economic recovery is flattening out after the initial bounce from the trough
- U.S. election uncertainty; a contested U.S. election could create market anxiety (such as Bush vs. Gore in 2000)
The list can go on for both sides. To have a balanced viewpoint, we on the Investment Committee at McIver Capital Management must consider the positives and negatives. Furthermore, we have to consider the weight of each factor as an input into the market, which is a complex system.
Overall, our view is to expect short-term volatility and potential weakness heading into the U.S. election, but longer-term strength beginning almost immediately following the declaration of a winner. As long as governments and central banks are willing to do whatever it takes to support their economies, the markets will have a counter force against economic shutdowns while COVID-19 vaccines are being finalized.
Some people plan for retirement over the course of their careers, while others wait to think about that next stage of their lives when it gets closer. Not all Americans save adequately for their old age, partially because they can’t afford to do so or because they have other, more present-day financial obligations, such as student loans, child care and high costs of living, to worry about.
Still, there’s a portion of the population, albeit small, that pursues retirement early — in some cases, by the time they’re in their 30s or 40s. They do so by living frugally and dedicating most of their income to the stock market. This movement is known as FIRE, short for “financial independence, retire early.” O’Leary, founder of the O’Leary Financial Group, originally spoke about the FIRE movement with Grant Sabatier, an early retiree and host of the Millennial Money podcast, where they also discussed the skills it takes to achieve such a feat.
The “Shark Tank” host, known as Mr. Wonderful on the show, spoke with MarketWatch about how feasible saving for retirement is for most Americans, how they can become millionaires by the time they retire and why Americans need to take the concept of financial independence so seriously. This interview was edited for clarity and length.
The scenario of a contested US election can’t be ignored. So we’ve asked Neil McIver of McIver Capital Management, Michael’s feature guest on this weekend’s radio show, to put together a more comprehensive webinar presentation on potential portfolio strategies. It will take place next Thursday, September 17th at 6:00pm BUT – access is limited so make sure you register as soon as possible.
CLICK HERE to reserve your spot
And we would also be remiss if we didn’t let people know that McIver Capital Management is, once again, accepting new clients.
Like in World War II, the United States is piling on debt to confront a whole-of-society crisis, raising the question of who will foot the bill in the long term. But, unlike the post-war era, the underlying conditions for robust economic recovery today are less than favorable, placing an even greater onus on wise policymaking.
The United States today not only looks ill, but dead broke. To offset the pandemic-induced “Great Cessation,” the US Federal Reserve and Congress have marshaled staggering sums of stimulus spending out of fear that the economy would otherwise plunge to 1930s soup-kitchen levels. The 2020 federal budget deficit will be around 18% of GDP, and the US debt-to-GDP ratio will soon hurdle over the 100% mark. Such figures have not been seen since Harry Truman sent B-29s to Japan to end World War II. Full Story
There remains an ongoing bullish bias that continues to support the market near-term. Bull markets built on “momentum” are very hard to kill. Warning signs can last longer than logic would predict. The risk comes when investors begin to “discount” the warnings and assume they are wrong.
It is usually just about then the inevitable correction occurs. Such is the inherent risk of ignoring risk.
In reality, there is little to lose by paying attention to “risk.”
If the warning signs do prove incorrect, it is a simple process to remove hedges, and reallocate back to equity risk accordingly.
However, if these warning signs do come to fruition, then a more conservative stance in portfolios will protect capital in the short-term. A reduction in volatility allows for a logical approach to making further adjustments as the correction becomes more apparent. (The goal is not to be forced into a “panic selling” situation.)
It also allows you the opportunity to follow the “Golden Investment Rule:”
“Buy low and sell high.”
Despite the surging stock market from the March lows, trillions in liquidity support from the Fed, retirement confidence declined.
“Americans feel under-prepared for the financial realities of retirement, according to new data from Northwestern Mutual. Nearly eight in 10 (78%) Americans are “extremely” or “somewhat” concerned about affording a comfortable retirement. At the same time, two-thirds believe there is some likelihood of outliving retirement savings.”
Again, that was 2018.
Two years later, and with the market 22.5% higher, have things improved? Full Story