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Sometimes, Forgetting About The Markets is Good Therapy! A July 4th Weekend Should Be One of Those Times

Getting riled up and down or worrying about the markets - all the time - is not a healthy way to live, most people would agree. All Markets go in cycles, and given enough time and providing that you are well diversifed, the markets have proven out over more than a couple of hundred years that they will weather the most harsh storms and continue to grow over the long term. Growth is not a straight line. A long protracted bear market scenario is of course serious but no-one is expecting that to be the outcome of the coronavirus crisis. Yes, it may take longer than any one of us may like to discover an effective vaccine and administer it, but this will eventually happen. An enormous ammount of resources and scientifc brain power is being allocated to the discovery, manufacturing and distribution of a vaccine in every country worldwide. And despite global tensions among super-powers, scientists are collaborating on a global scale.

We will get through this time. Business conditions and markets will improve and likewise employment numbers will rise again. There will also be significant hardship faced by many who are unemployed and we can but hope that governments will continue to find ways to ease their burden until the employment situation can get back to pre-coronavirus levels.

A good reason to get a financial advisor is that they will do the worrying and managing of your investment portfolio for you. They will be more objective in times of crisis and able to provide advice that will help steer you in the right direction and away from doing anything that might worsen your situation.

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Efficient or Innefficient Markets - Which One Is It?

What Is the Efficient Market Hypothesis (EMH)? Is it True or False, Half-True or Half-False?

The efficient market hypothesis (EMH), also known as "efficient market theory" states that share prices reflect all known information in the current moment and that ergo they are valued fairly. This in turn infers that consistent alpha generation cannot be achieved and that it is also fruitless to try and beat or out-perform the markets.

According to the EMH, stocks always trade at their fair value. Therefore, expert stock selection or market timing is a myth being chased by investment bankers, analysts and brokers at the expense of investors. Why should Wall Street be paid high fees if they are not outperforming the market. EMH states that the only way an investor can potentially beat the market is by making riskier investments. A low cost ETF or balanced fund that tracks the market is all that most investors need.

EMH or efficient market hypothesis fails however to take one key factor into account, namely human beings. Human beings are not rational. Stock market or housing or art bubbles and busts are littered along the path of progress in human history. They come and go. They repeat, again and again. We can probably go back a lot further in history to illustrate this point but we will start with what was referred to and more commonly known as "The Dutch Tulip Mania" in the 17th century when tulips reached absurdly inflated prices and then collapsed in 1637. Fast forward to the roaring 1920's and crash of 1929 and then to the dot.com bubble leading up to 2000 and the housing bubble of 2007. You get the point. Every one of these bubbles was fuelled by human "greed" and an infinite supply of hope that things would keep getting better or that stocks or property would go higher and higher. Not exactly rational given that the battle hardened and tested "theory-not" of "market cycles" which states that all markets whether it be commodities, stocks and collectables move in cycles.

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US - China Tensions. The Battle For Global Supremacy, Security & Influence

China USA TensionsGlobal tensions between the USA and China were already a "thing" prior to the Coronavirus rearing its ugly head. However, in a post-coronavirus world that has severely impacted economies, supply chains and trade, the sheer extent to which countries - in particular the USA - are dependent on vital goods such as key ingredients for pharmaceuticals, medical equipments and auto-parts for example, has been highlighted in dramatic fashion. Significant sectors of US industry have sacrificed "price advantages" over "security" in a long established US led transition of exporting manufacturing and jobs to China.

In a world where China and American trade relations may continue to sour and worsen, such dependency can no longer be viewed as a smart play. China has never been viewed as a fair player. They play to win at all costs. The mis-handling of the coronavirus outbreak has not endeared China to the world. The US which has suffered the worst impact of the coronavirus worldwide and where the governement was slow to take it seriously, has decided to blame the WHO (World Health Organization) for not being more circumspect about what was happening in China and more suspect about information regarding the outbreak and therefore wasting precious time.

The US pulled its funding from the WHO much to the chagrin of its allies while China was more than happy to cough up a couple of billion dollars to plug the funding gap and win more favor. An investigation is now underway within the WHO. It's fair to say that very few countries were prepared for a pandemic. It was never a matter of "if' but "when" and most of the world chose to ignore the matter of preparedness. That changes only in the instance of a pandemic hitting and by the time that happened - as we have all witnessed - it was already too late.

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Are The Markets Disconnected From Reality or Ahead of It?

For most people looking at the stock market it's hard to understand how the US stock markets keeps trending up when -as of this week - almost 40 million people, that is 1 in every 5 people in the USA are now claiming unemployment. It's hard to comprehend. 40 million people is almost 73% of the entire population of England or 4x the entire population of Switzerland.

Yet, the US stock markets -the DOW, the Nasdaq and so forth - keep trending up. Is the economy going to be back to normal in 6 months time? Are 90% of the population who are claiming unemployment going to be back at work in 6 months time? Are we going to have an approved successful vaccine in 6 months time that has been distributed to 350 million people in the USA? And if a vaccine is not ready or still in the process of being proven out, is the coronavirus going to disappear in the winter of 2020/2021? You will be hard-pressed to find a virologist in the USA that is not saying that it is inevitable that the coronavirus will re-surface in the winter of 2020 and that is even if it recedes during the summer which is not necessarily the case on a regional level, where patchworks of outbreaks will vary regionally as the virus migrates as it will with passage made easier in states with looser restrictions.

Is the massive government and fed stimulus enough to prop everything up indefinitely. There will be more. It may take time for the next round to be passed by the house and senate but the commitment to do so, if it is necessary, is there.

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No Man's Land - Hope, Reality, Unknowns and X Factors

Its Thursday, Aprill 30th and there are reasons for optimism. For example, the preliminary indications for Gilead"s Remdesevir and Oxford University's "Vaccine" development program look promising. There are however also reasons for pessimism such as unemployment numbers topping 30 million (exceeding numbers at the peak of the great depression), the possibility of renewed trade friction with China and a more cautious consumer in the immediate months ahead.

The rising tide of corporate debt over the last few years and more than 1,000 credit downgrades since January 2020 is also cause for concern. The COVID-19 economic shock is only going to exacerbate the issues in companies with marginal quality debt ratings. It is realistic to expect a wave of banruptcies. The Federal Reserve will be avoiding companies at the lower end of the ratings spectrum.

It is unrealistic to expect a robust return of the economy as most states adopt a gradual "phased" approach to re-opening their economies along with maintaining social distancing and strict hygiene standards. This will inevitably slow "commerce" and "demand" as we head into May and the summer 3rd quarter.

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Hawley Advisors
1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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