Seneca the Elder

I’ve been wrestling with this difficult decision for the past few weeks. Do I write about the incident involving the death of George Floyd or do I concentrate on other issues? As it states in the right-hand corner, this is my 166th newsletter. The inspiration for each newsletter has always come from current events. What happens in our country impacts the psyche of investors, which in turn impacts the prices of stocks and bonds.

Currently, however, there seems to be a disconnect between current events and stock prices, as multiple people have recently pointed out. What is going on? Let me try to shed some light on what may be happening…

Violent and destructive civil unrest on top of the Covid-19 economic shutdown is certainly cause for alarm. It is possible that there will be a spike in Covid cases in the near future. Worse over, the toll on businesses destroyed in the rioting will not help the economic recovery. It’s hard to find a silver lining in the protests seen in numerous major cities.  Moreover, we have a serious racial problem in this country and there are no easy solutions.

Corporate earnings are likely to be very weak over the next 2-3 quarters. Whether earnings recover in 2021, and at what rate, remains unclear. In the meantime, our nation’s debt continues to grow unabated, which is likely to be problematic down the road.

From all indications, it would seem that we are facing a Cold War with China. The fact that the world’s two largest economies can’t get along is not going to help the global economic recovery.

Given all these unsettling developments, why has the stock market recovered nearly all of the March decline? What could be driving it?

There are three primary reasons for the impressive stock market recovery over the past two months. First, the massive amounts of liquidity pumped into the economy by the government has softened the economic blow from the Covid-19 shutdown. As mentioned previously, all this debt will cause problems in the future, but in the short run, it has helped cushion the blow. Second, interest rates remain extraordinarily low, which supports stock price valuations, all else being equal.

“We are more often frightened than hurt; and suffer more often in imagination that in reality.” — Seneca. 

Third, and less quantifiable, but still powerful, is the worst-case-fear-mentality that has our country in a stranglehold. For some time now, there has been a steady stream of predictions that our economy and country is about to face some historic calamity. From global warming, to debt default, to a second civil war, to a financial collapse from some unknown reason.  A sense of doom and gloom seems pervasive.  Cynicism has replaced optimism, and distrust has replaced a sense of community and shared experience. Despite all this trepidation, there are multiple reasons for optimism. To begin with, our country has tremendous natural resources, the world’s most productive farms and the finest universities.  Moreover, our entrepreneurial spirit combined with access to capital makes us the most innovative country in the world.

The stock market, in its collective wisdom, understands two important things. First, worst case fears, almost by definition, never come true. Second, people are adaptive, resilient, and creative. Most problems we face are eventually solved. Change is constant, and progress, while never steady or predictable, continues.

Over the next several years, my sense is we will solve many of today’s problems. We will find solutions for global warming and we will discover a vaccine for Covid-19.  Beyond that, there is always hope that we will eventually find leaders who can unite our country, and encourage us to embrace the critically-important core values of integrity, community and individual responsibility while we recommit to a determined work ethic that built this great country in the first place.   

“Unhappy is the man, though he rule the world, who doesn’t consider himself supremely blessed. In order to consider himself supremely blessed he must deeply understand that things could be much worse but aren’t! To not do that is to always be less happy than he could be.” – Seneca the Elder

Michael Kayes, CFA