In August the Dow gained 2.4% but remains slightly in negative territory for year at (0.04%), the S&P 500 advanced 7% with a year-to-date gain of 8.3%, and the NASDAQ Y-T-D # +31.2%.
The past several months have been consumed by COVID-19. The global pandemic has literally and figuratively infected every aspect of our daily lives. Unfortunately there will be no return to normal. The new normal will be what I call America 3.0. America’s economy transitioned from agriculture to industrial during my grandparent’s formative years. After the Viet Nam war it transitioned from industrial to a service economy. Now, during my working years the transition from service to that of platforms, cloud, and all things internet is accelerating at an exceptional pace and, quite frankly, those of us who miss the “good old days” are drinking from a fire hose.
The challenges to our health, employment, personal cash flow, businesses, and way of life have been powerful and stunning. I can list businesses from my dry cleaner to my barber to the neighborhood pub that have chosen to close the doors for good. This type of impact has yet to be felt on Wall Street. The reopening of the economy, and challenges faced are not currently reflected in stock prices. Folks have either been forced or simply chosen to take risk. The historically low interest rates, while good for mortgage rates, are terrible for retirees trying to live on the income of their portfolio without taking on stock market risk. These low rates have driven dollars out of the fixed income/bond market into the stock market helping to cause inflationary stock prices. Other sources of “new” money have also helped push stock market prices higher. People who normally bet on sports in Vegas and other venues are now betting on the stock market. As the November election looms, the fundamentals simply do not support the valuations. When will this change? It could go on for several years as it did in the late 90’s or the chickens could come home to roost during the election season, it is impossible to know.
Looking forward, investment professionals will be forced to rethink traditional asset allocation. The classification of stocks as growth vs value may take on new meaning. Value may mean stocks such as Microsoft and Apple which are growing, but present some value as they do have earnings. Growth stocks may have interesting business models such as Tesla, yet not have any earnings whatsoever. What I am seeing in the investing world is a shift in thought toward more thematic investing such as cloud computing, cyber security, medical devices, biotech, etc. while giving less consideration to traditional metrics such as value and growth.
I believe investors have been forced to look toward total return, incorporating risk assets along with fixed income and an emphasis on thematic and industry trends. The way forward is likely a focus on innovative investing while looking for relative value and managing risk through incorporating nontraditional fixed income.
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