How the Stock Market Differs from the Economy

 

After reading the last Revitalization Partners blog, a friend of ours sent us some thoughts regarding the stock market. The point was how the financial market can and does differ from the economic conditions we see every day.

Our thanks to Jonathan V. Bever for the thoughts and Jim Falcone, Managing Director of Fulcrum Wealth Advisors in Bellevue WA for permission to publish in our blog.

Casey Stengel: “Never make predictions, especially about the future.”  We will heed his advice.

 

A NEW ERA …

In the following pages, we are going to argue that we are transitioning to a new era in the investment world; a paradigm shift is taking place. 

We see it highly probable that a period of increasing inflation, moderately rising bond yields, an improving economy, modest commodity prices, and a new bull market.

Not so fast; we can hear your objections!  What about the next presidential election, possibly more social unrest, the recession, bankruptcies, and last but least, the coronavirus?  

We understand. The negative news is abundant; however, shake it off and look around the corner.  Are we not saying volatility is going away?  Not a chance.

 

PROBLEMS REMAIN … SEVERITY DOESN’T

We are optimistic, while the problems we face today will not necessarily go away soon enough, the severity will. The solutions being implemented have long term consequences, and they are awesome.

Yet, we do believe the battle with the coronavirus will be a multiyear experience.  Please walk with us as we go down the yellow brick road; together we will navigate the economy, the stock market, and the effects of the pandemic.  Aside from the potential for volatility, we are extremely bullish.

With all the pessimism, one would think the American Dream is over. The American dream has not gone away; it was merely on vacation being revitalized (its version of social distancing). 

Interest rates will be low for the foreseeable future not only for governments and corporations but, we believe, eventually will be so for the rest of us.

 

AS MILLENNIALS FINISH COLLEGE …

As the Millennial generation finishes college, the economy will continue its slow road to recovery, the coronavirus will be managed effectively, new jobs created for increasing demand, and new families formed will accelerate the demands.  So, new homes, new cars, new TVs, new phones, etc. will be needed.

To accommodate this expansion, low-interest rates, low energy costs, low commodity costs, and plentiful liquidity to lend to institutions and the consumer.  We are going to posit interest rates for the consumer will be much lower.  Any politician that can transfer the low rates of the Fed to corporations will be awesome to the consumer, to GDP, and the economy.  

America does not need to be made great; America is great. We simply need confidence, equality, and economic push, and the citizens will do the rest.  The Fed would like to have about 2 percent inflation rather than deflation, and low consumer borrowing rates would easily accomplish this.

The policy of lower rates and lots of money printing began in 2008 and now is the accepted norm.  Many critics think the unintended consequences will derail the whole scheme. We have considered their logic and find it lacking in one thing: truth.  Mostly, it has taken time for the paradigm shift to be accepted by economic tinkerers and public psychology. In short, “the day of reckoning” will be beaten by the innovation of America!

 

ARGUED FOR 2 YEARS …

We have been arguing for over 2 years that our economy and stock market were heading for a slowdown, if not a full-blown recession. 

Our augment: the fed was removing liquidity and putting the brakes on the economy; this was done by raising the fed target rate and unwinding their balance sheet. 

Volatility arrived first in 2018 conjoined with the beginning of an earnings recession; this earnings recession is still being worked through. The stock market had a nice rebound in 2019 as the market had a P/E multiple expansion.

Ultimately, the P/E expansion was popped by the coronavirus in 2020. We all know what happened when the virus arrived: chaos, economic shutdown, and a severe historic decline in the stock market; not just in the USA but around the world.

It would take a steady hand, sharp focus, and emotional discipline to navigate the treacherous stock market environment.

 

NO PLACE TO HIDE …

There is no place to hide in a crisis, and it exposes those who are qualified and those who are not; it exposes the good and bad in people. Those who survived by smoke and mirrors will come to the end of their road. Meanwhile, we will continue toward the Emerald City and ultimately home.

Regarding the SARS Corona Virus: a lot more is known today than just 6 months ago. We are confident it can ultimately be “beat” by following the guidelines while a vaccine or cure is developed. It will take several years to work through the coronavirus and potentially other SARS viruses; the workaround is not impossible-thankfully in part because of technology and a lot of hardworking people all over the world.

The new Fed policy of lowering rates, printing unlimited QE is a 180 degree from their policy 2 years ago. Therefore, our thesis has turned 180 as well.

 

INFLATION & A BOOMING ECONOMY …

Rather than looking for deflation and a recession, we are looking for inflation and a booming economy. We think this will be a process with the likelihood of some short-term pain.

To point out the obvious: the business affected by the coronavirus to emerge in a couple of years-assuming technology come to our rescue once again to beat the coronavirus.

If we look at history as a clue, we should expect good things. I asked a friend of mine: if you were to print 10 trillion dollars and give it to any country in the world, which country would you give it too? After some thought, he answered the USA: because the USA is the proverbial melting pot of the world.

The innovative risk-takers who are willing to work hard seem to end up here from all countries. Sure, we Americans make mistakes, have colossal failures, but we get up, dust ourselves off, and continue toward the good life as we see it.

In Part 2 of these thoughts which we will publish in two weeks, the folks from Fulcrum will lay out the case for the new bull market and identify the risks and consequences of money printing that began in 2008.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.