What are the Markets Telling Us?

Most of the rhetoric that you hear in financial media is typically melodramatic. So, when there is an economic crisis caused by a health crisis you can expect it to be even worse. And it is.

Currently, the most efficient investment in a NASDAQ index fund (QQQ) is up 23.5% YTD. The return of a similar investment in an S&P 500 fund is essentially flat (SPY at -0.17%) YTD.

Some call the Nasdaq performance irrational claiming the next asset bubble is here. Those with outlandish claims citing SPY performance say this health crisis is overblown. I disagree with both.

The Nasdaq is comprised of tech-heavy companies. If you are currently working from home like I am, think about your day. For me, I wake up and use a tablet to access my kindle or the cloud where I store essays and articles to review and make notes. I go on a run and stream music or podcasts through my cell phone and Spotify. Then I move to my computer where I spend all day using the cloud and SaaS services.

You may not want to pay the price to invest in a share of Apple, but this is not a bubble. Technology is the only certainty in this current environment. All of this was a big part of our lives in January. It’s just a bigger part today and there is no reason to think that it won’t sustain and grow.

Now to the person who cites SPY and says everything is fine. This person is either insensitive or oblivious to the carnage that has been levied on the specific parts of our economy that do not have the benefit of doing their job remote.

Restaurants, salons, brick and mortar retail, dentists, physical therapists, elective surgical facilities, and others were all brought to their knees in a heartbeat. Revenue fell off a cliff. This was not the case in The Great Recession of 2008. That was much more gradual and unless you went out of business you were not forced to shut down for an extended period.

When you peel back a layer and examine what makes up the S&P 500, you will see that it also has a heavy weighting to technology stocks. Just not as much as the Nasdaq. What you also see here is that those tech stocks are what is carrying the broad equity markets.

There is certainty in this sector. This does not mean that investors believe that retail establishments and elective medical facilities are all going bankrupt. There is just uncertainty about who will be able to survive and how quickly revenues and profits will return.

Some equity market investors despise uncertainty. It causes many to flee to the sidelines in search of US treasuries, cash, or gold. Some need to feel better psychologically before investing their money.

We consider our equity investments to have a 10-year+ time horizon. Clients in retirement depending on distributions are not pulling from their equities. They are pulling from their stable fixed income that appreciated in value over the past four months. Diversified portfolios should do well as this recovery navigates through muddy waters.

We believe in holding well-diversified portfolios across the major asset classes and throughout the world. We do not try to time the market. We re-balance mechanically and without emotion.

I cannot say when we will look at our lives and be able to define it as “certain”. That will be different for everyone. But there is no asset bubble. Things are not ok just because the S&P is flat. And I do not discount that there are sectors of our economy that are in extremely difficult spots. But I also believe that we will all pull through this difficult time.

Develop a filter that eliminates all this unnecessary noise that is so easily accessible. Stay grounded in rational thoughts, both in capital markets and in terms of public health. Find those dependable signals that keep your feet on the ground.

-Mark Hume-