Opportunities Amid Chaos
What we are dealing with has no precedence in modern times. An invisible, mindless tyrant has brought the global economy to its knees. The toll on humanity is truly unconscionable. The physical, mental, and economic health of people worldwide continues to be impacted and will likely continue for many months to follow. Even so, we as fiduciaries must put our best advice out there to help investors navigate this situation. Here are some considerations we think are pertinent for most investors:
“Real knowledge is to know the extent of one’s ignorance.”
First, be skeptical of smart people with bold opinions. Early on in this pandemic, you were likely subjected to more dramatic guesses than coherently calculated data. It would be like estimating the damages of an incoming hurricane still deep at sea - without a radar. Indeed, times like these seem to highlight those of us bereft of humility. It was quite sickening to see so many market “experts” throwing around their mindless predictions and advertisements. It was, and still is, mostly just delusional theatrics; for-profit opportunism disguised as advice. Okay, now I feel better.
Second, be at peace with the unknown. Initially, the stock market was like a lost puppy, sprinting wildly and swiftly in either direction. This was due to the fact that nobody, yes absolutely no non-deity could grasp how bad things would get. (We still don’t fully.) Since the markets are continuously seeking to stay ahead of future outcomes, it normally causes an overshoot, essentially a severe underestimation of equity values. This is normal. Unless you’re a speculator with impeccable foresight, fight your ego and don’t gamble in an attempt to pinpoint the bottom. The brightest minds would all wholly disagree on this, so there’s no need for us to worry. We recommend staying healthy, present, and make sure you are allocated precisely to your personal situation.
Third, seek opportunities. Naturally, as time passes, reliable data increases and thus the range of potential outcomes begins to narrow. We’ve seen that mortality and infection rates are better understood, and for now are slightly better than median expectations. Further, the CARES Act coupled with jaw dropping monetary stimulus, has helped reassure investors that the federal government will do whatever it takes to stabilize the financial markets. So far, equities have responded well to the stimulus and volatility - although still high - has eased significantly. With some clarity, here are a few areas of potential interest for us:
Credit - The Fed’s decision to back the faltering credit markets compels us to favor it. We think the spreads between corporate bonds and treasuries will continue to shrink as fixed income investors relax knowing the U.S. government has them backstopped. Essentially we think a slightly pro-risk stance is appropriate right now.
Medical Devices - We think COVID-19 could give this whole sub-sector a boost due to more intense government involvement in the future.
Value Stocks - Value stocks typically outshine during times of economic recovery.
Global Technology - Strong cash flows, resilient revenues, and low debt are quite compelling right now.
Obviously we still have a very long way to go. Stay involved with your portfolio, but relax and stay focused without attaching to wild opinions. Stay safe, be well, and as always, reach out if we can help. - JL