Are these Markets crazy?
It may seem so to many people, but no, Financial Markets are not crazy. The recent V-shaped recovery in the US stock market has surprised many since that is not a great reflection of the broader economy. The S&P 500 set another record high as well as the Nasdaq while the Dow Jones Industrial Average still has ways to go. The S&P 500 is now at the level it was back in February when there was no economic impact from Covid-19. Unemployment is sky high and many businesses have gone bankrupt with more to follow. There are countless companies that are just riding out their cash reserves, government support or loans. I think that the first quarter of 2021 could see very high numbers of bankruptcies and foreclosures. So, with all that, how can the markets be setting records?
The answer is that this is a different kind of recovery, lead by companies that are mostly disconnected from the underlying economy and in many cases benefit from this pandemic. As predicted back in March, Technology is leading the way since Covid-19 has sped up digitization and forced many companies into “cutting out the fat”. In a normal recovery, Banks and Industrials will lead, this time around it is companies like Apple, Microsoft, Amazon, Facebook and so on. Because of the size of these companies, the impact on the indexes is much greater as that from many other companies that are not doing well at all. Markets are not crazy; they just do not reflect the overall state of the economy very well which is not that unusual. So, what does that mean for investors?
If you have money invested, it is important to be clear about your goals and intentions. Just because markets are where they are does not mean that they must fall of the cliff. If other sectors will recover and the big tech companies at least hold on to their valuations, markets could go much higher. An Equity laden portfolio has been taken advantage of that and would continue to do so. However, there are many things that could unravel this uptrend very quickly and if you are in the retirement risk zone, meaning that you are within 5-10 years of retirement or already retired, that approach carries too much risk and a more conservative asset allocation seems more appropriate. No matter what you read, see, or hear from people who claim to know and have been predicting previous down turns or upswings correctly; the truth is that no one knows where markets are headed next. While we can’t exactly predict or influence markets, we can control how we interact with them. My job is to search for strategies that have a higher chance of succeeding than failing and include additional opportunities to lower overall risk and protect assets.
