T2 Asset Management

Sep 2020 Market Commentary

How is this possible? This is a question we have been asked often in the last few months. How is it that an economy with a loss of 20 MILLION jobs in just a few months combined with locked up global economies, has a stock market at all-time highs? Let’s not forget, you can’t even travel to Europe if you wanted to. Cruise in the Caribbean? Ha! We’ve lost 20 MILLION jobs in hospitality, leisure, travel, restaurants, bars. You name it, if it was a service industry, it was decimated.

To continue the theme about the economy, for the quarter, annualized GDP growth was down 31.7%, which was better than the -32.5% that was expected. Retail sales were up 1.2%, which was less than the 1.9% expected. Finally, non-farm payrolls increased by 1.37 million jobs, slightly worse than expectations. That may seem like a lot of jobs, but we have still only recovered half of the 20 million jobs that were lost due to COVID-19. The economy is a disaster at the moment, so what is going on with stocks?

Below we see a chart of the S&P 500 Index for the last 12 years showing the entire bull market. As you can see, the first 8 years were fairly steady, as the economy was solid even though we were helped by low interest rates. The last 3 years have been characterized by a megaphone top formation as the volatility has increased tremendously. This all comes down to the Fed and other central banks. In fact, the two big rallies in early 2019 and then early 2020 were directly a result of the Federal Reserve announcing big changes in policy towards low interest rates and money printing forever.

 

 

 

 

The effect of this money printing and low interest rates is like a shot of adrenaline into a heart attack patient. This may keep them alive, but it is hardly a sign of good health. It is basically a contest between a struggling global economy and a super printing central bank. In the end, the economy will win, but the timing of that is uncertain. We could go on for quite a while as the markets try to price in a Cinderella ending.

We’ve been talking about extended valuations in the markets and advised taking some money off the table during these rallies. This time is no different, the markets are giving you a gift to allow de-risking portfolios at these levels. Once again, don’t go running and screaming from the market, but do incrementally add a more cautious stance.