T2 Asset Management

Oct 2020 Market Commentary

So, what’s next from here? This is a question that comes up more and more as the stock market and the economy are more at odds than at any time we can remember. The simplest indicator of the relationship between the economy and the stock market is the so called “P/E Ratio.” This is a simple ratio that has the price of the stock market on the top and the earnings of the stock market on the bottom. Normally, this should stay in a certain range to keep things from getting out of hand. The average since they have been tracking this number has been 15.85. Today’s reading? 34.96! It is more than double the average and in fact it has only been higher two other times, during the dot-com boom and during the financial crisis of 2008. These periods were hardly great examples of stock market action.

For the month, the economic data could best be described as catastrophic but improving. The most recent Gross Domestic Product (GDP) read for the second quarter had the economy down 31.4%. This was the worst quarter in history. Payrolls continue to improve with an addition of 661,000 jobs for the month but were short of the 850,000 expected. We are still down about 8 million jobs from the peak, but we are making our way back. Finally, retail sales were up 1.9% for the month compared to estimates of 0.7% There is no question that the recession caused by the global pandemic was severe, but it is now looking like things are improving and could be normalized sooner than expected.

While the post shutdown bounce has driven us to all-time highs, what’s next for the markets? It’s really hard to say, other than eventually the markets and the economy will pair back up. This is unlike anything anyone has seen. Global central banks are pumping trillions of dollars to support stock markets, and as we see below, we are near the highs. That said, we have been moving back and forth in a range for the last few months. All we can say is that the economic fundamentals do not support where the stock market is trading at this moment. This can happen when lots of money is pumped into the game. Just play monopoly or poker and see what happens when players are unduly rewarded with lots of cash. Bad decisions don’t always matter when there is plenty of money in your hands.

We continue to believe that investors should be moving some of their portfolios to a defensive position until there is better clarity about the future or some uptick in economic conditions. The markets don’t often give you this many opportunities to adjust.