Monthly Market Blueprint: The analyst doth protest too much, methinks

Mon 07 Dec 2020

November featured plenty of good news for markets: The US election returned multilateralism to the Oval Office, Covid-19 vaccination is set to begin before the year’s end and S&P 500 companies have surpassed earnings expectations. In the background, central banks have vigorously reaffirmed their commitment to keep markets lubricated and the mounting debt cheap.  It should be no surprise then that US stocks, the global equity benchmark, delivered their third best month since 1991 (up 10.8%), 1.3 years’ worth of equity returns within about 20 working days. We have just entered December, traditionally also a good month for equity markets.

Our commitment to asset allocation and long-term investment allows us to see beyond contemporary and transitional risks, like the pandemic or the hyper-partisan US politics and focus on the question that is really important: are current prices reasonably supported?

If the answer is “yes, by fundamentals”, all is good in the world. Companies are making money and investors are paying a fair price for the privilege of participating in future profits.  If the answer is “yes, by institutions”, all is still good, and probably less volatile, but it compels us to keep an eye on said institutions. This has consistently been the case for the past few years and the reason why we haven’t been meaningfully underweight risk during that period. If the answer is “yes, because of everyone is buying”, it’s traditionally a reason to be extra cautious. But we don’t have much evidence to support the contention that the current rally is a sentiment-driven bubble.

Strategically, the world is in a much better place than it was last March.  Yet, there are still reasons to worry. A dearth of catalysts ahead, the closing of hedge fund and prop desk books until January, Brexit negotiation stalemate at the very last moment, pressure on high street businesses as a lot of Europe is still in lockdown and US viral loads picking up are all legitimate reasons for concern. In China, many State-Owned Enterprises are looking at a mountain of debt payments in the next quarter, even as authorities are carefully rolling back emergency-era measures. And while all of the world’s political attention is on the State of Georgia’s Senate runoff, which will determine the length of the leash for the Biden administration, people are perhaps less mindful of the real risk that EU-stalwart Germany might change tack after the April CDU internal election. And so, it goes.

That is the perversion of our profession as investment experts: we are literally paid to worry about the next thing. The more mindful we are of our agency responsibilities with clients, the more empathetic to their worries, the more we may fail to appreciate current context. We are conditioned to look at the next bend in the road, paying less attention to the scenery.

Investors with discretionary portfolios are naturally worried, because they take risks without any control over the outcome. Add the fact that fear of loss is about three times stronger than the happiness of gains (according to Nobel-Prize winning research), and worry becomes perpetual. The point of having experienced investment teams is to recognize that negative catalysts will always exist, and that their job is to separate tactical noise from strategic threats.

There is always the next thing and the thing after that and they may always cause some volatility, which we may be able to exploit tactically by overweighting or underweighting assets during our quarterly investment committee. However, over the longer term, as we approach the end of the Covid-19 tunnel, we see that the takeaway from this crisis is that financial Capitalism is very agile and very resilient (albeit with the helping hand of the state and central banks –which are still very much a part of the system), even more so when the threat is exogenous rather than endogenous.

To trust that asset allocation is a means for a happy retirement and the tangible attainment of financially-related goals, is to believe that financial market capitalism will continue to adapt, evolve and deliver over the longer term which is exactly the place where pensions, homes and the other long-term objectives of financial planning lie. – George Lagarias, Chief Economist