The title “2020” could become a blockbuster Hollywood movie someday. Unfortunately, it will be a suspense thriller, perhaps even a horror flick depending on how the next few months play out.
Piling on the global pandemic crisis, there’s now massive locust swarms buffeting Africa. It is the worst infestation in decades and billions of these insects are devouring crop fields and pastures. It is becoming the next humanitarian food crisis.
Then, overlay marauding wild monkeys in Thailand attacking humans and seizing control of businesses for good measure. The unwelcome primates have moved in and are wreaking havoc on a Thailand community.
Wikipedia says Macaques are normally forest-dwelling mid-sized monkeys with cheek pouches for holding food (no personal jokes).
The Thai species is a crab-eating Macaque that has developed a palate for human food. Numbering nine-thousand strong, they are commandeering food trucks, invading stores, opening packaged food and drink (all unpurchased of course) and demanding treats from store owners and shoppers. And they will bite when dissatisfied.
They also enjoy tearing off antennas and windshield wipers from vehicles, among much other mischief. Many businesses have been forced to close.
I can’t wait to see what’s up next for 2020. Oh no, it is now hurricane season, ugh.
This note is intended to serve as our mid-year 2020 investment outlook. So, what is our outlook? In a word, concerned.
If 2020 was a sci-fi movie, by now Tom Hanks and Morgan Freeman would have collaborated as world-class epidemiologists to create a breakthrough vaccine. Roll the credits.
Instead, our reality is that irresponsible Millennials and assorted kooks have undermined the effective social distancing work done this spring and now there is a nationwide second viral wave threatening the early shoots of economic recovery.
In March, the only positive forecast we could muster was that the summer months could help contain the virus (wrong) and that good testing / contact tracing systems could be in place to curb community spread (wrong).
As a Fed Reserve board member stated: “The best economic tool to pull out of this economic crisis is following health-care protocols”.
Warren Buffet, the famous investor, is a reassuring voice these days. One of his many sage quotes is very relevant: “Investing is 90% temperament, 10% intellect. In investing, it is not the person with the highest IQ who wins, it is the person with the greatest emotional discipline. I have success not because I’m smart, but because I’m rational”.
We’ve been working to follow Buffet’s advice by practicing good discipline and rationality managing investment portfolios during these trying times. It would be much easier to chase investment headlines and follow herd trading trends, but we know in our gut this will lead to even more disappointing outcomes.
Based on our research, here are our guesses for the rest of 2020:
• The US economy will not return to “normal” until the second half of 2021 at best. The vaccine trials are encouraging but testing kits and PPE shortages have demonstrated that herd immunity via vaccinations administered to hundreds of million people will not be easy. Set investment expectations accordingly.
• The FOMO (“Fear of Missing Out”) tech stock trade is now driving a handful of tech stocks to double-bubble valuations and distorting investors’ perspective. For example, as of mid-July, the SP500 Index had returned a positive 2%; not shabby given the crisis, right?
Not so fast. Per Goldman Sachs, five mega-tech stocks in the index - Microsoft, Apple, Amazon, Facebook and Google - rose 35% YTD while the other 495 stocks collectively lost about 5%, to get a melded 2% YTD index return. Smaller sized and value stocks have performed even worse.
At these dangerously high tech sector valuations, we’ll take a pass.
• US value stocks will likely continue to underperform growth stocks for now, but a regime change is coming. Once the economic outlook improves, however, value stocks are ripe for a sustained run of outperformance. It happened during the entire decade of the 2000s following the tech crash of 2000, so ignore a future investment style regime change at your own financial peril.
• Stock prices will vacillate over the next several months linked to headlines - good and bad - about economic data, corporate earnings, government stimulus, monetary policy moves and virus / vaccine news. Stay invested and focus on 2022.
• Investment grade bonds are now are as scary as a virus, locusts and monkeys combined. US interest rates are near zero percent and real yields are negative. There’s talk of allowing nominal yields to fall below zero percent, just like in Europe and Japan. Bonds have been on a forty-year bull run that is ending and there’s nothing but future financial pain in store for bond investors. Invest accordingly.
• Sustained zero interest rate policy will mean more zombie companies who can’t pay their bills yet don’t disappear and even larger tech monopolies who crowd out startup competitors.
• In their misguided pursuit to end bad economic cycles, the Fed is now printing money and directly purchasing corporate stocks and bonds. It also considering “yield curve control”, which means wresting control of interest rates from private bond investors. These moves distort investment markets and will make investment risk measurement much harder.
• Large government spending, bailouts and deficits will continue indefinitely. The government and the Fed are picking winners and losers in various important industries and further fogging price discovery for investors.
• As the money supply and fiscal deficit spending expands, meaningful inflation is a likely outcome. Investor concerns about future inflation explain the recent sharp rise in gold and silver prices. When we discover a risk-effective way to invest in precious metals, we’ll share it with you.
• The US dollar has been weakening since March and is expected to slide more due to massive budget deficits and money printing. If sustained, it too will be inflationary and portend positive things for emerging markets, infrastructure, real estate, financials and energy.
After typing this dreary outlook, I need a drink. Until next time, stay well…Tim