This Month’s Newsletter

Random Musings in Our Random New World Join our Monthly Newsletter July 2020

Carl W. Hafele, CFA, CPA

Co-CIO, Principal

Whew! What a first half of 2020. The stock market plummeted nearly 35% early on, the Fed commenced buying bonds and we are all “masked up” from COVID. Rather unpredictable and some unprecedented events.

I decided to look at our thoughts and writings in our newsletters in the first six months, all available on our website at http://www.lanieram.com/newsletter. In summary, it’s like looking back in prior times of crisis and the result is a simple “shake of the head.”

In January, I questioned if the 2020’s would be roaring or boring, and suggested we will probably be in between due to a supportive Fed, okay valuations and a secular bull being tested by social programs’ growth. Sure wasn’t boring!
In February, my partner Trip reviewed the prior four decades regarding earnings, inflation, PE’s and stock returns. The conclusion was diversification – the numbers 1, 2 and 3 rules of investing – is not dead.
In March, my partner Mark shouted out that all should call their mortgage broker and take advantage of the rates available in the COVID crisis. I also wrote two pieces in the midst of the meltdown. One was regarding perspectives on crises, concluding your long term asset allocation targets are so important and should be driven by your risk tolerance, and don’t sell now! Another crisis period piece discussed S&P earnings and multiples – important to know in a super crazy period of investing.
In April, I also discussed the history of bear markets. Currently, the 2020 bear thus far looks like a painful “big” bear, but not a 2000 and 2008 “polar” bear or The Great Depression.
In May, Trip discussed the dual rescues of the Fed and our government and the resulting stock market rebound. The Fed has spent trillions of dollars supporting the financial system and the government has given us the CARES Act and PPP. Both are designated to keep us out of another Great Depression. As a long-time student and professor of economic history, I concur with most of the 2020 moves.
In June, Mark clearly emphasized that the stock market upward trajectory versus corporate earnings downward trajectory is unsustainable. The market is effectively saying the worst of COVID is behind us, the economy is reopening quickly toward pre-COVID levels, unemployment will plummet and profitability restoration is just around the corner. His conclusion – this doesn’t feel normal.

So where are we now? The bullish case above includes the intervention of the Fed and it potentially buying / supporting all assets – including equities! Is this the end to free market capitalism or just a temporary intervention? Perhaps until a COVID vaccine is available to all and then test if the markets can stabilize without intervention? The only truth we know is this is a brand new territory.

The bear case has many more elements. Profitability will be reduced for years including some industries like retail, hotels and travel fearing an existential threat. Some say it will be 2023 before we return to 2019 profit levels. Current price/earnings levels are high but not yet to levels seen at the 2000 peak. Social unrest is an additional huge economic drag on top of COVID. As the economy slowed, tax revenues have plummeted and expenditures have skyrocketed, making the deficit for fiscal 2020 undoubtedly our largest ever. And, oh, an election is just months away – one must choose now between capitalism and (near) socialism. Sad.

Nothing in history resembles this period in time. Deep recessions were common every five years when manufacturing and agriculture dominated the economy. Enter unemployment insurance, two-income families and a collapse of jobs in cyclical industries and farming. This reduced the length and depth of recessions – voilà! But now, over 85% of wage earners are in the service sector. COVID has killed confidence for spenders (particularly the richest ones), which is limiting the economic recovery compared to the most recent recessions. Thus, government gifts to most to boost consumption, which is 70% of our economy.

Our conclusion? There has never been a better time to have a diversified portfolio. This includes exposure to the traditional asset classes of stocks and bonds accompanied with diversifying strategies of real estate and hedge funds.

Carl W. Hafele, CFA, CPA, is Co-Chief Investment Officer and Principal at Lanier Asset Management. He is also an instructor in Finance and Economics for the MBA program at Bellarmine University.