If you read the headlines, then you’ll find ample experts who are willing to take either side of the argument about what happens next. One says we will never see the recent stock market highs in our lifetimes (Jeff Gundlach). Another states that the economic boom and stock rally in 2021 is going to be colossal (Jeremy Siegel, Dr. Ed Yardeni).
The central bank in Washington, in the form of the Federal Reserve, and in other developed G7 economies like Britain and Japan are pulling out all of the stops in order to provide liquidity and support for years to come. Then again, if you followed a recent news conference from the UK’s Chancellor Rishi Sunak, the country is going to start removing support for furloughed workers as soon as this summer.
Main street versus Wall street. Central banks versus economic depression. Virus versus our way of life.
Rather than weigh into this heated debate – that involves whether we get a ‘second wave’ of the coronavirus or whether we simply revert to our old ways and get the economy fired up again – I don’t fancy trying to pick a side.
Instead I want to propose something deeper: we’re actually dangerously unaware of our inability, at a moment like this, to admit we don’t know what happens next.
There’s nothing wrong with not knowing the answer.
I don’t know whether the economy is going to collapse this summer, or whether like an old gas-operated generator we will simply keep yanking on the cord until it starts motoring again.
Yet I have to admit I think Warren Buffett was right earlier in the month when he implored card-carrying capitalists not to bet against America.
We may not be at the stock market bottom yet, but when people start signalling that the death of corporate America is nigh, you’ve got to think that maybe the counter-intuitive signal here is it is time to put some money to work in risk assets.
The fact that we have robots trading stocks and shares (aka algorithmic trading), sorting containers for us and even sifting through medical data to come to basic conclusions that we can take forward should re-assure you that we are, in some areas of society, moving forwards.
Problematically though this massive wash of data and information we have gives us the false sense that we actually know what tomorrow will bring.
If you don’t believe in the inherent uncertainty of the market, then think of this: who saw Coronavirus as a risk back in September 2019? Or even more profound, who thought that the price of a barrel of oil would go negative in April 2020?
Uncertainty is all around us and it always has been. At the same time there were a lot of specific and clear indications back in January 2020 that the stock market had reached unsustainable highs, as we tipped on 19th January 2020.
In order to succeed at investing from here you are going to have to ‘embrace the dissonance’ and accept the fundamental fact that you do not fully know what the future holds.
Invest in What You Do Know
I know that in Canada there are three brilliant and well capitalised stocks that are worth investing in. I also know that a balanced portfolio of passive index trackers is hard to beat. In particular the American S&P 500 index – over 95% of investors fail to beat this index over a period of 12-15 years. Therefore the vast majority of investors should simply buy the index today.
For those with a penchant for taking on more risk, well, make sure you buy the best and most well-capitalised businesses with a lot of cash. After all there are a lot of small and medium businesses that are going to suffer from bankruptcy over the coming quarter. The reality is that a lot of them will end up being snapped up by larger companies with the available cash on the balance sheet to weather this storm.
Try to avoid self-managing your entire stock portfolio. Take it from somebody with over 10 years’ experience in this area: it is hard work consistently beating the stock indexes.
Businesses in Europe, and in particular the UK, are undervalued by most conventional measures. As we wrote about at the end of March the risk/reward profile is very good here. Since that article was published the FTSE All Share has returned 6.4%, within the span of a month.
Avoid Making Rash Decisions
Finally make sure you keep your chin up and continue to believe in risk assets and the economic system. It’s entirely possible that we continue to see volatility, bankruptcy, and economic distress over the coming months and years. That being said people who fight in the opposite direction and stuff their money under the mattress or try to plug it all into Bitcoin or trading platforms are actually taking on more risk than they realise.
The financial system itself and the banking system is substantially better capitalised than it was in 2007-2009. Have a look at this chart to see the proportion of bank credit against bank reserves:
Hint: lower is good. It means that banks have much higher reserves against the credit that they are lending out.
Speaking of possibility to the downside (which the news is emphasising) – it is quite possible that all of the stabilisers that central banks have put on actually have the intended effect and ‘juice the economy’ back to life. Which means, whether we have another big dip in the stock market or not, there are much brighter days ahead of us.