Recess is Over

June 15, 2020

The run-up in markets has been astounding, humbling in fact for many people who use things like economics, history or reason to evaluate markets.   The call made here to not buy yet seems like it was misplaced.

Well kids, recess is over, time to get back to classes.  CNBC and other media outlets are suggesting that millennials, sitting at home with nothing to do with their time or money are buying equities and driving up prices.   That’s good news if you wanted to sell out before things really get ugly.   That’s bad news if you don’t understand fundamentals.   The recess is over.

Last week volatility spiked again on Thursday with markets down about 5%.  Friday was a wild day, but markets ended up.  Still it looks like the realities of the risks ahead are starting to set in.   So far, early this morning, it appears that markets will continue their path downward as futures are down in excess of 1%.  These are big moves.


The path of markets is difficult to predict in the short term, even when uncertainty is contained; or put another way, when economic conditions are stable.

In the current environment, there is political uncertainty in the short term (riots) and medium term (election).  There is economic uncertainty (this list is too long, but it is unclear what production or consumption will be in the near or medium term).  There is also the human factor with COVID-19 still hammering many communities around the world.

Any one of those factors may cause a significant drop in economic conditions.  All of them together is a catastrophe for economies.  Modelling what this means for earnings, risk premiums and therefore prices is a fools game, but history suggests that prices should be substantially lower than they are.

The best bet for almost everyone is to stand aside.  There was a tragic story posted on Marketwatch yesterday, where a young investor/trader was reported to have lost $700,000 before he took his own life.    The general aspects of the story look genuine, and the lesson is one that has been mentioned here before.   The key ingredient is how you feel about losing money.

If you have worked hard for 30 years to save for retirement and then 20%, 30% or maybe 50% gets pulled away in a bad investing year, it can feel like a lot of wasted effort.   Unless you really, really know what you are doing and/or have lots and lots of time to recoup your losses, consider taking money off the table.

There is no rational, fundamental or economic justification for the current prices of many equities.   While some like Amazon or Netflix may be justified in their valuation, there is a Tesla and a Hertz that don’t make sense in the current environment or maybe ever.   Further, those nonsensical valuations can persist long enough for investors to consider that ALL investments can or should use the ‘new paradigm’, thus deepening the pain if things return to more normal valuations.

There is a good chance that the political, economic and social realities of the COVID crash will return, if not in the near term, then before the end of the year, and history suggests that those realities will see slower growth, higher debts, higher taxes and therefore lower prices.    History also suggests that markets decline quickly and rise slowly.  There will be time to get back in.  (A prior post offered up some history . . . significant economic slowdowns usually require about two years (20-30 months) for the markets to hit bottom.  We are in month four of this crisis and it is far broader than the last crisis.)

Be cautious.   It appears that school may be back in session.




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