“Bull markets begin in pessimism and end in euphoria.”
This statement from legendary investor, John Templeton, many decades ago has a ring of potential truism today. August has closed with its best performance since 2000 as upward momentum continued for most sectors. While the news flow for August may have been exhausting (two political conventions, the Kenosha shooting of Jacob Blake, California wildfires, Hurricane Laura, uncertain back-to-school planning, COVID-19, Congressional stimulus stalemate), stocks behaved like a frolicking horse foal. Frothiness and an absence of discipline and caution are now part of Wall Street’s atmosphere.
A major example was the amazing price increases in both Apple and Tesla shares after they announced stock splits. A reasonable person, let alone an investor, would conclude that if you gave someone five single dollar bills in exchange for one five-dollar bill, nothing has changed. Stock splits give folks more shares, but not an increase in value. However, that’s not what happened. Both Apple and Tesla surged pre-split on massive volume. People were rewarded for their illogical speculation. As a grizzled veteran of the markets, I can only account for this via the mantra of FOMO, or fear of missing out. Nobody wanted to be without these two stocks even though there was no value added from the splits themselves. A sign of euphoria? You bet.
Let’s be honest here. Isn’t it a bit difficult to believe that the S & P 500 could be higher in this year of Coronavirus? America has tens of millions out of work and added unemployment stimulus has ended for now. The airline industry will be able to begin their job slashing in a month. Wholesale industries, like restaurants, leisure/entertainment, and travel may never regain normalcy again. Consumer spending and confidence are both down. We’re all tired of dealing with COVID-19 every day. The Center for Disease Control projections are for more than 300,000 Americans to die from the pandemic before year-end. Why the optimism?
My opinion, as I’ve stated before, is that the hope for an effective vaccine being discovered in relatively short order has been the driving engine for stocks. The markets are telling us that everything will return to normal very quickly. The pent-up demand caused by lack of spending will lead to increased corporate earnings. We also need to mention that the Federal Reserve continues to be a co-conspirator in the narrative. Incredibly low interest rates appear to be here with us for quite some time and the checkbook will be undoubtedly open if and when Congress approves more stimulus. I have no idea who will win the tug of war – the hope and easy money of Wall Street or the difficult realities of Main Street.
I came across some interesting and timely research yesterday. While Standard and Poor’s tells us that September is historically the worst month for stock performance, I found some additional detail. Julian Emanuel, the chief equity strategist for BTIG, wrote yesterday that August’s strong performance could be telling us something about the upcoming Presidential election. He states that August’s numbers bode well for Donald Trump’s re-election. In the three months prior to November voting, positive S & P 500 returns have accompanied incumbent party Presidential victories 85.7% of the time. However, Emanuel writes, going back to 1928, when stocks rose 5% or more in August, and the June to August return was in the 25% range, stocks often struggled in September and October. When the S & P 500 is down from the end of August through the election, the incumbent party has lost the White House on all six occasions. It’s just food for thought… as I said above, I have no idea who will win the COVID-19 hope versus reality tug of war in the near term.
I’ve been cautiously optimistic about stocks for quite some time. We’ve suffered a severe downturn and are now back to pre-Coronavirus levels (and then some for NASDAQ). Investor patience and lack of panic has allowed volatility to decrease since May. Folks are feeling better about their portfolios. It’s incumbent upon me, though, to posit a voice of caution whenever I feel euphoria coming on. Perhaps the Apple and Tesla split mania was simply an anomaly. Perhaps it’s a harbinger of more to come. If that becomes the case, remember the sage words of John Templeton. Markets are often devoid of emotion. But in times of extreme pessimism, the counter reaction of buying stocks has proved fruitful. The reverse holds true for significant euphoria, and the dot-com bubble of 2000 provides that historical backdrop. I feel that the euphoria is nowhere near excessive yet, but it could get there.
As always, your team of RC, Christie, Ruth, and me are here to assist in any way we can. We’re constantly monitoring conditions to try to anticipate macro changes in the investment environment. We’re certainly living in an interesting time, that’s for sure. Please feel free to call or e-mail with questions or comments. We look forward to hearing from you soon. Stay safe and stay sane.
|The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.|
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