COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed "put". Daily cases up vs 7D ago, but still too early to conclude this is a new wave
Click HERE to access the FSInsight COVID-19 Daily Chartbook.
STRATEGY: 4 reasons stocks still can go up ALOT. Millennials + global labor shortage as important as Fed + fiscal policy
We have done a number of calls this week and two things seem to come up in each discussion. These are fairly intuitive, but clearly on top of investor minds:
- First, whether markets have seen their highs for the year, given the upcoming headwinds of 2020 election uncertainty and heightened risk of second COVID-19 wave from the flu season.
- Second, where is the best risk/reward trade between now and year-end
Foremost, I think it is perfectly reasonable for any investor to be extremely skeptical about equities in 2020. After all, we are in the midst of the worst Depression in 5 lifetimes, exceeding the Great Depression. The world is dealing with the worst pandemic in 100 years, or at least 50 years (since 1967). And the policy steps take to battle this tragedy have long term consequences. And add in widening divisiveness in the US between Baby Boomers and Millennials, arguably even wider chasm than the growing divide between Conservatives and Liberals, and one sees why the "future is very very uncertain and scary."
But I learned a long time ago that the stock market doesn't care about my opinion and rather, my time is better spent trying to understand the message from the market. And we think the underlying message is one that remains constructive. That is, we think there are many factors that explain the extreme resilience of stocks in 2020. We have written about these cornerstones in many of our recent commentaries, so I will not repeat all of them, but 4 factors really stand out to us:
#1: Don't fight the Fed
Massive support from Fed and fiscal policy. Even as a sole factor, this explains a lot. Don't fight the Fed.
- Yesterday's Fed decision and forward-looking views underscore this -- rates low for long
But this is not a sufficient explanation. After all, look at the amount of money created by ECB and BOJ in the past 10 years and have very little to show for it. The market is not completely fooled by this "sleight of hand."
#2: "Stress test of 5 lifetimes" and equity now more valuable in capital structure
US corporates survived the most extreme stress test of any of our lifetimes, and their prospering during this time means equity risk premia is going to fall. Moreover, within the capital structure, equity is proving to be more valuable in a time of stress than previously exhibited.