S&P Finishes Slightly Down After Disappointing Jobs Report, But Finishes Week In The Green

Key Takeaways

– S&P 500 closed at 4,391.34 which was up from 4,357.04 last week.

– We understand there are a lot of headline risks, but we also see a pretty amazing setup for the market to climb a Wall Of Worry.

– The VIX has not gone into backwardation in recent volatility. We see this as demonstrating high-skew and see downside moves mitigated by the high level of protection that exists due to increasing bearishness.

– We expect a few negative earnings announcements focusing on margin compression, but it is unprecedented for expectations from early in the year to not be beaten.
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The extraordinary events of the period since COVID-19 led to changes we couldn’t have imagined only years ago. Market commentary is laden with pessimism. We don’t think this is a surprise or accidental. We have faced the highest mass casualty event in US History and a bungled response has left the public trust woefully lacking.

Domestic strife and the rise of demonization of those who don’t agree with you as a new media business model make the reasons for anxiety and apprehension about the future very real. There has been no time when exogenous events caused such a radical shift in daily life since the Second World War.

So, let’s look back at this conflict and how and why it ended to give ourselves some perspective on what we currently face, and to potentially imply some insights about what is potentially in store for us in the wake of this extraordinary dislocation.

Will previous trends accelerate? Some probably will. However, profound trends you used to be able to set your watch to, like urbanization, have been wholly reversed, resulting in a very different economy than the one that preceded February and March of 2020.

Let’s take ourselves back to the Summer of 1945. It is hard to put ourselves in the shoes of the people alive at the time. The sacrifices made by the Greatest Generation to vanquish European Fascism and a brutal, truculent, and militaristic Japanese regime is unlike anything that has happened since. Hundreds of thousands of young Americans were killed in combat with a capable and fanatical foe.

The recent bloody Battles of Iwo Jima and Okinawa had shocked the American public who had a much higher tolerance for violence than we do today. The use of a horrifying weapon, the Kamikaze (which means divine wind), resulted in very high casualties and sobered the American military brass to the task ahead of them. On June 9^th, fears of the brass were confirmed when the Japanese Premier announced that his nation would rather fight to the bitter end than ever accept an American surrender. At the time, there was very little reason to suspect anything but what would have likely been the bloodiest and most terrible battle in human history.

Operation Downfall, the US Military’s plan for an invasion of the Japanese homeland was grim to say the least. The best thinkers in the US military projected millions of American casualties. Japanese casualties were projected to be multiples higher as a radical regime trained everyone down to primary school children on how to resist the anticipated American invasion. However, for the few in the world who understood recent strides in physics, an alternative and many would say a better future than what most imagined was possible.

Sometimes pieces of evidence can speak volumes. Would you believe it if we told you that soldiers who were most recently wounded in Afghanistan or Iraq likely would have received a Purple Heart that was initially printed by the US military for casualties in the proposed invasion of Japan? The Purple Hearts printed for that ghastly reality have lasted us through every American war since. So, sometimes when pessimism is contagious it can also be wrongly hyperbolic.

The outcome was perhaps more optimistic than many reasonable people would have ever imagined in terms casualties. This doesn’t negate the terrible tragedy that occurred that day and the innocent lives lost, but it does add some context to why folks at the time were more than open to the option of using an experimental weapon. So what technologies that are making great strides today will redefine our future into something potentially better than we are even capable of currently imagining?

Well, there has been a lot of strides in healthcare. We may now forget that many doomsayers said a COVID-19 vaccine would be impossible to achieve in a short time frame. History suggested this. The vaccines for the flu and chicken pox took 28 years to develop.

The Pfizer and Moderna vaccines took less than a year to develop. Technology has repeatedly given us a brighter future than we imagined possible since the advent of the industrial revolution and we strongly suspect the gifts that technology and innovation provide us with tomorrow will be greater than anything in the past. A third great wave of medical advancement will likely alter human life forever for the better.

There was doomsaying this morning. The weak job numbers have led to speculation that the Fed will err now, leading to a huge sell-off. Will they still taper after seeing weakness? Or maybe, you may have thought financial apocalypse was coming on October 18^th because of a looming US default. Of course, some suspect growth is cooling and then others, always ready to profess doom, call what we are in the biggest bubble of all time. Merck’s new therapeutic and vaccine approval for children, according to Dr. Scott Gottlieb, make the end of this pandemic imaginable.

You can certainly make a legitimate case that there are many risks that could de-rail the market. We tend to seek evidence that confirms what we already think and to disregard evidence that contradicts it. Without discipline confirmation bias can always cloud your judgement.

Therefore, we can all be wrongly hypnotized by pessimistic outlooks and doomsaying when we have ample personal evidence to support that pessimism. Of course. this market will crash, look at how bad COVID-19 was bungled. A legitimate thought in some ways, but also a misleading one in our

estimation. Remember that there’s not only negative black swans, but also positive ones too. The market has capacity to surprise an overly negative consensus. We like Epicenter AND FAANG. Strong markets stay strong.