Blue Bell PWM

INSIGHT

Markets Rising

Scott Miller, Jr.

Managing Partner

June 5, 2020

Why are Markets Rising When Headlines Appear Ominous?  

It was not long ago that many investors were asking how can stocks recover when everything I hear concerning COVID-19 is so dismal? Many are asking the same question regarding the looting and destruction of property occurring in cities across the country.

Why are markets going up when readily available information appears to be getting worse and uncertainly is intensifying?

The principal reason as to why stocks are reacting positively to more bad news remains the same, the Federal Reserve. Marty Zweig is credited with conceiving the term “Don’t fight the FED” in his book “Winning on Wall Street” published in 1970. “Don’t fight the FED” means as much today if not more than it did when Mr. Zweig made his recommendation over 50 years ago. Current unrest will not force the FED to change its current strategy and if anything may expand it. In other words, the Federal reserve will continue to print money. Cities or states may need a bailout to deal with the fallout and the Federal Reserve appears ready and willing to do anything necessary to avoid disaster which may mean more money printing. Most experts believe that the Federal Reserve has implemented the correct action. Those who have criticized the FED have done so out of concern over stagflation or inflation. It appears as if the market is shrugging off those risks over the shorter term for many reasons; one of which is the fact that the United States remains the safe haven of the currency world. Inflation may become a problem later down the road.

Markets are forward-looking and stocks are valued based on future earnings stretching out over many years. Looting may be detrimental to earnings in the short term, but the long-term viability of large companies remains largely intact.

The looting is affecting large companies as we continue to see Best Buy, Target and others looted every day, but small businesses are also being looted. Large companies have working capital or access to it along with a substantial workforce that can navigate and recover faster than small businesses. Like COVID-19, big business can get up and running again quickly when appropriate and their small business competition is either gone for good or far behind. This doesn’t make main street feel good, but it could make big business more valuable both short and long-term as competition diminishes or simply cannot compete.

Right or wrong, concerns over COVID-19 continue to diminish while optimism surrounding the reopening of the economy is rising and may be offsetting any negative implications from looting. There is increased optimism surrounding treatments including Remdesivir and other antibody therapies as well as a belief that a vaccine is possible and may come to market faster than expected. People appear anxious to get back to normal and there doesn’t currently appear to be a strong correlation between states that have opened and increased infection rates.

We all see the masses on TV, but we must separate the protestors from the looters. The looters are a miniscule percent of the overall protestors and are the problem. The protesters are seeking change, but not structural change to the United States economy rather they are seeking access to opportunities. Opportunity is what expands economies and no structural changes with increased opportunity may prove to be a good thing.

Finally, some pundits will say that markets are getting it wrong. Experts agree that equity markets are exceptionally efficient long-term as investors respond rationally to available information. However, over the shorter-term market inefficiencies exist due to information asymmetries, transaction costs, market psychology, human emotion, among other reasons and are they and may have a difficult time reflecting an assets fair value. Were the markets correct at the lows in March or are they correct today? There are numerous reasons why markets can “get it wrong” over the shorter term.

Market valuation is never about a singular event or data point; a multitude of factors determine markets values in the short-term. Markets misinterpret data often. If price discovery were perfect, there would be no need for a stock market. As a price discovery mechanism over the long-term markets work and price discovery is very accurate. Is the value of equity markets today overvalued or undervalued based on daily events? Only time will tell for sure, but this is exactly why we preach that investors must maintain a long-term view.

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Markets Rising

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Why are Markets Rising When Headlines Appear Ominous?   It was not long ago that many investors were asking how can stocks recover when everything…
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