9 Critical Market Facts Explained/Confounding Myths Dispelled

A growing narrative today is that the financial markets are not correctly priced for the dour “realities” of a real economy that is crippled by the ongoing pandemic. Indeed, on the heels of an historic risk-asset rally from March’s peak panic, it appears on the surface that nothing is truly cheap anymore, leaving many investors wondering “what are my alternatives?” Our response to that? “Exactly.”

We need an alternative(s) plan to generate returns for the rest of 2020 and into 2021. We’re convinced that durably robust total returns can be achieved by establishing a barbell-styled portfolio, through positioning tactically in pockets of mid-quality income-producing assets, by holding some equity risk, by allocating to alternative asset class supplements, and by holding generous levels of cash, along with an anti-fiat currency, like gold. Our plan rests on both understanding the critical facts that are influencing where cash-flow driven asset markets are heading, as well as comprehending how today’s market myths can lead investors astray and how to avoid those missteps.

Myth: The disconnect between stock market strength and economic uncertainty is a conundrum.

A tremendous amount of ink has been spilled discussing the supposed quandary of the equity market’s robust recovery, while at the same time economic improvement has been more uneven and uncertain. At the heart of this misunderstanding is an apples-to-oranges comparison: the fact is that the stock market and the economy, while connected, are two distinct entities. Indeed, they can even move in opposite directions.

As a case in point, the correlation between domestic corporate profits and GDP growth collapsed in the 1990s and has hovered near zero for the past three decades. Further, in today’s environment, the industries that have been most adversely affected by the pandemic lockdowns (hotels, restaurants, leisure, airlines) hold an outsized impact on labor markets, but a relatively minimal influence over financial markets. And at the same time, those firms that hold the greatest weights in major market indices also tend to employ relatively fewer people than did the top firms several decades ago.

None of that is to ignore the genuine economic pain being felt by many small businesses, which are truly struggling through this period with massive revenue and employment losses, but those firms are not the same as those in the major equity indices. Finally, many commentators dramatically underestimate the impact of monetary and fiscal support.