September 17, 2020

The last few months have given us more than enough to think about in terms of the economy, health issues, politics, and culture. We daresay that the deluge will continue in the coming months. With the re-opening of schools, flu season, the national election, and the prospect of a vaccine, we’ll have a lot to consider as we plan for 2021.

MARKETS ARE RESILIENT… 

As we know, March 23rd 2020, marked the recent low in the S&P 500 with that index closing the day at 2237. From late February, the index lost more than 35% of its value, and fears were that we were heading for a protracted market meltdown. Relatively quick actions by both the monetary and fiscal authorities, however, helped to stop the slide. Concerns about a bond market catastrophe and credit freeze were addressed as the Fed became a buyer of debt, and as credit markets thawed, equities responded. It took the S&P 500 only 103 trading days to recover its lost value following the March 23rd low. On August 18, 2020 the S&P closed at just under 3390, a new high. More recently, the market was showing a roughly 60% recovery from the March low. Meanwhile, the economy is in recession.  

… PERHAPS MORE RESILIENT THAN MANY INDIVIDUAL INVESTORS UNDERSTAND.

The most frequent question we’re asked these days is “how can the market be hitting record highs when the economy is so bad?” The short answer is that the market (and the stocks within it) is customarily priced based on expectations for the future, not what is happening now, or what happened last week. In fact, contrary to most people’s intuition, historically markets begin to rally long before a recession ends. One could say that based on current levels, the market is predicting a swift recovery for the economy and corporate profits. As usual, however, there’s a bit more to the story.

We think that global bank interventions, combined with aggressive fiscal policies have provided a safety net that the markets desired, and then some. We could parse out pieces of these programs, and debate the long-term effects of this level of government intervention in markets, but throughout the Summer… it is evident that investor’s spirits were buoyed. With interest rates at historic lows, equities have been the default choice for many investors. The rub, is that the remarkable performance of many of the equity indices, was driven by few sectors… and a small number of large companies. Particularly companies in the technology sector, which includes, technology-driven businesses. In fact, to show the relative performance of technology, note that the technology sector, that only a year or so ago represented less than 20% of the S&P 500, now represents about 28% of the index.

So… here we are in September, with the market up on a year-to-date basis despite what can only be described as one of the biggest economic challenges to hit us in our lifetimes. As we look forward, we’re mindful of the challenges we face in truly and finally overcoming the societal and economic effects of the current situation.

BUT, THE CHALLENGES ARE BY NO MEANS BEHIND US. 

In speaking with people over the last several weeks, discussions have often centered around our thoughts on the events that will need to take place for the economy to begin true and sustainable recovery. We’re of the view that perhaps more than any other time of the year, the coming months will be crucial to the process. To be sure, much is dependent on our ability to avoid yet another spike in new COVID cases. To the extent that anything creates another wave, we remain at risk, so we’re not advocating reckless actions.

That said, we would argue that the re-opening of schools may be the number-one hurdle to the eventual full reopening of the economy. Like virtually all companies, we at Atlas are dealing with the issue as many of our associates are parents of small children, and some are spouses of school teachers. For individual families, the task of managing family and work is daunting, to say the least. If working parents are faced with children not being able to attend school full-time, or staying home even half-time, it could mean work time lost. On a collective basis, this represents an enormous challenge for productivity and the economy.

Furthermore, the Fall represents the beginning of an important period for the business. Not only do retailers benefit during the holiday season, but it is an important time for restaurants, the travel industry, and media. Disruptions to business in the Fall can be devastating, as it is difficult or impossible to make up for losses at other times of the year. For example, to the extent that there is a risk of no collegiate or professional sports in the traditionally busy fall season, all of these industries would suffer unrecoverable losses.

On top of this, we’re approaching a national election. While we will refrain from making predictions (typically a bad strategy in any election year), we will point out that this election is perhaps the most contentious we have seen in many years. Regardless of the outcome, we can expect heightened conflict in Washington and throughout the country. The ability of the elected President and the political parties to deal effectively with the unrest that will follow will be important to the path and recovery of the economy in our view.

OFTENTIMES, WITH HARDSHIP COMES OPPORTUNITY…

While these are certainly interesting and challenging times from a cultural and political point of view, from an investment perspective, they may provide opportunities to the insightful investor. As has been mentioned in previous letters and emails to Atlas clients, we think that the coming years will show that active investing has a significant ability to out-perform the passive approach. While the experience with COVID has been devastating, we believe that it has served to accelerate certain secular trends that were already occurring in the economy, and those trends will continue to develop in the recovery.

…FOR THOSE THAT CAN MAINTAIN FOCUS AND FIND THEM.

As we look into 2021, we are optimistic. In the markets, we may see heightened overall volatility. Despite this, we think that there will be a clear distinction between sectors that progress and those that are left behind. Within those sectors, certain industries and companies will show leadership, while others languish. While the overall economy may face challenges, insightful positioning and security selection will be key to investment success. We’re working hard to position portfolios appropriately for the markets ahead, and are optimistic about the future despite the risks. As in every market and the economic cycle that has preceded this, we expect a full and healthy recovery.

IF YOU CAN KEEP YOUR HEAD.

Rudyard Kipling began the famous poem If with the words “If you can keep your head when all about you are losing theirs.” There may be no truer phrase that can be applied to investing. This recent market event may be the clearest example of the notion that maintaining one’s risk-based asset allocation through market cycles is the most prudent approach to long term investing that any of us will ever see. We stress that despite the volatility that may come in the future, this principle should be kept at the forefront of investors’ minds, and applied consistently.

Of course, if you have any questions or concerns, please feel free to contact your Atlas Wealth Management Advisor. They will be happy to discuss your specific situation with you.

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