We’re now into the last week of the first half of 2020 – and what a six months it has been! The news for capital markets has been mixed, as markets have tumbled frighteningly and then rebounded smartly. If one were to naively look at market levels at the start of the year and at the end of June, one might think that very little happened – that it was a pedestrian, non-descript half year. In stark contrast, no one would say anything of the sort regarding the broad economy. Unemployment was at generational lows at the start of the year yet stands at generational highs presently. The same goes for economic output and GDP growth. What gives?
In previous posts, I’ve noted that there are certain things that are, by definition, unknown and… in a very real sense… unknowable. Pundits, however, are all over the map in their presumptuousness and certitude about what is known. Since my day job involves acting as a fiduciary for a select number of Canadian families, I want to stress that I do not hold out as having any unique insights about current conditions, but that I do have some serious concerns. The future is unknowable. The present, however, looks awfully risky to me.
What I continue to find fascinating is the way identical facts can be given radically different narrative spins. The stock market (or, more properly…. ‘stock markets’) is/are indeed very different animals from the broader economy. My concern remains that a disproportionate number of commentators point this out as justification for markets going ever-higher over the last three months or so. In short, these pundits suggest that the market is “right” and that the economy is “wrong”.
I find that narrative telling. After all, the same facts could just as easily lead to the opposite conclusion. What if the market is “wrong” and it is “right” to be deeply concerned about the overall economy? No reasonable person would dispute that there is currently a massive disconnect between the two. Valuations for stock markets are pretty much universally in the top decile (meaning they have been cheaper less than 10% of the time based on historical metrics). Meanwhile, the overall economy is unequivocally in the bottom decile based on historical standards and – depending on who you believe and how current your data is – possibly even in the worst 1% (!) ever. There are many credible people who believe the economy has not been this bad since the depths of the great depression in the 1930s.
As I have said before, the facts are not in dispute. What is in dispute is the interpretation of those facts. Speaking personally, I find the combination of extremely high valuations coupled with an economy that is on its knees and will almost certainly remain there until the end of the year at the very least to be extremely disconcerting. There is no prediction here, per se. However, I cannot help but fear that this will end very badly (and likely sooner rather than later). For my part, I will continue to play defense with my clients’ hard-earned money. Given the moves that have already been made, they should be about as well off if things “normalize” at this point. Conversely, if things do indeed get a lot worse, my clients should be in a safe harbour during a vicious storm. I’m just amazed that so few people recognize the dark clouds that have been looming for some time already.