Foremost, the liquidity provided by the fed has been a catalyst for higher prices. They have essentially backstopped a whole asset class to make sure the debt markets run smoothly which is vital to stabilizing the market. But I don’t believe the market is as strong as the headlines make it seem. The S&P is being driven by a handful of names. However, if you look at the RSP (equal weight index) vs. the S&P (market cap weighted index) there is wide variance. The S&P is down 8.68% while the RSP is down 16.50%. Many stocks are 25%-50% off their highs. Unfortunately, the stock market doesn’t capture the real damage that’s being done to small businesses not in the index.
I do believe that Covid-19 has marked a significant turning point for society. In my mind, it’s become a ‘proof of concept’ that the world can live its life digitally, at scale. The world has suddenly, instantly, almost seamlessly moved life online. Grocery shopping, working from home, education, medical support, entertainment, e-commerce, etc. have all simultaneously become part of our collective digital experience. And I don’t think we are going back. The shift to online has been accelerated and is just beginning. We’ve crossed the Rubicon.
Fortunately, we were positioned for this shift. It was something I believed would happen over time. But now the timeframe has been compressed. Many of our investments provide the tools needed to enable the shift. Paper money is going away, decentralized working will become mainstream, how we consume entertainment has changed, how we communicate with colleagues is altered, how companies automate and streamline their workflows and billing have changed and on and on. Companies like ServiceNow, SalesForce, NVidia, Netflix, Bill.Com, and Shopify, PayPal, Square are all poised to benefit from this shift, which is still nascent. I’m hoping our investments are a tableau of how the world is changing, and that they will benefit for years to come.
As to the short-term vol, it’s tough to say where the markets are headed. I think the stimulus, plus trillions in cash raised by investors will put a bid under the market. After all, giving the government money for ten years and getting back 60 basis points is not very exciting. In fact, its real return is negative. As an asset class bonds could be more dangerous than equities. There is a binary set of possibilities that are both bad. Either rates stay where they are or go lower, in which case investors lose money via monetary debasement or rates rise and you lose money on your principal.
Here’s an interesting way to think about it; According to Horizon Kinetics, a 10-year treasury now has a 0.68% yield. If the yield rose to just 3% the price drops over 20%! A 30-year treasury at a 3% yield losses 35%. No Bueno!
Equities as an asset class will play an ever more important role in allocations from both retail and institutional investors. More importantly, in my opinion, companies that enable the transition the world is undergoing will do well despite the economic turmoil.
I’m sure there will be more volatility and big down days, but over time, stocks will move higher.
Regards,
Andre McClure
KDM Capital