…If it’s not Well, then it’s not the End! I’ve seen this quote, or something like it, on greeting cards and miscellaneous memes. I did a Google search and it seems that John Lennon, of all people, is attributed a version of this quote! I have thought this way about the capital markets since the recent lows on March 23 and a decent rally since then. The question of the day: when will we know we are Well AND at the End?
I wrote a blog post last year back on December 16 titled, 20/20 Foresight? (https://www.dattilioash.com/our-blog/2019/12/16/2020-foresight). In it, I recounted the difficulty thought leaders have with forecasting capital markets. Though I’m not going to hold them to it, Wells Fargo forecast a decent 7% return for the S&P 500 in 2020; we shall see! It goes without saying that no one saw this coronavirus pandemic coming and could have predicted the market turmoil, never mind the winners and losers.
It is clear to me that we are currently subject to significant “headline” risk, i.e., the risk that either good or bad news will be released and impact the markets accordingly. Market returns, thus, are “scenario dependent” and there is no way to hedge this risk – the best we can do is stay broadly diversified, including a cash allocation in your diversified portfolio.
Though the market has recovered quite a bit from its recent lows, the S&P 500 is still down -12% year-to-date. So, we are certainly not Well; we could re-test the lows or go higher from here (i.e., the “W”-shaped recovery versus the “V”-shaped recovery, the latter).
It doesn’t seem like the End, either. Many areas of the capital markets still suffer from significant dislocations; high yield bonds come to mind (see chart below).
High yield bonds (“junk bonds”) are now trading off their recent high spread of 1,000 basis points, down to “only” 785 basis points; we started the year at about 350 basis points (wide spreads are bad, narrow spreads are good!) So, one measure of the End for me is to see high yield bonds start performing better; we should be hopeful that there is enough already-enacted and available fiscal and monetary policy to help us get there.
Also, it goes without saying that as long as Covid-19 is with us and uncontrolled, we will be in some state of turmoil some distance from the End.
When asked what the market will do, though it is interesting to go through all the story lines, I still repeat the famous words uttered from my favorite CIO: “Beats Me!”