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Week of August 31, 2020 Thumbnail

Week of August 31, 2020

Greetings!

We hope this finds you safe and well.  The stock market hit new highs last week, and we're running out of adjectives to describe its incredible run.  

  • The downdraft in February and March was the steepest decline into bear market territory on record
  • The recovery from bear to bull was the second-fastest on record
  • Fed-supplied liquidity has pushed the market to new highs almost daily.

Linked below please find an interesting perspective piece on the extraordinary round trip the stock market has enjoyed. 

While investors are broadly relieved that the market has recovered and asset values across the board are rising, we see many signs which give us pause.  As we have pointed out on multiple occasions recently, equity prices have decoupled from fundamentals (corporate earnings), especially with respect to mega cap technology companies.  The problem is that fundamentals are what provide intrinsic support for stock prices when the inevitable shocks occur; the greater the difference between liquidity-driven prices and underlying fundamentals, the more fragile the equity rally becomes and the more susceptible it is to a painful pullback.

The Fed has supplied extraordinary amounts of liquidity to the financial system, and asset prices of all types have been lifted: stocks, bonds and commodities, too.  Although euphoria certainly feels nice on the way up, it is currently overpowering the normal "wall of worry" which is - over time - a healthy offset.  The price discovery mechanism in the marketplace (which relies on an overarching balance between optimism and technical valuations, greed and fear) is breaking down at present.  Gold, credit, duration and equity are all getting bid up by investors, which begs the question, "If everything is trending higher right now, what investments will hold up well in the next inevitable downturn?"  Playing defense when the time comes will be challenging.

And so, we urge a sense of sobriety.  We’re not yet ready to bet against the Fed, but we see the valuations of large cap technology stocks getting stretched.  We are paying close attention, and feel comfortable that the stocks we hold in other sectors have not become unmoored from their underlying fundamentals.

Thank you, as always, for the confidence you have place in us.  Please feel free to contact us to schedule an appointment to review your portfolio or to update your financial plan.

Very best,

 

FMA ADVISORY, INC.

 

Perspective on the Second Fastest Bea...

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