A Tale of Two Markets - Mid Year 2020
The first half of the year has seen unprecedented upheaval, at least in my lifetime with the coronavirus pandemic and social unrest. As August approaches, we are trying to figure out what happens next: Do our daughters go back to college on their campuses? Do my basketball players get to play their fall sports and do they return to their high school classrooms? And do we at Kellett Schaffner invite our clients into the office for financial plan updates?
History tells us that, no matter the answers to these short-term questions, the economy and markets do recover. In fact, certain parts of the market have recovered and, by many metrics, appear to be wildly overvalued with the NASDAQ composite index now up for the year. However, on deeper review, it really is the tale of two markets with the technology centric part of the market rising seemingly every day while the rest of the market struggles to find its footing. For perspective, the information technology sector is up 36% on the year while energy is down 42% and financials are down 16%. Relatedly, while NASDAQ is up, small caps are still down 16% and the DJIA is down 11%.
We continue to believe the market will be choppy in the near-term with a resurgence in virus cases in many parts of the country causing significant changes to our way of life. Many restaurants are operating at 25% dine-in capacity, sports leagues are playing shortened schedules without fans, and air travel remains down 70% compared to a year ago**. With masks now the norm in many parts of the country as we try to “flatten the curve” until there is a vaccine and as we watch the November election take shape, we expect markets to continue to favor stocks that are less impacted by our need for social distance. How far those stocks can rise is anyone’s guess with many of the technology names trading at valuations not seen since the dot com bubble of 1999*.
The Shiller P/E ratio and the “Buffett Indicator” both continue to suggest the market is overvalued compared to historical norms. For perspective, the Buffet Indicator is at 151%, breaking the all-time high of 148% before the tech bubble burst in 2000. All of that said, while parts of the market appear over-valued and with significant uncertainty remaining in other sectors, I’m reminded of the old saying that it’s not about timing the market, it’s about time in the market. The market direction is almost impossible to predict, other than up over the long-term. And thus, we suggest some cash to invest over time while largely staying in the market to realize the gains from the growth of the US economy over time.
If you have any questions, please feel free to reach out to us. We are in the office full-time at 513-554-1472 to answer your calls or setup a Zoom video conference. And of course, you are welcome to email us at any time. Finally, Brian will send out a letter offering in-person meetings in August if you are comfortable visiting us. We will adhere to CDC/Ohio guidelines with masks, social distancing and frequent sanitization.
Brian Kellett, brian@kellettschaffner.com. Phone 513-312-6067
Jared Kline, jared@kellettschaffner.com. Phone 513-768-2238
Nick Gemmel, nick@kellettschaffner.com
