The dominance of a handful of the largest companies in the market, as measured by the S&P 500, is dramatic. Scott Minerd, Guggenheim Partners CIO, said last week, “I have never in my career seen anything as crazy as what’s going on right now. We are in ludicrous season.” Some might say these comments are a little over the top, but just look at one of the extreme situations that Scott is referencing.
The Coronavirus has grabbed the world’s attention in a major way. The outbreak in China hit a new plateau on Tuesday with the number of confirmed cases exceeding 20,000 with more than 420 deaths. For the time being the market impact has been controlled, in part, by massive capital infusions from the Central Bank of more than 240 billion over the last several days.
2019 was a party for stock investors. Most equity asset classes broke double digits with many exceeding 20% gains for the year. HCM equity portfolios fully participated in the fun. But, don’t let the calendar year spotlight fool you.
Of all the one-line investment mantras investors have followed over the years, none would have made you more money than the little ditty in the title. As I have described it to clients before, the Fed is essentially an organization with unlimited funds to influence markets and doesn’t care if they make money. Their expressed purpose is to strategically inject liquidity into the financial system with the hopes of facilitating economic growth. Another term to describe this activity is “Quantitative Easing” (QE). Since the Great Financial Crisis, there have been 3 “official” rounds of QE and a slight variation termed Operation Twist. Most would consider these programs a success, but not necessarily for their stated goals of accelerating economic growth. The stock market has been the biggest winner since the first round of QE was introduced in December 2008. During that same time, both GDP growth and inflation have held steady near 2%. This gap in growth rates has led many analysts to the conclusion that QE is the ultimate stock market steroid.
Some of you may be familiar with the work of M.C. Escher and his ability to make stairs do seemingly impossible things. One of his most popular pieces, Relativity, depicts three distinct staircases forming a triangle. However, this triangular formation runs into trouble towards the top of the work, as the staircase seems to bend the laws of gravity and forces the brain to do a little extra work in processing what exactly is going on. I would encourage you to take a look for yourself.
With economic growth slowing around the world, the air in the balloon may be starting to cool down a bit. Going back to last year, most everyone believed the air going into the balloon was red hot and that economic growth was going to keep rising. Fast forward 12 months and we are starting to see more signs that challenges to economic growth, and our steady supply of hot air, are growing.