Modern Monetary Theory

In the last few research reports, I have been discussing and alluding to the need for liquidity, and a non stop supply of money to keep the economy functioning. It seems to me that the entire world is moving toward embracing modern monetary theory and as time passes I think this economic theory could become mainstream.

The link below exhibits a good outline of what modern monetary theory is:

https://www.barrons.com/video/what-is-modern-monetary-theory/A1156A5A-E72D-4425-B63E-4DAE32E053BF.html

Economic Information

As time has passed, we’ve been getting more and more information on how the economy is performing since the virus has spread across the world.  There is no question that the global economy has contracted significantly during this time period.

However, the absolute collapse of the markets has been buoyed by the world’s Central Bankers. Almost every asset and form of liquidity has been backstopped by the Fed and its global counterparts.  These moves to shore up the functioning of the Capital Markets has had an incredible impact on the confidence of the markets.

This confidence has been inspired by the Fed’s seeming unwillingness to allow almost any asset class to depreciate in price. They’ve backstopped overnight money markets, municipal bonds, corporate bonds, international trade markets, to name a few of those asset classes. We’ve even had a former Fed Chair suggest they should buy stocks.

Add all that up and it seems pretty evident why asset prices across the globe have appreciated so much from the market’s bottom in late March.

It is likely that the elections will come into focus now, so we might see more downside volatility as election approaches.  Nevertheless we feel the Central Bankers around the world will continue to support the markets, regardless of who is President.

Job Market Update

A few more data points

Today, we got our second read on the job market while in the midst of the pandemic.  Last week, 3.3 million people filed for unemployment benefits. This week that number ballooned to 6.6 million.

Interestingly enough, as I type this, the market is up over 400 points.

We will see how this plays out over time, but usually, when faced with uncertainty, the market prices in a worst case scenario.  And, frankly, that worst case scenario might be the worst case plus a little extra.

Given that we just saw 6.6 million people lose their jobs and the market is up (at least for now), does give some credence to the fact that the market overreacted and priced in even more economic damage than losing 10 million jobs in 2 weeks.

Time will tell, but we are watching very closely.

Super Tuesday

Per my last communication to all clients, I mentioned that the rise of Bernie Sanders was hurting stocks.  As he gained in the polls, stocks (healthcare stocks in particular) were getting hit.  His socialistic ideology, specifically his idea to nationalize the healthcare system, was scaring the markets.

Last night, which was Super Tuesday, Joe Biden gained an incredible amount of momentum.  And it appears, he is the leader for the Democratic nomination for President.

With this, the market is rallying big time to the upside.  And, as you would expect, healthcare stocks are very strong with Bernie losing some steam.

Market Update

Given that this Coronavirus scare seems to be turning into a bit of a panic, I wanted to take the time to reach out to everyone and give them our thoughts on the market.

Obviously, there has been a big and rapid decline in equity prices. In our opinion, this decline has been built on the back of three things:
1) Coronavirus fears
2) The rise of Bernie Sanders
3) And a market that is coming off an amazing year of upside performance

Let’s address each of these items in reverse order.

Last year, the market had an incredible run to the upside. The price change on the S&P 500 last year was 28.88%. Given this combined with the fact it is a Presidential election year, it makes sense for the markets to demonstrate a fair degree of volatility. I would make the argument that, regardless of Coronavirus fears, any market coming off a big upside move with the uncertainty of a Presidential election looming in the distance would face challenges in repeating that great performance the following year.

Building off of that, this year’s Presidential election seems to be adding a new wrinkle of intrigue. Bernie Sanders, a socialist, is making some waves in regards to gaining the Democratic nomination for President of the United States. Of course, his socialist beliefs are seemingly not in line with America’s tradition of free market capitalism. He wants student loans forgiven, health care for all, and isn’t afraid to raise taxes on businesses and individuals to help pay for some of those costs. With this, it is not surprising to see the market selling off as a socialist, who seems to be anti-capitalism, is gaining in popularity with the American voters.

And, finally, we have an incredible amount of fear taking hold of the market regarding the Coronavirus. Frankly, it doesn’t appear that the Coronavirus is the deadliest of all the major healthcare crisis’ we’ve seen in the recent past. According to the Kaiser Health News, the mortality rate of people who’ve contracted the Coronavirus is 2.3%. The mortality rate for SARS was 9.6% and for MERS it was 35%.

Given this, it doesn’t seem like the market is worried about a global pandemic that will kill hundreds of millions. However, the fear seems to be more focused on the economic side. It appears that investors are concerned that a recession might arise from this virus. If the virus leads to massive long-term factory closings and supply chains get disrupted, then the global economy could face a bottleneck in production and distribution and that could cause a recession. And since it has been such a long time (12 years) since our last recession, market participants might be pricing one in because they feel we are “overdue” for one.

All in all, these factors seem to be a wild confluence of events that just happen to be making the perfect storm of fear and worry for the markets. Although these fears weren’t predicted by almost anyone in the world, clients at MRP Capital Investments appear to be in solid shape across the board. Make no mistake a market that falls 10% in less than a week will result in virtually all portfolios facing some downside pressure.

Nevertheless, we had been net sellers into the year end and beginning of the year rallies in the stock market. The result of those actions were to see, in a seemingly across the board manner, no over-exposure to equity investments among clients. Not that many clients were under-weight stocks at the time of the unexpected Coronavirus fears overwhelming the market, but almost every client was neutrally weighted to equities relative to their custom tailored investment policy statements. This keeps our risk-controls in place in regards to asset allocation. Furthermore, we are over-weight the more defensive sectors of the market (healthcare and staples being the two big standouts). Again, it is our hope that these tactics shield our clients from some of the market volatility, while providing us ample firepower to buy stocks at these cheaper prices when things settle down.

And that is our plan: to monitor the economic data and the markets and begin buying when things appear to be settling down. If we do happen to see this market turn from drastic downside moves to big upside moves, there is, generally, a big intra-day reversal which triggers that change in investor outlook. For example, we might see the Dow Jones Industrial Average begin the day down 1,000 points. Only to see that 1,000 point loss reversed a few hours after the market begins trading and the index ends the day up sharply. That’s the kind of reversal I’m referring to.

In the meantime, we will be doing what we can on a daily basis. With that in mind, we think client awareness is vitally important. So, we’ve attached two reports to this email. The first is a Q4 2018 newsletter. In that newsletter, we wrote an article entitled “Ugh; Another one!” In that article we discuss the 2018 4th quarter sell off and how we felt that if we gave the market enough time, we would see a pretty substantial rebound in equity prices. And we highlighted a number of other market sell offs that we’ve managed money through and survived the downturn and ended up thriving in the coming recovery. We feel this selloff should be quite similar to those past sell offs. Hence, including that article along with this communication.

Lastly, we have included our firm’s latest full blown research report entitled, “Liquidity.” Granted it was written about a week before this full blown Coronavirus panic overtook the markets. But that means the report was focused on the fundamentals of the economy, not the fear created by the virus. What that report shows is a market that needed a pullback to remain in sync with the economic fundamentals that provide the underpinnings of the market. Given that was our mindset before this pullback began, we are actually relieved that we are deflating market prices a bit. Short-term it is painful, but long-term it may be vital for the continuation of this Bull Market.

As always, we will remain diligent in our efforts to stay abreast of the market and economic fundamentals and the positioning of our portfolios.

Strong Year in the Markets

Strong Year in the Markets—12/23/2019

As the year is coming to a close, the market has been very strong.  As I type this, the price change on the S&P 500 is a positive 28.5% for 2019.  All this has occurred with political turmoil swirling within the United States, a trade war raging between China and the U.S., and geo-political uncertainty popping up all over the world.

The question that many may ask is, why?  Why has the market rallied so hard to the upside with all these uncertainties in the air?

I think the answer to that question is; earnings.

At the end of 2016, S&P 500 earnings’ were $94.55.  Projected 2019 S&P 500 earnings are $140.55.  Running the numbers and those data points shows a 48.5% cumulative growth rate in earnings over that time frame.

There is no question; that will make the market move!

 

Divergence in Fundamentals and Market Performance

The market has been very strong this month with the price change on the S&P 500 being up 6.34% month to date. Performance numbers like this should represent a growing economy and booming earnings. However, the latest employment report has a drastic disappointment and earnings growth is slowing. Additionally, all the talking heads on tv are discussing when the Fed will cut rates. And, as we know, the Fed cuts rates to help stimulate a stalling economy.

So what gives? We have a roaring stock market and a potentially slowing economy.

This is something to watch for sure.