Quarterly Market Update
One of the key tenets behind the approach at Open Access is that investing is half as complicated, but twice as difficult as it seems. Successfully reaching your financial goals boils down to a few basic principles. However, sticking with these basic principles can, at times, be challenging. These views are based on Occam’s Razor – an approach that reminds us that if we have multiple methods, or strategies, or theories to choose from, the simplest one is usually best. This principle is remarkably effective in everything from finding your car keys to planning for your retirement.
Out with Warren Buffett, and in with the millennial day trader
Global stock markets today are exhibiting this ‘less is more’ philosophy. There’s no sense, it seems, in searching for undervalued companies with positive cash flows and strong competitive advantages—the brokerage accounts of your typical value investor are still underwater in 2020. Rather, in a year marked by oddities, those who simply put their savings into the S&P 500 companies that lost money in 2019 would be up handsomely year to date.
What is going on here?
In line with our last report to you, our investment team notes that many of the economic indicators we track are ‘less bad’” relative to their historic plunges earlier in the year. That said, there are scant signs of the robust economic expansion one would expect given the rally in equity markets.
Moreover, it is common for speculative stocks to outperform in the recovery phase (case in point, the ‘junk rally’ in 2009). The current divergence, however, between the economy and the markets, tech stocks and bank shares, and large companies and small companies, is exceptional.
It comes down to interest rates. They are today’s Occam’s Razor for investors.
At present, main interest rates around world are at zero, and in some cases, negative. While this is primarily intended to revive economic activity, it also creates a there-is-no-alternative market (TINA market). Specifically, with GIC’s and bonds yielding next to nothing, there is no alterative to stocks. And, in a world where money is essentially free, speculative shares benefit the most.
What does any of this mean for me?
At the start of the year, we had the view that a low-low-low environment would persist. That is, a backdrop of low inflation, low interest rates, and low economic growth. The pandemic, and the subsequent fallout, merely accentuated this outlook.
It is unlikely that interest rates will rise significantly from here. This should put a floor under assets – everything from stocks, bonds and house prices can remain high despite diverging fundamentals. With that in mind, we will put in the usual caveat that predicting the market in the short run is a mugs game.
The good news is that we do not have to. Your Open Access account performed well this quarter and remains resilient through an unpredictable year. By doing the simple things – diversifying your portfolio, regularly contributing, and discounting daily fluctuations – you are another step closer to achieving your financial goals.
If you have any questions about your Open Access statement, account holdings or portfolio positioning, please feel free to contact our client services team. In addition, check out the latest portfolio information under the “Log In” page of this website.