Insight post

Dec. 8, 2020

The Growing Disconnect Between the Markets and Economy

Marc’s Market Insights – December 2020

Investors breathed a sigh of relief as states slowly concerned the results of the Presidential election, allowing for the transition of power to begin in earnest. For now, we seem to have narrowly avoided the nightmare scenarios involving nationwide protests, violence and drawn-out uncertainty over the results of the election.

 

In fact, it seems investors are largely cheering the outcome as it appears highly unlikely that President-elect Joe Biden will pursue overly regulatory, expensive and progressive social programs given the loss of key Democratic seats in the House and what is shaping up to be a paper-thin margin of victory for Democrats in the Senate. 

 

Federal Reserve Chair Janet Yellen earned the nod for Treasury secretary and she appears to be a more acceptable choice, according to the markets, than Elizabeth Warren, whose vision for large-scale structural change would have very likely spooked Wall Street. With Yellen, Biden is leaning on a well-known and experienced public servant who is supported by most Democrats, respected by many Republicans, and largely palatable to Wall Street.

 

But while it looks as if the transition of power in the White House will continue uninterrupted, Americans across the country are still suffering through the COVID-19 pandemic – which will likely only worsen as the holiday season approaches. Coronavirus cases are once again on the rise and U.S. hospitalizations have reached new highs every day for the past two weeks. It appears that many Americans have grown weary of restrictions and warnings from health workers and public officials are falling on increasingly deaf ears. One new forecasting model is predicting that trouble for the economy on the road ahead.

 

The past few weeks have been buoyed by news of progress in several vaccine trials, which is certainly a positive development for the country and for markets. But while the scientific breakthroughs for Pfizer, Moderna, AstraZeneca and others in the vaccine race are welcome beacons of hope, the truth is that it will likely be months before an effective vaccine is available for widespread distribution to everyone in the U.S. And with all the virus headwinds we are currently facing, the promise of a vaccine could even lead to more lax and unsafe behavior from the public.

 

Despite these real complications and worries, many investors have been driving the market higher by looking ahead to a future where an effective vaccine is widely available, the COVID-19 pandemic is kept in check and the economy is on the mend.

 

The reality is that Americans across the country are dealing with a drastic surge in coronavirus infections, a stalled economic recovery and dwindling savings coupled with a dried-up stream of government fiscal aid. Perhaps most reflective of the growing disconnect between the markets and the economy is Tuesday’s sharp rally, which pushed the Dow Jones Industrial Average to a new all-time high, surpassing the 30,000 level, while 12.6 million people are still unemployed.

 

As the gap between the artificially high markets and a downtrodden economy continues to grow, many signs point to an impending sell-off. Investors would be wise to prepare accordingly to protect their portfolios.

 

At Swan, we believe our hedged equity approach, the Defined Risk Strategy, is well-positioned to protect investors’ assets should the markets sell off again. By staying always invested in low-cost ETFs, the DRS is designed to seek consistent long-term rolling returns while also limiting risk during major market downturns by remaining always hedged using long-term put options. This way, investors won’t have to “miss out” on any gains in the equities markets but can still protect their irreplaceable capital during unexpected market events.

About the Author

Marc Odo, CFA, FRM, CAIA, CIPM, CFP®, Client Portfolio Manager, is responsible for helping clients and prospects gain a detailed understanding of Swan’s Defined Risk Strategy, including how it fits into an overall investment strategy. Formerly, Marc was the Director of Research at Zephyr Associates for 11 years.

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