Saturday, June 27, 2020

In love with the shape of you (my economic recovery)

Lately, the stock market has been rather listless. Like dancing a slow waltz - two steps forward, one step back.

Image by Markus Winkler from Pixabay

Speculators hoping for some quick trade action must have been disappointed.

The wind of the bull rally a few weeks back has been taken out of the investors' sails.

The lack of direction feels as if we have entered the eerie eye of a storm. The unnerving lull before all hell breaks loose.

While most people are still worried about the virus and the economy, dissenting voices have started to pop up, arguing for the case that the worst is over.

Take Morgan Stanley. The investment firm proclaimed "greater confidence in a 'V-shaped recovery', citing positive economic data and policy action from health authorities, governments and central banks." [news]

Throwing his weight behind this idea is private equity juggernaut Blackstone Group CEO Stephen Schwarzman. He believes the economic reopening will spark a rapid rebound from the bottom set in the second quarter. [news]

Also joining the chorus are Stephen Innes, Chief Global Market Strategist at Axicorp [news], and former Goldman Sachs chief economist Jim O’Neill [news].

But clearly not everybody is as optimistic as these folks.

Certainly not the U.S. Federal Reserve ("Fed").

In its latest economic forecasts, the Fed projects a 6.5% contraction in U.S. GDP for 2020. [news] This is worse than the median 5.7% decline predicted by private economists, according to Bloomberg.

In other words, the Fed is warning investors not to bring out the champagne just yet.

Pundits expect Singapore to do no better. According to the latest poll by the Monetary Authority of Singapore, the local economy is forecasted to suffer a 5.8% contraction - huge contrast against the 0.6% growth projected in the March survey [news].

The Ministry of Trade and Industry had downgraded Singapore's 2020 GDP growth forecast to the range of -7% to -4%, from -4% to -1% earlier. [link] Should the 2Q20 QoQ GDP growth turns out negative, Singapore would have officially entered a technical recession.

Well, a terrible 2Q20 result is already priced in. It is water under the bridge. Experts are now looking ahead to the rest of the year for green shoots.

In its 3Q20 Quarterly Global Outlook, UOB sees "higher odds" of a V-shaped global recovery. [link] In fact, they see a "lower base case of a 45% chance of a U-shaped recovery, followed by a larger 30% chance of a V-shaped recovery and a similar 25% chance of a weak L-shaped recovery."

(I'm amazed how some economists can put a probability number to a guessing game.)

And the debate rages on.

On one end, we have the bulls who see the sunshine after the rain, and are willing to bet copious amounts of money in the stock market. On the other, we have the naysayers who think the collateral damage is done from the lockdown, and it will be quite a while before the economy gets its mojo back.

Who is right?

Are we going to have a V-shaped recovery? Or will it be a U-, W-, L- or geometrically complex shape of economic rebound?

The better question is: Who cares?

Unless you're a policy maker, or a central bank governor with a magic wand, chances are what you do will have very limited impact on how the economy heals. (You can buy that long-desired Rolex, or dine at your favourite Michelin star restaurant to keep the velocity of money going, but that's about it.)

My take is: don't bother with what the talking heads are spouting on financial media. Their job is to make educated guesses on the overall state of the economy, not on your personal portfolio.

Instead, focus on the one thing you can do, that will have a more lasting impact:

Select the stocks to invest in, WISELY.

Be sure the company which you agreed to be a co-owner of, has a strong balance sheet to survive any crisis, and a good record of earning profit and free cash flow year after year.

Market leadership, high barriers of entry, or a sizeable advantage over competitors are a definite plus.

And not forgetting an honest and capable management team at the helm, who do what they said, and say what they did.

In short, invest in the sort of businesses that will last through your children's generation.

As Warren Buffett quipped,

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

When your portfolio is made up of these stalwarts, I can guarantee you will have a good night's sleep, even as the economy limps forward.

You can then sing happily to the addictive tune of Ed Sheeran's song, regardless of the shape the economic recovery takes.