Ron Finke: The importance of underlying optimism
Last week I saw a couple of financial industry folks talk about how awful it is that the stock market indexes are rising while Americans are dying of CV19, George Floyd is senselessly killed by a Minneapolis policeman, and Antifa and others are trying to burn our cities to the ground. Indeed, how can these general conditions co-exist?
By the way, I have yet to read of, hear in conversation, or otherwise know anyone who thinks Derek Chauvin deserves anything more than a fair trial before he is convicted! I am certain there are twisted minds or hearts in the country that disagree, but what does the existence of an apparently evil police officer have to do with the fundamentals of national finance?
During one of the media discussions of this, Fox News told the truth: The stock market often rises in total disregard of terrible events or developments in our country or the world. Since this seemed insensitive, the network later apologized. Did some observers really believe Fox was promoting murder and mayhem as good for your financial health? CNBC apparently also had a similar discussion.
The two conditions are usually unrelated. Mr. Market is concerned most with the question of whether, in six to 12 months in the future, economic conditions will be better or worse. More specifically, an investor continuously makes a judgment about the probable progress of individual companies, industries and the economy, or the lack thereof.
If most investors really believed that riots will increase and unemployment in the U.S. will continue or rise through year end, the market would be plunging rather than rebounding. But that means absolutely nothing about the person’s heart and soul.
Consider the history leading up to World War II and its beginning. In spite of the war in Europe beginning in September 1939, our U.S. Dow Jones Industrials Index lost only about 2.9 percent that year. In 1940, as we began to arm our Allies to fight the Germans, uncertainty weighed heavily and the market fell further. Most of the investment losses had already occurred by the time Congress declared war on Japan on December 8, 1941.
The first months of our engagement in 1942 were disastrous. Germany and Italy continued to conquer Europe and North Africa while Japan was repelling U.S. and British forces in the Pacific. Nevertheless, the Dow Index began its upward trend in May 1942 and rose 25 percent by year end. Market movement is first and foremost about the direction things are pointed, always looking ahead by a number of months.
I think that is what is happening now. We had an instant recession. Only time will tell whether we have made wise pandemic policy decisions or not. But reasonable people are optimistic about having a positive direction by the fourth quarter and into 2021. And this should be rewarded no matter who becomes president next January. Caveat: This is no way means that we will not experience another significant drop or two, especially as the actual revenue and profit reports come in later July and August. I will be surprised if there is not more turbulence ahead.
One must have a basic attitude of optimism about one’s world environment in order to invest either through lending money, debt or fixed income, or owning a piece of a company, stock equity. Warren Buffett, the oracle of Omaha, will be 90 years old in August, but he is investing in the people and ideas he believes will make a positive difference during the next several decades.
That is what allows him to give billions to charities. Socialism never produces any extra resources with which to solve major problems of humanity.
(Market statistics from Worden Brothers, Inc., TC2000, 2020.)
Past performance is no guarantee of future results. Advice is intended to be general in nature.
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at email@example.com.