Who’s Next

If you’re like me, perhaps you’ve spent more time on social media during quarantine than you did before. Perhaps you’ve seen the various challenges floating around Facebook, asking people to post ten impactful books, or the one I did, ten impactful albums. I started off with the ones that changed what I was listening to for some period of time: U2’s Under A Blood Red Sky for example, or Miles Davis’ masterpiece Kind of Blue. Eventually though, I couldn’t think of any more albums that changed the arc of my listening experience, so I just defaulted to some of my favorite ones—no surprises for the over 40 set: a Stones album, a Beatles album and a Who album. Who’s Next, to be specific. Who’s Next was a late add to the list for me but it definitely belonged, even by the first metric of being impactful. It had plenty of traditional The Who bombast, but it also went in a totally new direction with Baba O’Riley and Won’t Get Fooled Again. Who’s Next was both high water mark and a crossroads for The Who.

So, about this market. Who is next? Will this recent powerful rally prove to have been a high water mark? Are we at a crossroads? It sure feels that way, but then again, feelings are usually a contrary indicator.

There has been considerable ink spilled (at least of the digital kind) in recent weeks about the market’s incredible rally in the face of such gut-wrenching economic data. With the unemployment rate at 14.7 percent in April and now 21 million people out of work, the market’s rise has been bewildering to some and is even beginning to draw the ire of moralists. How can the market go up while people’s lives have been upended or ruined? It is even becoming a bit of a political issue.

As unseemly or impolite as the recent market performance might have been, there are indeed powerful real world reasons why performance has been robust.

One, the federal government has helped. Stimulus and backstops totaling the truly mind-boggling number of $6 trillion have, at least for now, convinced markets that the worst is behind it.

Two, time is on our side. While there is a clear danger that the virus resurges with the economy reopening, we do now have therapeutics and additional resources that we simply did not have back in February. While young people are NOT immune, attack rates seem heavily skewed toward the elderly and the sick and the mortality rate seems surprisingly low outside of metropolitan areas for reasons that are not completely understood.

Three, the real rally has been in tech, the sector best positioned to withstand or even thrive amid the downturn, political headwinds of this week notwithstanding.

Lastly, volatility continues to fall, which usually coincides with a rising market. Volatility, as measured by the VIX index, has already fallen all the way from about 90 in the dark days of mid March to below 30. The good news is that the VIX “lives” in a normal market in the ten neighborhood or even below. Now, will the VIX get all the way back there amid the new normal? Perhaps not, but historically, the VIX is still quite elevated at the moment and I believe it is bullish that it is.

So, do we “sell in May and go away” like the old investing maxim suggests? By most measures, the markets are not inexpensive, certainly based on forward earnings. Well, investors who took chips off the table in May have largely underperformed so far. Corporate earnings expectations, while dismal at the moment, are perhaps improving vs. our worst fears. Perhaps the best course of action is to stay the course. It usually is, after all. It doesn’t matter Who’s Next.

We Won’t Get Fooled Again.

Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC.