Wednesday, January 6, was a flashbulb memory day, one of those days when you remember exactly where you were when you saw something that you could hardly believe, something that you did not want to believe, but something that you knew to be true. For me, that memory will be of sitting at my desk receiving a text from my wife telling me to turn on the television. What we all witnessed, a large group of flag-bearing angry people storming the U.S. Capitol, was sickening. When I spotted a North Carolina state flag among the banners, I had to walk out of the room.
My first ancestors to arrive in what eventually became North Carolina were Palatines, refugees from the long and bloody conflict between Protestants and Catholics. They first fled from what is now part of Germany to England, where Queen Anne, taking pity on them (but stopping short of offering asylum), set them on ships to the colonies. Some Palatines landed near what is today the city of New Bern. Several difficult years later, at the Battle of Core Creek, Native Americans slaughtered every single member of my ancestral family except for one, a seven-year-old boy. This boy was taken in by one of the survivors. Over time, his new family flourished. The colony flourished. The state flourished. The nation flourished. Not in a straight line, and not without terrible conflicts. But this country and the principles on which it was founded constitute the most powerful engine of liberty, justice, education, and prosperity that the world has ever known.
Seeing my state flag, let alone our national flag, abused in such a way was a stark reminder to me of the responsibilities that we all have to each other. The preservation of liberty requires a commitment to good faith, and commitment to each other, especially in dark times. I am confident this country will pull through. It always has.
Many observers of the terrible scene at the Capitol this week also watched in disbelief as the financial markets soared. They soared again yesterday. How could this be? How can markets rise when men in animal pelts and antlers occupy the chambers of Congress?
As I learned firsthand a few years ago as I helped produce a documentary about a hedge fund titan who sought to bring down a multi-billion-dollar company using no small amount of righteous indignation and moral posturing, the markets are completely amoral. They’re not necessarily immoral, but they are definitely amoral. One doesn’t take a moral argument to Wall Street.
Instead, one takes it, theoretically, to Congress. That’s what these poor misguided souls were attempting to do. Of course, they lacked permits for protesting and at least some of them have said they were there to start a revolution, ostensibly by stopping the certification of the ballots from the presidential race. Unfortunately for them, they appear to have received extremely bad advice and now face legal jeopardy.
This does not mean the feelings these people and others may have of being disenfranchised are not real. In this country, the reality is that economic prosperity is not particularly widely distributed, with the lion’s share of gains going to the top. Look no further than the S&P 500. The tech sector, which has powered the growth of the index for years, represents 37 percent of the index’s value. It employs 2 percent of the American work force. Do you think that stokes a teensy bit of resentment about Big Tech? Furthermore, despite the remarkable recovery of the financial markets last year, with the S&P 500 finishing up 18.4 percent, employment is nowhere close where it was pre-pandemic; only 55 percent of jobs lost last year have been regained, with most of the lingering unemployment occurring among those workers who did not finish college.
Policymakers are aware of all of this. Naturally, there will be additional economic stimulus coming down the pike sooner rather than later under a Democratic-controlled Congress. Accordingly, infrastructure stocks have soared, as well as energy-related shares and financials. Financials seem to be responding to the prospect of higher interest rates, which have been buoyed by rising inflation expectations. While inflation remains subdued, the combination of economic stimulus coinciding with the dramatic economic recovery that would accompany widespread vaccinations is pushing up expectations. In this environment, shorter duration assets such as dividend-paying stocks would outperform long-duration assets such as high-priced tech stocks and long bonds, all else equal. Commodities and even alternative assets such as cryptocurrencies have been exploding higher during the last month.
While most valuation measures suggest the markets are not inexpensive versus historical levels, volatility remains elevated. The VIX Index, the market’s “fear gauge,” at 25.1 as of Jan. 6, is well above its long-term average of 19.8. All else equal, I think that’s bullish. It seems reasonable to expect that the VIX should continue to decline from its peak near 80 last year, probably headed below its average before mean reversion begins. I think that will be a positive for the markets.
Of course, the irony is that as investor fear subsides, the markets become marginally less attractive in the near term. Last year, fear was rampant, even as the market shot off its March lows like a cannonball. Many investors sat out the rally, wary—with perfectly good reason—of the growing pandemic. Other investors, wary of the presidential election, missed out on the significant gains made since November 3. I believe there are many investors who have been unable to set aside their political beliefs and expectations about what happens when one side or the other wins. That’s unfortunate. Because in the meantime, companies around the globe are churning out vaccines, creating new ways to shop for everything from groceries to insurance, and producing electric vehicles and other marvels.
The market must have uncertainty to exist, let alone rise in value. And for buyers, the more the better. Uncertainty is a problem for pollsters and politicians; it is a gift to investors.
We have been given innumerable gifts in this country. As Americans, we are some of the most fortunate people not just on the planet but in the history of the planet. That’s because of our faith. Not necessarily our religious faith, but our faith in each other. On September 23, 1711, faith preserved the life of seven-year-old George Koonce in the face of unspeakable tragedy. On January 20, 2021, faith in each other will preserve us all.
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. www.raymondjames.com/burkekoonce