The Pandemic Adds to Bifurcation


The gap between the rich and the poor in the US has steadily increased for many years, but the Covid 19 pandemic accelerated the pace of divergence. Service and nonessential manufacturing workers are suffering the brunt of the economic dislocation, while highly paid office workers, and most professionals and retirees have escaped relatively unscathed.

The equity markets are also divided between winners and losers. Big cap growth stocks ballooned in value while the rest of the market suffered. Some of this is understandable given that stocks like Amazon and Apple tend to reflect more of what is going on at the top of economic ladder than the general economy, but much of their gain is just a massive injection of liquidity chasing momentum.

Political bifurcation is potentially even more worrisome. Markets correct eventually and find equilibrium. Societies can be torn apart for a very long time. A country that cannot agree on the facts, has no common ground, defines half of its citizens as enemies, and lacks a unifying purpose cannot prosper, or even effectively fight a pandemic.

The good news is that we have been through these things before and found our way out. Income inequality is a persistent problem, but despite setbacks like the pandemic, in the big picture we have been steadily decreasing poverty in the US and around the world.

The bifurcation in the equity markets will end as it always does. At some point valuations of the big growth stocks will become so rich that first smart money, then dumb money will pile out of them. It is just a matter of when, not if.

A vaccine could cure the bifurcation in the equity markets by giving life to cyclical stocks. Long suffering airline, energy and other economically sensitive stocks rally with every new vaccine trial or business opening, but their relative strength has so far been short lived. When the real thing comes along the rallies can be sustained and the whole market can advance without a major correction.

Alternately, it may require a fall from the top to bring the whole market down to levels that can then sustain a broad rally from much lower levels. That is what happened in 2000-02 with the bear market in tech stocks leading to a bull market that lasted almost two decades. Either way, the logical investment position is to avoid overexposure to big tech and own enough cyclical stocks to benefit from their recovery, while favoring those growth names that have the best relative value. Accept some short-term underperformance in what is most likely the latter stages of a top-heavy market, while building positions in what are likely to be safer and better performing stocks in the future.

Political bifurcation is problematic, but we are a country that has held together, even during the great depression when other countries fell to authoritarian rule. We survived the McCarthy hearings and recovered from the divisions the Vietnam war caused. The phrase “enlightened self-interest” comes to mind. At some point we have always realized that we cannot prosper as a divided society and as much as we abhor the other side’s positions, a compromise must be reached. We can do this again!

Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.

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