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Iron Capital Insights

  • Iron Capital Insights
  • September 25, 2020
  • Chuck Osborne

Searching for Direction

“Smooth seas never made a skilled sailor.”  ~  Franklin D. Roosevelt

It is getting a little choppy out here. After the market rally, which went too far, the technology stocks that led that rally came back to earth a bit. Now the market is searching for direction. Volatility has increased a bit, but as of this moment we remain in a trading range, which is shop talk for, “We are not going anywhere.”

When this happens, it is a sign that the market is searching for its next move. Should the bull run continue, or should the bear raise its ugly head? It depends on what the market decides is important.

The bull case is pretty simple:  the economy is far better than feared, and we are recovering from the lockdown-induced stop. While there are certainly industries that have been hurt by the reaction to the pandemic, there have also been many companies that were helped. The latter are largely technology firms whose stocks have flown high, but they have also come back a bit.

There is a third category:  the companies that have weathered the storm. Banks, for example, have not really been helped, but their businesses are doing fine. They still have not participated in the market rally, and they are priced at ridiculously low valuations. Analysts are beginning to pay attention to this fact, and upgrades are coming. Will stock prices follow? They certainly could.

The bear case is more mood and politics. Wall Street has seemingly just clued into the fact that it is an election year, and a highly charged one at that. There is a significant probability that with so many people mailing in their ballots, we may not know who the President is on November 3. That is not going to be good in the short haul.

More important to the market may be the fate of the Senate. If Biden wins and there is a Democratic sweep, the short term may be smooth as this would avoid civil unrest, but then, what matters is – what do they actually do? The party platform does not represent what I believe to be the actual core of the Democratic party, let alone America as a whole. The question is, who would actually be in charge – the Joe Biden we knew from the Senate, or AOC and her socialist “squad”? If the latter, protecting principal will be the best we can hope for, and perhaps the least of our worries.

If Trump wins, the long term is more certain, but in the short term we will see riots. There is a significant segment of the population that believes their side losing means Democracy is broken. The truth is, of course, the exact opposite; but facts don’t seem to matter to this group. The market will not like that.

If Biden wins but the Senate remains under Republican control, this could be the best outcome from the market perspective. I’m not saying it is best for our country – that is a political judgment and not my place, but it will mean peace in the short term and moderation in the long term, and Wall Street likes that.

In the meantime, prudence is necessary. In sailing, when the wind picks up and the waves get a little higher, a sailor reefs the sails, which means she reduces the size of the sail to slow the boat and get it under control. The saying goes, “The time to reef is when it first crosses your mind.” We are entering a time where it may pay to be defensive.

Warm regards,

Chuck Osborne, CFA
Managing Director