Quick Thoughts: Wall Street and Main Street Disconnect

• Waves of COVID-19 infections, historic unrest around racial injustice, the upcoming US elections, growing tension between the United States and China.
  
  
• Examples of rapid industry shifts include: work from anywhere, remote sports and entertainment, greater reliance on restaurant take-out and delivery services, increasing industry consolidations, supply chains returning domestically, bankruptcies of many small— especially retail—businesses, and the move of urban digital-era hubs to lower-cost areas.
  
  
• Globally, while low interest rates, fiscal stimuli, and easily available financing have helped keep alive some weak companies, debt is not a substitute for lost revenues and profits.
  
  
• The FAAANM stocks (Facebook, Apple, Alphabet, Amazon, Netflix, and Microsoft) appreciated 263.82% since 2015, about one-third of the S&P 500 Index’s return. The rest of the US equity market (S&P 500 Index without the FAAANMs) appreciated 35.68%.¹
  
  
• The US markets have generally outperformed overseas markets. However, if you exclude the FAAANM stocks from US indexes, the US equity markets have performed about in line with overseas’ markets, and any difference is from currency moves.

The key question looking ahead is whether the stock markets will continue to climb based on monetary and fi scal responses or whether something could make equity markets unwind. I continue to believe that stock market and economic fundamentals will not remain disconnected forever. I think companies that will do well over time will have: clear business strategies, economic moats, workforce diversity, attention to Environmental, Social and Governance (ESG) factors, returns above the cost of capital, strong balance sheets, positive cash flow, and skills leveraging technology.

What Are the Risks?

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated, or may decline further in value. To the extent a portfolio focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a portfolio that invests in a wider variety of countries, regions, industries, sectors or investments. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.