Sailing With Blinders On
Investing in a Guidance-Less World
Markets are sailing around all-time highs, but without guidance could there be rough seas ahead?
Typically, when a company hosts an earnings call it will issue what is referred to as “guidance.” Guidance is what companies tell investors to expect from future fiancial performance. However, with the current economic uncertainty amidst the pandemic, many of these companies have decided not to make claims as to what investors can expect. In fact, a recent Bloomberg article said, “80% of companies refused to provide guidance over the last three months.”1 Considering that even the best experts have had a hard time making forecasts, most companies have decided to not even try.
Unfortunately, this lack of insight makes it very difficult for investors to gauge a company’s resiliency to the effects of the pandemic. Without the ability to measure this for 80% of companies in the market, it challenging to forecast the impact on an investor’s portfolio. All of that being said, where does this leave investors looking for direction?US equity returns have been very strong during the recovery from the market’s March bottom (S&P 500 TR is up 48.9% from March bottom as of this writing)2 However, many of the most respected investors in finance are raising a cautionary flag when it comes to various valuation metrics and their sustainability.
Wilshire 5000 to GDP
The above chart illustrates what is commonly referred to as the “Warren Buffet Indicator”, which is the market cap of the Wilshire 5000 Stock Index (an index that is representative of the entire stock market) divided by the US GDP. This is one metric used to gauge the valuations of stocks. As you can see from the chart, this indicator is trading at or above all-time highs which means that growth in valuations has outpaced underlying economic growth. To evaluate whether or not these conditions are sustainable, one must rationalize what the potential for economic recovery looks like. There are enough letter descriptions used to illustrate the types of recoveries — V, U, L , W, K, M, but it is not clear what we can expect. This conundrum has led many professional investors to struggle to justify these valuation levels given the amount of uncertainty in these forecasts.
Blue Square Wealth
At Blue Square rather than trying to predict the future, we aim to prepare for it, regardless of its direction. Using our proprietary technology and rules-based approach to investing, our decisions are not swayed by predictions or emotions.
Our investment strategy has a risk management focus that aims to position portfolios defensively during significant market declines. By systematically raising cash during these periods and then investing it when markets are more accommodating, we aim to create a less volatile investment experience, and ultimately deliver better risk-adjusted returns over full market cycles.
1) Source: Bloomberg 2) Source: Morningstar, S&P 500 TR 3/23/20 – 9/15/20
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