About That Recovery...

If you were to solely judge by the stock market, you might conclude that the U.S. economy is firing on all cylinders as it recovers from the COVID-19 lockdown. After all, the Nasdaq is well into record territory. And the S&P 500 is just a handful of points away from setting some new highs.

And the thing is… the U.S. economy has been on a tear. According to the July employment report that came out last week, we’ve added just about 13 million in five months. Forty-two percent of lost jobs have now been recovered since February. There’s no way around it: That’s a pretty impressive performance. 

The stock market told us this was going to happen. The market is always forward-looking, and that explosive rally off the March lows was a signal the U.S. economy is more dynamic and resilient than economists were giving it credit for. And if you’ve watched how quickly many companies have pivoted to implement new strategies and technologies into their day to day, you have to be impressed.

Yes, I will admit: I was skeptical of that rally when it started. After all, we were setting records in every bad economic metric you can think of. 

One thing I’ve learned: No matter what your bias is, you don’t just abandon your investment plan or trading strategy when the you-know-what hits the fan. Anybody that simply went to cash in March and stayed there missed a barnburner.

I can’t stress this enough: You basically never want to just sell everything. Sure, you can lighten up, take some profits, reduce your exposure. But if you sell it all, then you have to pick a spot to buy back in. And it’s guaranteed that stocks will rally long before the coast is clear. So if you’re feeling bearish when the turn comes, you’ll be able to find plenty of evidence that will keep you on the sidelines. 

That’s exactly what happened as we came out of the global financial crisis (which apparently the cool kids are now calling the “GFC”). In 2012 — two full years after the bottom — I pounded the table for Bank of America (NYSE: BAC) at $9 a share. I got hate mail. People said the banks were going to fail. They said the market was going to fall apart any day now…

None of those doomsday scenarios happened. And still, it took some people nearly a decade to try the stock market waters again… just in time for COVID-19.

It’s Always Something; If It’s Not One Thing, It’s Another…

Of course you know how this rally is going to play out, right? Stocks are going to keep on rallying until they suck in every penny they can, until they turn as many bears into bulls as they can… then the market’s going to tank 10%–20%. 

Look, I’m not cheering for that in any way. I am not a “told you so” kinda guy… and, really, no successful investor is.  

Successful investing demands humility. It’s an expensive lesson and every investor on the planet has ponied up. Exactly how expensive depends on how quickly you learn that lesson. I’ll even help you out with a little cheat sheet to help. Don’t worry; when I say “little,” I mean it. In fact, this cheat sheet only has three words on it. You know what they are? “I don’t know.”

That’s it. That’s the cheat sheet. I don’t know. Say it with me: I DON’T KNOW! These three words will set you free. And they will make you a better investor, too. 

Because at the end of the day, there’s always going to be stuff affecting the market or a stock you like/own that you didn’t know. Might as well get used to it.

But seriously, “knowing” is rigid, inflexible. “Knowing” is all or nothing, hell or high water, damn the torpedoes. Those are not good traits for successful investing. 

“I don’t know” is open to new information. “I don’t know” learns. “I don’t know” rolls with the punches and sometimes even changes horse midstream. 

I Know What’s Going to Happen

C’mon, I had to.

Back to the economy. Seems to me, at some point, all the bad economic stuff that the stock market has been ignoring is going to become an issue, like the fact that we now have fewer working in manufacturing than we did four years ago. And there are currently 740,000 fewer people working in manufacturing than there were in February. Ask Honeywell (NYSE: HON) or United Technologies (NYSE: RTX) how many laid-off workers they plan to rehire. The answer is ZERO. 

Remember that pivot we talked about earlier? Manufacturing companies are using the pandemic to get leaner and meaner. They know demand is down, and they’re using the lull to add automation (another long-term trend that is being accelerated by the pandemic). 

It’s pretty much common knowledge that 2–3 million jobs are gone for good. That’s a semi-permanent damper on demand. 

Now, the Honeywells of the world will be fine. Automation will boost their margins, so even if they make and sell less stuff, they will still be able to grow earnings. The leisure/entertainment companies may not be able to be so flexible. 

That’s just one example. There’s a lot more potential bad news for the market that’s currently being ignored out there — rising tensions with China, a Biden win (let’s face it, higher taxes will hit stock prices), emerging market debt.

Which one will it be? 

I don’t know. 

When will it happen?

Don’t know that either. 

But some time in the not too distant future, CNBC’s gonna be running those “Wall St. in Crisis” bits. Maybe Barron’s will have a bear on the cover…

Will you be able to buy when it’s looking nasty? 

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.