Stocks Draw Down Sharply to End Week

Catch Up Quick

• U.S. borrowing is on pace to exceed the annual economy as early as next year

• Facebook claims it will prohibit political ads the week before the election

• Two-thirds of NY state restaurants say they'll close without more government aid

• 83% in the U.S. and 79% in the U.K. say higher education will change forever (Axios)

• The Justice Department intends to launch an antitrust case against Google

• Colleges across the U.S. are driving new waves of coronavirus hotspots

• The U.S. added 1.4M jobs in August

Friday Insight

• Valuations have indeed become overextended since the equity market lows of March, as many investors have since bet on a v-shaped recovery with superfluous optimism— if this current correction were however the beginning of another larger draw down, I'd expect to see inflows towards the bond market as well as safe haven assets, which has not quite been the case

Thought of the Day

• It is no secret that stocks have surged in the midst of multiple crises during these fast few months

• Bulls are talking about positive vaccine data, incoming monetary policy, sidelined institutions ready to invest, and an army of retail investors with buying in mind

• Bears are talking about high U.S. — China tensions, a turbulent upcoming election, chaos induced from social injustice, a pandemic with no concrete end in sight, and a slowly recovering economy

• In times of high uncertainty, it can be helpful to simplify frameworks

• For instance, consider the following: 1) investors can either hold cash or invest 2) stocks either rise or fall

• Note: Investment potential refers to the amount of cash you have relative to stock prices

• If invested while stocks fall: lose money & lose investment potential

• If invested while stocks rise: make money & lose investment potential

• If holding cash while stocks fall: save money & gain investment potential

• If holding cash while stocks rise: lose money & lose investment potential

• You lose money in cash while stocks rise, counting the forgone returns (in excess of your cash interest rate) as a true cost

• In summary, holding and investing have symmetrical risks from a returns perspective

• However, holding cash allows one to retain high investment potential, and jump into a cheap market with lots of cash to deploy

• This is not an unhealthy scenario to target, especially when systematic risk is high

The Bottom Line

• While this framework is highly abbreviated, when markets get crazy, simplicity and patience can take you a long way

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Enjoy the Long Weekend :)