July 2020

“I’d Gladly Pay You Tuesday For A Hamburger Today”— Wimpy, from the cartoon Popeye

Author: Matthew G. Kovalcik, CFP

When I was a child, I lived for Saturday morning cartoons. One of my favorites was Popeye the Sailor. Popeye loved his spinach. Me, not so much. The nuns at the Catholic pre-school I attended force-fed me canned spinach, and it was downright awful! Nevertheless, I loved watching Popeye. All these years later, I can’t recall much of what he did or said, but I do remember his sidekick, Wimpy. Mainly, I remember Wimpy’s prescient phrase, “I’ll gladly pay you Tuesday for a hamburger today.”

Wimpy was always a little short on cash … or maybe he worked at the Federal Reserve where the mentality of borrowing in excess today and paying it back in the future is the rule. Regardless, I think of Wimpy’s famous quote often when I see the ridiculous behavior from the Federal Reserve and the Treasury as they throw money at every challenge we face.

The Federal Reserve’s modern-day corollary to Wimpy’s signature phrase might go something like this: “We’ll gladly stick it to you and your children in two decades so long as we don’t have to suffer today.” It’s all done in the name of propping up equity prices, which fuels consumer sentiment and ultimately keeps the economy in an uptrend.

We don’t yet know how much money the Fed will throw at the pandemic, but it will be many trillions before it is all over. I don’t really think we have the capacity to understand four trillion dollars because we don’t ever deal with that amount of money. How about in terms of time; think of how quickly the seconds tick by throughout your minutes, hours and days, and then ask yourself, how long is four trillion seconds? It’s about 127,000 years!

As I write this on June 10, with the S&P trading at about 3195, I’m reminded of the old phrase, “Don’t fight the Fed.” There is no doubt in my mind, with the dislocation between Wall St. and Main St. that there is some merit to it, but how long the Fed can prop up the equity market nobody knows.

What should investors do during these unprecedented times? For starters, investors are wise to maintain a baseline asset allocation target. An investor might have a target for bonds of 40% and 60% for stocks. As the investor’s opinion of the world and the capital markets changes, allowing for deviations from baseline targets in either direction is acceptable. For example, when an investor is feeling cautious, it would be acceptable to reduce stock exposure and increase bonds. Shifting 10% here or there is not going to have much of an impact on the bottom line; the changes need to be more significant to make an impact. One might consider changes of 20-25% around baseline targets; these changes will be more meaningful but prevent the investor from going too heavily into any one asset class.

Understand valuation! Typically, when the market declines, as it did in the last week of February and most of March, we think of stocks as being “on sale.” This time around, since earnings dropped faster than stock prices, the market became more expensive. Today, we are forecasting earnings on the S&P of roughly $127; therefore, a current valuation of 3195 leaves the S&P with a price to earnings ratio of roughly 25. This is a dramatic over-valuation to the historical average of 14 to 17 times earnings. And even if the second half of the year turns out to be robust, which seems like a stretch to me, and we finish with earnings of, say, $150 per share, that still leaves us with an earnings multiple of 21.3. Accordingly, I would argue that the downside risk is greater than the potential gain in the near term.

In most bear markets, the S&P does not recover in a “V” shape; it tends to move in a “W” or “WW” pattern. Consider the decline in 2002-2003 pictured below. The market made three attempts at establishing a bottom from July 2002 through March 2003.

I believe the market today is overdue for a “re-test” similar to what we saw in 2003. That is not a bad thing so long as your allocation properly reflects your tolerance for risk. Remember, three things: (1) Investment management is the management of risks, not the management of returns; (2) Patience is your friend when it comes to investing; and (3) Your short-term strategy does not have to align with your long-term strategy.
You’ll serve yourself well by being aware of the potential outcomes, ultimately arriving at a conclusion of whether it’s a good time to take excessive risk or not. But do not take risks you cannot afford lest you end up like Wimpy—unable to pay for a hamburger today. 

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