The Covid-19 virus has set back the global economy. This has required massive central bank policy intervention and raised national debts to post housing crisis highs. Yet despite the high debt and uncertain world economy, investors have continued to buy and hold stocks. This commentary addresses why this has been true, what we are doing confronted with markets with questionable remaining value, and the prospects ahead.

In March, US major market indices fell 32% because we shut down the economy at the direction of the Center for Disease Control. In April on news of potential vaccinations in the works and encouragement to reopen, the markets quickly recovered aided by $3 trillion in direct stimulus spending from the US Treasury. Ever since, optimism has continued to outweigh fears despite a hard rebound in the spread of the virus in the US. The fact there are less than one percent interest rates out 15 years till maturity on bonds makes stocks the most reasonable investment option—bonds offer little competition and stocks had been discounted.

We held significant amounts of cash going into the correction, not in anticipation of the virus coming to the US, but because we believed earnings of companies would not meet analyst’s expectations given last year’s lofty stock market level. Now once again, we have reached new highs and 5 tech stocks—Apple, Microsoft, Amazon, Alphabet (Google) and Facebook—make up nearly 20% of the S&P500 market cap. Indeed, Apple and Alphabet + Google have topped $2 trillion in market cap; Amazon & Microsoft are above $1.5 trillion, and Facebook is nearly $1 trillion. Price Earnings ratios are in the high thirties-to-forties on many companies, and Bonds offer little value at one half percent yield—bonds now offer a negative real return (return minus inflation) and may have greater risk than stocks.

Before turning to prospects ahead we reiterate our view that the rising risk is about “King Dollar”—keeping the US Dollar as the reserve currency of the world. Ever since the financial crisis, many countries, but China and Russia in particular, no longer want the US dollar as the sole reserve currency. They instead want a basket of currencies. The IMF had agreed to the basket, but the UK move to exit the Euro (Brexit) and now the pandemic has caused China to start testing a digital currency backed by commodity reserves—principally oil and gold reserves. To the US, “King Dollar” is of paramount importance with our considerable debt load and faltered economy. Consequently we are hitting back at China to hurt their economy with economic policies targeting their best companies, stopping graduate students from studying here, making Chinese listed companies subject to US audit, and blocking US pension plans from investing in Chinese companies. Less Dollar demand would likely cause serious deflation and/or a dollar devaluation.

We believe it is again time to be cautious. We have raised cash and may raise additional amounts ahead of the election. Recall our methodology is to increase exposure when risk is low and increase it when it is high. Risk is high. The markets are considerably ahead of the economy and our best judgement is that the twain will meet at lower prices.