Several decades ago (far too many) I was a new MBA graduate and had entered the management trainee program at what is now one of the world’s largest fully integrated communications firms.
The program was comprehensive and included gaining exposure to several communications disciplines: advertising, public relations, direct marketing, branding, sports marketing, and so on. As part of this training, I attended several TV commercial shoots—which were eye-opening in terms of how much planning went into the process, the costs involved, and the number of people who touched the final produced commercials.
The first one I attended, frankly, was incredibly tedious. It was for Procter & Gamble’s Coast soap, which had a great introductory campaign running, named, coincidentally, “The Eye Opener.” It was not very exciting to be on a set with 30 other people watching actors (appropriately covered up) take showers using Coast for over six hours.
The second one was far more interesting. It was for a sporty Volkswagen model and was being directed by a well-known name in the industry. The shoot took place at a picturesque outdoor location of mountainous winding roads. The director decided he had a great idea on the set that departed from the approved storyboard (which was, after all, why he was being paid a high fee for directing the spot.) That required an anxious huddle between the agency production team, the director, and the client. His idea was approved, and on the shoot went.
His concept was pretty wild and, from my untrained point of view, totally unrealistic.
I asked our experienced agency producer whether she thought viewers would find it believable.
She replied, “Don’t worry. It’s just WSD. They will buy it.”
Of course, I asked, “What is WSD?”
“The willing suspension of disbelief.”
That short conversation had a big impact on me; I have never forgotten it.
An impressive rally, fueled by optimism
Over the years, I came to realize how big a role the “willing suspension of disbelief” plays in many successful movies, commercials, TV shows, plays, books, and just about any creative endeavor.
Alfred Hitchcock and Rod Serling were masters of WSD. Steven Spielberg, Andrew Lloyd Webber, J.K. Rowling, and many others still are.
As one who closely follows the financial markets, as you probably do, I can’t help but think how a little bit of WSD has helped fuel the current rally.
Up until last week’s market-driving news of the COVID-19 resurgence in several U.S. states, many major indexes were on a torrid pace. The NASDAQ Composite made a new all-time intraday high on June 5, before powering higher and breaking the 10,000 level for the first time and reaching 10,221.85 on June 23.
According to Bloomberg’s David Wilson, the NASDAQ 100 was “on the verge of completing a comeback that has taken more than 17 years to unfold.” He added, “The turnaround is based on the ratio between the NASDAQ-100 and S&P 500 indexes, which plunged as much as 69% from a March 2000 record through September 2002. The ratio rose above the record as U.S. exchanges opened Thursday (6/25), only to come up short by the close.”
NASDAQ 100/S&P 500 Index Ratio
SentimentTrader first published the previous chart and said, “This incessant demand for all things internet and tech has pushed the NASDAQ 100 / S&P 500 ratio’s 14-month RSI to the highest level since the peak of the dot-com bubble. … While many traders were getting-rich-quick during the 1990s bubble, many traders also lost their shirts (and wallets) during the subsequent dot-bomb bust.” They noted, additionally, “Analysts were recently upgrading their price targets for S&P 500 stocks at the fastest pace ever.”
Market bulls, while generally acknowledging that markets may have a rocky ride, do seem to be adopting some aspects of WSD.
Whether it comes to GDP growth, forward S&P earnings, the outlook for commercial real estate, consumer spending, employment, small-business recovery, or other economic data points, they take solace from some “green shoots” and see a clear path to something resembling a path to normalcy in the not-too-distant future.
This is not really all that far-fetched, as certain data sets have certainly given credence to the possibility of a V-shaped recovery (while others, not so much). As was pointed out in this column last week, “The Citigroup Economic Surprise Index, which measures the number of economic reports that come in ahead of economists’ forecasts, moved to its highest level ever!”
Is the worst of the economy behind us?
It is hard to be critical of anyone who thinks the worst of 2020’s economic data is in the past, though as Bespoke Investment Group wrote on Friday (June 26), “Massive monetary and fiscal stimulus created potential for a strong rebound in activity, but as long as the virus remains a threat, activity can’t recover fully.”
Respected analyst Tony Dwyer, in a late-May note republished in Proactive Advisor Magazine, talks about adding to positions on weakness in what he sees as a fundamentally bullish environment. Others also talk about a bearish attitude essentially “betting against science, modern medicine, and the impact of government and Fed policy.” That statement has a lot of resonance.
On the other side of the fence, fund manager Jeremy Grantham is among some who have proclaimed this is a “real McCoy of market bubbles.” Nassim Taleb, author of the “Black Swan: The Impact of the Highly Improbable,” said on CNBC last week, “If you don’t have a tail hedge, I suggest not being in the market [as] we’re facing a huge amount of uncertainty.”
Another CNBC show last week featured a roundtable that called this a “binary environment”—with investors and institutions either very bullish or very bearish, saying in effect, respectively, “no problem” or “no way.”
There is one thing it seems all investors can agree on: While the path forward is uncertain, truly positive news on a vaccine or a next-level course of treatment will immediately trigger a monster rally.
I like a chart put out by Fidelity that more or less calls it as it is. Global economies are at or near the bottom of the economic cycle, and it is an open question about the trajectory of the recovery—though Fidelity’s analysis leans toward a glass-half-full outlook (or, at least, slowly filling), while seeing continued bouts of serious volatility ahead.
Business Cycle Framework
Whether you are an investor who leans toward suspending disbelief about some worrisome aspects of the economy, or one remaining skeptical about a significant recovery coming anytime soon, the message in this space has remained consistent: An investment portfolio consisting of a diversified and coordinated set of dynamically risk-managed strategies may be better-equipped to deal with the ups and downs of any market environment.
One of the advisers we interviewed for Proactive Advisor Magazine put it very well, saying that a dynamically risk-managed portfolio approach has three major benefits for his clients: “(1) the psychological benefit of knowing their investment strategy is predicated on smoothing out volatility; (2) the tangible mathematical and compounding benefit of avoiding deep losses in their portfolio; and (3) having an investment strategy that is customized to their risk tolerance.”
You don’t have to “willingly suspend disbelief” to see the sense of that.
Have a safe and productive week.
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