Market performing 'the way it always does in the second half of a recession'

The time for pessimism was March, David Fingold told WP, with the cheeriness of someone who’s just found a winning lottery ticket. “Don’t let the past few months affect your ability to be optimistic about the future.”

As befits a man whose glass is always half full, the VP and senior portfolio manager at Dynamic Funds entered February upbeat but saw warning signs and raised cash. As we all know, things took a sharp turn for the worse as the market plunge and lockdown propelled us towards recession. Since then, the situation has got incrementally better and, insisted Fingold, followed the recession playbook.

“Everyone should be optimistic about the future,” he said. “My recommendation is look forward. If you're risk averse, and I understand because I’m a conservative investor, be conservative. If you invest in companies that have good profitability, have strong balance sheets, and aren't struggling to make payments to the bank, you don't need to worry if there's a bump in the road. You'll pick yourself up, brush yourself off and move on.”

This is not flippant positivity. While recognising the severity of March, April and May, and the potential pitfalls that lie ahead, Fingold believes there is no disconnect between the economic fundamentals and where the stock market is and that the latter is actually performing exactly as you would expect compared to other post-war recessions.

High-frequency numbers like jobless claims or factory closures have set up a base effect, creating a pattern where they fall sequentially and the market moves up. The analogy Fingold uses is that “the market does not know what is good or bad, it only knows if it's better or worse”. He told WP that if we look back over 50 years, whenever we've got these enormous spikes of jobless claims, the market’s been up significantly over the next 12 months. During the recent retracement of business activity, he said the stock market declined equal to the medium decline from all post-war recessions.

Fingold reminded WP that the National Bureau of Economic Research also said this may turn out to be the shortest recession ever. The record is six months – from the early 80s downturn – so the recession could be over on August 31 given the official recession start date was February.

He said: “The stock market is currently performing, if you look at which industry groups are leading and the reaction in the stock market, entirely the way it always acts in the second half of a recession. And that’s when I'll quote Mr Buffett and say the ‘one thing we've learned from history is nobody learns from history’.

“The kinds of commentary I hear today where people are in denial about what's going on in the market and economy are entirely consistent with what I've seen coming out of the past four recessions.”

To reinforce the point, Fingold reached outside the investment world, drawing on Ecclesiastes 1:9 – “What has been will be again, what has been done, will be done again” – and Billy Joel, a rather more contemporary social commentator. He said he understands why the pundits are negative but that they fail to understand this is textbook recession performance. Most people believe they live in unprecedented times. They don’t.

“The pundits were negative through much of 2009, just like they were negative through much of 2003. I certainly remember how negative they were in 1992. And I remember Billy Joel telling me that we had a problem in Allentown during a time when the U.S. was more rapidly creating jobs than at any other time in its history.”

He added: “You look at the really strong rally off the bottom and the industries that were at the centre of it - hotels, airlines, travel, leisure – and they have had an enormous bounce. They're behaving exactly like the banks behaved in 2009 with this huge run from March to June of ’09. They got way ahead of themselves and started relatively underperforming for 24 to 36 months before they had a good run in 2012. The small cap versus large cap has been pretty normal in terms of its reaction and, from March to June, the performance of deep cyclicals was also normal.”

That’s not to say it’s going to be plain sailing. Fingold told the bears that if they want something to worry about then they should focus on how the shortest recovery could follow the shortest recession, and the low risk of a double dip. These unpredictable events, however, are why he’s a conservative investor.

“It's why we own a high-quality portfolio of companies that have strong margins and strong balance sheets, because if something unexpected happens, the conservatism will protect us.”

He added: “The founder of our company, my mentor Ned Goodman (DundeeWealth), always used to say ‘don't be in a rowboat; don't look backward, look forward’. We were very concerned in March and in our mandates that allowed us to raise cash, like the Dynamic Global Dividend Fund, we went to 30% cash because of the pessimistic developments.

“But when we got to a point of maximum pessimism, that's when I said we have to look forward because it can't get worse than this.”