May leaves us with a very positive balance regarding the behavior of the stock markets. No one remembered the “sell in May” and that we have had twenty days of negotiation in which the coronavirus has been dealt with daily.

The improvement in the contagion and death curves of the most affected countries
It has allowed to go from a critical phase in April to a much more optimistic one in May. Asia made a considerable leap towards almost full normalization. Italy and Spain,
it can be said that in general Europe, they advanced in the phase of containment of the
pandemic which allowed drawing a progressive reopening calendar of the
economy. Also the countries that entered the contagion phase later and
greater impact in absolute and relative terms have suffered, as is the case of
USA and Brazil.

Precisely the advance of the de-escalation and the possibility of a vaccine were very present in the investment spirit justifying not a few of the most important bullish days that took place in the month.

Additionally, messages from central banks in favor of a massive
aid and loan program, continue to shape endless options
within monetary policy that emerged in parallel to the frameworks of
action of the different governments through concessions, subsidies and bailouts.
All in all, the world was filled with green hope and it is difficult to find an index
with a monthly negative balance as shown in the Financial Times chart with the
global evolution of the stock markets in the month of May.

This could be the summary of the strategy area of ​​a bank, an analysis firm or a manager in your monthly letter, in which we rarely find a critical opinion with the markets and what happens around them. All happy and content then not in vain we are witnessing one of the biggest rallies in history for the speed and time in which it is occurring. Are there really reasons to justify this excessive joy?

The bags have not gone up because progress has been made in the investigation of a vaccine

The bags have not gone up because progress has been made in the investigation of a vaccine. We all know that in the hypothetical case that it were true, its large-scale production and the possibility of mass distribution would come after a possible regrowth. Nor would it serve to alleviate the evil that affects economies, especially the European one. The news in this sense has helped, but more so, the pharmaceutical companies than the stock markets as a whole.

While the virus has spread irregularly the impact of confinement on economies has been more synchronized than previously thought. Therefore, just as the pandemic is global, the economic recession is also global. And we have had proof of that with a battery of disastrous economic data in May from a historical point of view. And I add, in addition much worse than expected, a circumstance that has not been priced at any time of the month. The economy may recover earlier than essentially believed because the predictions are treated with disparate probabilities. This is so for investing psychology. Generally, investment opportunities improve when the investor is more sober than optimistic.

Investment opportunities generally improve when the investor is more sober than optimistic

But it is also true that for that to be true, investors must be aware of and show concern for the risk. Exacerbating optimism and a very low risk profile, these are the two circumstances that came together in May.

Market risk is not measured by volatility but by probability
that we assign to different events. Uncertainty shows us the importance to accept the ignorance that we have about the future. The point is not to look for a prediction as a path but that it must serve to face the fact that we must make decisions.

My experience tells me that investors are reacting less and less to issues related to the economy and what happened in May confirms this. Howard Marks believes that it is not that the macro does not matter but that very few people can master it to lead to a great return. It is a meaningful statement, but one that I do not fully share, since the macro includes the micro, and the interaction between both factors cannot be exclusive when making decisions. I am sorry for the Taliban of Value Investing but without understanding the economic world, companies are not understood.

If Marks were fully correct, we wouldn’t have spent weeks watching prices rise wildly as profit estimates plummet. Not surprisingly, some bags – like the American one – are almost more expensive than before the fall. Absurd.


In my opinion, I believe that he has fallen into a dangerous complacency in the hope that life will return to normal quickly. The question is that if the stock markets continue to rise and at the same time obviate the real risk of a great recession, there is a denial of reality, and therefore, in the way in which investors must deal with this situation. Until then, this party has all the earmarks of continuing, and therefore, ending very badly.