Morningstar - Q3 2020 - 8

Dispatches

Is the Stock Market
Rebound Overdone?
Here's what to consider
before you invest.

Phillips Curve

Retirement Myth-Busting
Ivory Towers

Active Management's Dilemma

Policy

How to Improve Retirement Plans
for Teachers

Global Briefs

18 Americas

LETTER FROM THE BOARD

Daniel Needham

Greater Europe
Australia & New Zealand

We've heard questions from clients about why
the market is doing so well right now given
how bad the economy is and whether we will see
the lows of March retested.
They're good questions, but there might not
be clear-cut answers for those who want certainty.
We'll discuss three points embedded in
investors' questions.
Point 1: Markets Are Unpredictable in the
Short Term

This point is perhaps obvious, yet there seems
to be no end to the appetite for predictions
from investment managers. It's not just investing-
anyone who watches sports on television fully
knows that a) the unpredictable seems to happen
a lot, b) humans' ability to predict any shortterm outcome is very limited, and c) we still love
to hear and make predictions.

Morningstar Q3 2020

companies are profitable and managements
continue to allocate capital so that their
growth compounds. The path, however, is far
from smooth and even.
We do find that market prices will depart from
market fundamentals, or the aggregate
cash flows produced by companies. When a price
is below what we think a stock is worth,
all else equal, we'll typically find that to be an
attractive investment. This doesn't require
accurate short-term predictions.
Point 2: Markets Predict the Economy

Bill Miller, the famous value investor who was
chairman of Legg Mason Capital Management and
later founded Miller Value Partners, observed
that markets predict the economy rather than the
economy predicting markets. Economic data is
historical-backward-looking-while markets are
forward-looking. This explains why markets
typically rebound before a recession ends, but it
certainly doesn't mean markets are always right.
Is it true today? Have markets correctly seen
that the economic impact from the coronavirus
will be less than thought in March? We just
don't know.
We do believe, however, that buying assets
when they're attractively priced is usually well
rewarded. Also, doing so removes the need
to be right about predictions. Even if markets test
new lows, we think they'll eventually recover
and that assets bought at attractive prices
will do well-regardless of whether they were
bought at the most attractive price or not.

In the short term, one should be prepared for
a wide range of outcomes in markets. Yet,
we are often surprised at what markets do. Being
surprised implies a level of confidence in our
expectation that is probably misplaced. So, not
only are markets unpredictable in the short
term, we are also overconfident in our or others'
ability to predict.

The idea of "the market" is a tricky one, and
what we say about a market can depend on how
it's defined. So, it's important to understand
what's within an index before you talk about
it-or invest in it.

With investments, we try to keep a humble
confidence about the long-term path of
markets. History has shown time and again that
market declines are eventually repaired by
rebounds and that the general direction of stocks
in aggregate is up, as long as their underlying

EXHIB IT 1 illustrates how the headline performance
number for an index that's meant to represent
U.S. stocks, like the S&P 500, doesn't tell the full
story about the investable universe. Small-cap
value stocks have lagged large-cap growth stocks
by a wide margin year to date, and the S&P 500

Point 3: A Market Is More Than an Index

Morningstar - Q3 2020

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