“I Don’t Care If The Market Is Crashing, Rebounding... Or Just Going Sideways…”

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Why This Fund Manager Who’s Up 30% This Year Isn’t Celebrating The Market’s Move Higher Yet

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The market turmoil is “not over yet.” Here’s what you need to know.

Dennis Lynch is the head of Counterpoint Global at Morgan Stanley Investment Management, overseeing the Insight Fund which is one of the top 10 large cap growth funds of the last decade and is beating the market by more than 30% so far this year.

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But even with that success, which he says has been “relatively fortunate,” Lynch isn’t celebrating quite yet. 

“Times like these are just so unpredictable… it’s not over yet,” Lynch said. “Just because the market went down and went up doesn’t mean there’s a beginning and an end. In some way, when you’re an investor, it’s always a beginning. I think you need a long time to pass in order to judge whether or not you had a successful strategy or a successful period of decision making.”

One thing that could send stocks lower, according to Mawr Trust’s Jeffrey Mills, is stocks being too expensive for how unpredictable things are right now.

“The market is trading right now at about 20x forward earnings,” Mills said. “I think that multiple is just a little bit high considering all the uncertainty out there.”

“Only 15%… in the S&P 500 is trading above its 200-day moving average. So, you’ve had a lot of investors crowd into a specific perceived area of safety in the market – large growth stocks,” Mills said. “Look at cyclicals. Look at small caps, banks, transports. All the areas that might indicate a more durable recovery in the economy. They’re all stuck below 2018 lows.”

Another catalyst that could send things lower could be another round of “pretty brutal” data.

“We’ve got a couple of big fundamental things on the horizon, meaning second quarter GDP and second quarter corporate earnings,” said Federated Hermes’ Phil Orlando who believes a “cleansing correction” is right around the corner that could spake a 10% drop or more within weeks.

“You’ve got some investors who are bearish by nature and got sucked into this” 32% rally, Orlando said. “If the market starts to pull back in coming weeks, they’ll throw in the towel and say ‘Ah! I knew I shouldn’t have gotten into the market. The market is going down. This coronavirus is killing me.’ And then, they will wash their shares into the market.”

Back to Lynch, the Insight Fund represents “our best ideas” and his team’s goal is to “collect what we think are highly unique companies.”

The fund, which has more than $3 billion in assets under management, holds names like Amazon (NASDAQ: AMZN) and Slack (NYSE: WORK), and is focused on identifying upcoming trends, particularly in the tech, software, and healthcare sectors.

“We think, in general, that markets are complex, adaptive systems,” Lynch said. “They’re constantly evolving. It’s partly our job to continue to adapt to try to figure out what other people are missing and identify big ideas before the rest of the world does.”

While the Insight Fund is up 14% over the last three months as the coronavirus roiled the market, Lynch is cautious about investing in the extremely volatile market we’ve seen since February. 

“Generally in a period like this we try not to be too active because it is often your emotional snap judgment that isn’t necessarily right,” Lynch said. “In fact, we’ve already seen that a little bit in two cases where companies that you would have thought might have weaker fundamentals as a response to this pandemic in a few cases have actually had the opposite.”

One such example was the sell-off in Shopify (NYSE: SHOP) between mid-February and early April, when the stock fell -36%. But since then, the stock is up a whopping 132% on the heels of an earnings report that Lynch said demonstrated that the boost from the shift to e-commerce was offsetting the hit from small business struggles.

“It would have been very easy if you were in snap judgement mode to say ‘you know, I should sell some of this’ because of the obvious first-order exposure to small-medium business, and you might have missed the next part,” Lynch said.

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