On Our Minds

Investment Market Update, Q2 2020

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Growth is on the Horizon

The S&P 500 Index has rebounded 35% from the low on March 23 and is now only down 6% year-to-date. The rally was slow and deliberate as the headlines shifted from a virus-induced economic lockdown to a gradual re-opening. The economic re-start will revitalize small and large business activity and inspire consumers to emerge from their shelter-in-place. The support of the Federal Government’s CARES Act and the Federal Reserve’s active management of the low interest rate and liquidity environment will dramatically help the recovery. Unless the virus infection curve rises again, the second quarter GDP will mark the trough of U.S. economic activity so future quarters should demonstrate accelerating economic growth. Optimism is supporting higher valuations with development news of many potential vaccines and the declining virus infection curve. The U.S. population is adapting to the new virus-preventative measures with new policies and procedures which will balance safety and growth for the future.

Several market technicians and strategists are warning that the leadership in this market has been mostly among the large cap technology companies. The five largest companies in S&P 500 Index (Microsoft, Apple Google, Amazon and Facebook) represent 21% of the weighting in the index. These strong growth companies continue to innovate and focus their digital strategies on cloud storage, social media, digital shopping, enhanced intelligence and virtual reality. The sector performance leadership has been remarkably narrow with information technology up 17%, healthcare up 10% and consumer discretionary up 8% while the remaining sectors are negative. The energy, financial and basic material sectors are down the most while the small cap index is down 16% and the mid-cap index is down 14% year-to-date. There should be a broadening market rally that will fuel these sectors to catch up over the summer months.

The international markets are also experiencing great volatility and some optimism recently. The European Union is trying to negotiate a stimulus package that relies on the more productive northern countries to provide debt relief and stimulus to the southern countries. The EU is expected to have 8-12% economic contraction this year and requires government intervention, but skeptical resistance by northern countries will prove hard to overcome. Russian GDP, with its heavy dependence on oil prices, is contracting dramatically which provides less social and political stability. China remains in political and economic disfavor after pandemic mismanagement and recent actions in Hong Kong. We should expect China’s government to be the political punching bag in the U.S. elections in November which will deter acceleration in trade. Due to these uncertainties we remain underweighted in all international markets.

Stay well!

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Growth Poised to Follow Re-opening of the Economy

Investors reconsidered the emotionally-oversold market in the month of April and bravely pushed the market higher by 12.7% even before news about the virus infection curve flattening. Since the “shelter-at-home” policies have reduced the infection rate, government policymakers are announcing dates for re-opening the economy. After an economic full-stop and 26 million Americans losing jobs, an economic restart will be a slow process.  By staging a deliberately slow ramp-up in economic activity, the government hopes to prevent the healthcare system from being overwhelmed. While Wall Street and the markets are anticipating a “V-shaped” economic recovery, Main Street may experience more of a Nike “swoosh-shaped” recovery. 

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Investment Market Update,  Q1 2020

I wanted to write a note to you about the tremendous first quarter market volatility and the 20% S&P 500 Index decline. This “waterfall” decline was the worst since the 2008 Great Recession and was particularly unusual since the market was trading at an all-time high on Feb. 19. The COVID-19 pandemic is an unprecedented event elevating fear and uncertainty, but it is a transitory event for the markets and the U.S. economy. Meanwhile, we hope you please practice social distancing and stay safe.  

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COVID-19: Investment Update

The equity and fixed income markets are experiencing unprecedented volatility and fear about the coronavirus. This is a health crisis that has evolved into a financial challenge for policy makers as they attempt to suppress the spread of the virus while not closing down the economy entirely. Unfortunately, the only way to deter the spread of the virus is to reduce or close transportation and impose a quarantine. Since the only way we know to limit the number of infections is to reduce social interaction, we expect more states will join California, Illinois and New York in a “lock down.” For a historical comparison in 2009-2010 the H1N1 “Swine-Flu” virus infected 60 million Americans and killed 12,500, and yet the panic was not as prevalent. 

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4th Quarter 2019 Investment Update

Supported by stable interest rates and optimism regarding the China trade negotiations, the S&P 500 Index rose 28.9% and the Nasdaq Index, with its high information technology weighting, rose 33% for the year. Enthusiasm and expectations for a better economy and strengthening earnings grew as the year progressed. Current equity market valuations look historically elevated with an overall 18x expected Price-to-Earnings ratio, but with few attractive investment alternatives, the financial market gains can continue. There is still over $1 trillion in private equity and hedge fund cash ready to be invested, so even a minor correction would be met with supportive technical buying. The rally was concentrated in the Large Cap technology growth stocks with Mid Cap and Small Cap stocks generally up less significantly. Value stocks like financials, consumer staples, energy and utilities – which are not expected to have significant earnings growth – underperformed during the year.

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