Red Sky at Morning

Stocks began 2020 on a bit of a sour note before the pandemic.  In February and accelerating in March, prices truly fell off a cliff as COVID-19 spread around the world.  Then, as though with a flick of a switch, prices reversed on March 23rd and began a remarkable five-month long run.  For some reason, September was the month prices finally chose to take a look in the mirror and pause.  Measured by the S&P 500, stock prices fell in the month of September 3.8% and are now up 5.6% year-to-date.  A lot of investors are surprised that they have a positive return at all considering all that’s gone on this year. 

The good news is that the market has recovered from its March lows.  But looking more closely, very few stock prices have actually recovered.  For example, looking at several different segments of the total market on a year-to-date basis, we see troubling divergences.  On one hand, the Nasdaq 100 (QQQ) is up 30%, and the S&P 500 Growth Index (IVW) is up 20%.  To a large extent, these heady returns have been driven by the FAANG + M stocks (Facebook, Apple, Amazon, Netflix, Google and Microsoft), and a handful of other high-growth names.  In stark contrast, the S&P 500 Value (IVE) is down almost 11%, the DJ Dividend Index (DVY) is down 19%, and the S&P 500 equally weighted is down 4%.  The number of stocks not participating is reason to check one’s blanket optimism.

In some respects, the market has been trading (daily ups and downs) with an eye toward the approval and distribution of a safe vaccine against the virus.  Moderna, one of the leading pharmaceutical companies working to produce a vaccine recently announced that they are unlikely to have a vaccine ready until March or April 2021.  Shares of more economically sensitive stocks (cyclicals) and shares of more value aligned and higher dividend paying stocks tend to respond positively to good news surrounding vaccines.  One thing I take away from this is that the market will, in all likelihood, not begin to “normalize” until there is in fact at least one vaccine widely distributed and widely accepted.

Optimistically, we are seeing a general recovery in earnings – primarily driven by the digital, cloud, and software side of the economy – spread across a range of sectors and industries.  From a fundamental perspective, this is an important positive for stock prices looking forward.  I think there will be continued improvement on this front and we may well see operating earnings numbers for the S&P 500 by late 2021 that are similar to 2019’s numbers.  That would represent a relatively quick exit from the current recession in relation to what happened in the dot-com recession in 2001 and the housing bubble recession of 2008.     

A more circumspect view is that economic change may have been catalyzed by the pandemic in ways that are not apparent yet.  We are in uncharted waters.  Radical change in the workplace and challenges with higher education feeding young technocrats into the new economy are works in progress.  I think the pandemic has quite remarkably pulled the economy forward by several years.  There are millions out of work who will need to be re-educated and re-integrated into an economic structure that may be permanently changed – and this will likely take longer than most would like to admit.

The large and uncomfortable elephant in the room is the upcoming election.  At the moment, polls indicate a change in government, and this would clear the way for more fiscal stimulus.  The stock market is clearly anticipating this outcome and has priced it in already.   I think that the US economy, its leading role in the world, and in turn, the stock market, will be best served through more consistent, well thought-out and more clearly communicated policies from Washington. 

As ever, we are watching closely.  In past times when we have faced challenging market conditions, we found it prudent to focus on owning high quality assets – stocks for which we have full transparency into their pricing and their financial conditions.  We also require ready liquidity, which may sound odd, but when things go wrong, lack of liquidity can be problematic. 

In the meantime, please do not hesitate to call if we have not been in touch.  We are working both in the office and remotely and look forward to speaking with you.   Please, be safe out there.


Bruce Hotaling, CFA

Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are of this date, and are subject to change without notice.   Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.  Investments are subject to market risk, including the possibility of loss of principal.  Past performance does not guarantee future results.  The S & P500 is an unmanaged index of 500 widely held stocks.    Investors cannot invest directly in an index.   The PE ratio (price/earnings) is a common measure of relative stock valuation.

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