Medical Science

April was a remarkable month in the stock market.  After March delivered one of the worst months in recent memory, stock prices as measured by the S&P 500 recovered dramatically, with a 12.8% total return in April.  Year to date, prices remain down 9.3%, and the trailing twelve-month return for stocks is 0.8%, essentially unchanged

Just to refresh your memory as to what has happened this year, the stock market hit an all-time high February 19th (S&P 500 closed at 3,385).  Prices then plunged over 33% in only 20 trading days and the market hit its low point on March 23rd (S&P 500 closed at 2,237).  Believe it or not, since the March low, prices have surged over 23%.  In prior instances (there have been nine) when the market has risen in excess of 20% in a 25-day window, prices over the ensuing 3 and 6 month periods are all positive (Bespoke).

A lot of people are struggling with the profound disconnect between the economic data and what stock prices have been doing – it is extremely difficult to connect the dots here.  Not that it is ever easy, but more often than not we at least think we can make sense of things.  Q1 GDP was down 4.8% (annualized).  When Q2 GDP comes out, it may well be the worst drop in GDP, ever.  Yet the stock market taken as a whole does not reflect anything as extreme as these figures might portend.

Medical science is the solution, simple as that.  An important distinction is that it matters far less what the people in Washington DC say, as opposed to what the people in the community do.  Curve flattening is working and the number of new cases and mortalities are on the decline.  Just the same, going back to something close to “normal” will require a vaccine.  There is optimistic news from several companies, including Pfizer, which has initiated a trial, and the much appreciated Dr. Anthony Fauci who said he thinks a vaccine will be completed in a historically short time frame. 

On our end, our work hangs on our ability to analyze data, fundamentals, quantitative factors, technical patterns and relationships.  Macro data often sets the table, but we buy stocks based on specific attributes.  As earnings are released, we are seeing patterns emerge: importantly, the earnings of many of the companies we own will not be overly impacted by the economic fallout from the virus.  Industries such as cell towers, social media, online retail, cloud-based businesses, software, med tech and utilities are posting encouraging results.  On the other hand, many companies (airlines, hotels, restaurants) are essentially closed.  Job loss has spiked and unemployment is at levels never seen before.  This is optically a challenge.  We are experiencing the fallout from the virus in ways notably different than how the stock market is pricing in the anticipated earnings disruption.

In my opinion, stock prices at this point in time reflect a cup-half-full outcome.  The Federal Reserve has done an exceptional job steering the financial system clear of another financial crisis.  Congress has delivered firehose fiscal spending that will no doubt give the economy a life sustaining jolt.  Stock investors now appear to be assuming 2020 is simply a wash, and have fixed their attention on the potential earnings outlook for 2021.  I am concerned over the risk of a recurrence in stock market volatility if the goldilocks recovery does not arrive on time, and according to plan.

Our focus is to continue to own high-quality growth stocks which have served us so well over the years.  Large-cap growth stocks were up 14.5% in April, and are off a modest 2.2% year to date. They have held up extremely well as the pandemic has circled the globe.  We are now looking to add in cyclical companies, whose share prices have come under extreme selling pressure, and as the recovery takes hold, I expect there to be considerably greater price appreciation.  As we have discussed in the past, holding adequate cash and other liquid reserves in times like this is critical to riding out the storm.  I’m optimistic that medical science will get us out of this, and a vaccine and effective anti-viral will bring us back to life as we knew it.  To get there, I also think we will need to be even more patient than we are generally accustomed to being.  Please do not hesitate to call – we are working from home but connected, on-line and available.


Bruce Hotaling, CFA

Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are as 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&P 500 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. This note contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

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