What’d I Miss?

During the first half of 2020, the stock market has shown itself to be every bit as volatile and unpredictable as investors often fear.  As measured by the S&P 500, stocks generated a total return of 1.78% for June, and are now -3.18% for the year; stock prices have staged a truly unprecedented rebound.  According to Bespoke Investment Group (July 2, 2020) by March 23rd, stock prices had fallen 33% in 33 days as the virus brought the worlds’ economy to a sudden stop.  In the 100 days since the March 23rd low, the S&P 500 has rallied nearly 40%, the strongest 100-day return since 1933. 

The pandemic driven swings in stock prices have most investors on edge.  A week ago, investors appeared concerned the rapid spread of the virus across the U.S. would put an end to the stock price rally.  In a blink, investors appear to now not be concerned with the virus data.  The news flow on the virus’ spread and its impact on the economy, jobs and the future reinforces the fact that we are truly flying blind.  Worrying is evidence the virus is actually a vascular disease, effecting many organs of the body.  It also appears to be mutating, becoming more transmissible and less deadly.  Please, wear your mask.

The market is now more clearly than ever made up of haves and have-nots. Large cap growth stocks are the indisputable darlings of the market, as measured by the IVW (iShares S&P 500 Growth ETF), up 7.7% YTD versus the value counterpart IVE (iShares S&P 500 Value ETF)  -15.6%.  That 23.3% spread is big enough to parallel park a Tesla Semi.   This spread has grown to new heights, but is not a new phenomenon.  The performance disparity between growth and value is similar, though not as extreme, to the last 10 years.  Another disturbing fact is the non-participation of both small and mid cap stocks.  The year-to-date top performing sector is technology (14.9%) and on the other end of the spectrum, energy (-34.6%) and financials (-23.6%) bring up the rear.

The mid-point in the year marks the all-important 4th of July holiday.  Happy Independence Day.  I hope you were able to celebrate our country’s declaration of independence from Great Britain, in some physically distanced manner.  My family’s celebration included watching the film version of Lin Manuel Miranda’s Broadway musical Hamilton.  If you have not seen it, I will go out on a limb and strongly recommend you do.  All that is required is a subscription to the Disney+ service and you are on your way. 

The release of Hamilton over the holiday is remarkably pertinent in light of the extraordinary behavior we are seeing out of Washington, D.C. The underpinnings of our constitution and our experiment with a new federal system were under immense pressure then, just as they uncomfortably are today.   The show reminds us that all men are created equal (except for women and African-Americans) and its brilliant multi-ethnic cast highlights the degree to which freedom and equality remain challenges for us.  We also learn that we have Alexander Hamilton to thank for securing a powerful and enduring banking system, and I expect he would be pleased with the way the Federal Reserve has upped its game to rescue us from a second financial crisis.

The fiscal and monetary stimulus in place (with more pending) are likely to be transformative for the economy.  We cannot see the benefits yet, but signs are emerging.  Some recovery in the job market is evident, with the number of workers on temporary layoff beginning to fall, from 11.5% to 6.6% in the last two months.  This improved employment is matching businesses reopening.   How far we can extrapolate forward with the outbreak of the virus widening is unclear.  Earnings season begins next week.  This will be telling as a majority of S&P 500 companies have cut or suspended guidance.  I am optimistic that the companies we own will continue to put up numbers, as we continue to eye opportunities in more economically sensitive businesses that may pick up steam with a re-emergence of economic growth.

Overall, I am pleased with our positioning and how our stock portfolios have performed in a most difficult year.  We are continuing to work remotely, and find it (with the help of Zoom) quite effective.  If you would like to review your accounts or have any questions please do not hesitate to call or email.  We are all available for you.  Please take good care.  


Bruce Hotaling, CFA

Managing Partner

What Comes Next?

This year we have watched as the stock market executed a remarkable v-shaped recovery from the traumatic lows it explored March 23rd.  At that point, the S&P 500 was down over 30%.  Since then, prices are up 37.7% (as of June 3) the largest 50-day gain ever, according to FactSet Research.  May saw shares rise 4.7%, and now for the year, prices are down 4.9%.  In a similar manner, the bond market has seen the dramatic cracks that appeared largely remedy themselves.  Investors are breathing a sigh of relief, while asking themselves, what comes next?  

When I assess the investment landscape in an attempt to reconcile where there is opportunity, and excess risk, I am of two minds.  On one hand, the market itself is its own best leading indicator, and it is pointing to continued opportunities.  Recession or not, the vast amounts of financial support from the Federal Reserve and Congress’ fiscal stimulus are unprecedented.  A large component of the market is made up of companies whose fortunes have not been impacted by the virus; many in fact have been unwitting beneficiaries of the new economic order.

On the other hand, while the curve has been flattened and the health care system stabilized, the protracted fallout from the virus is unclear.  There is not a therapeutic or vaccine on the horizon yet.  This means we have the continued threat of infection, and required physical distancing and modified work protocols, which will dull the economy’s rebound.  Unemployment is at record high levels, and our consumer driven economy is dependent on spending.  Recovery may be further hampered by higher taxes, higher default rates on rents/mortgages, and extended periods of recovery particularly for both the service and travel/leisure industries.  

Normally the principal barometer of stock behavior is earnings and forward guidance;  2Q 2020 earnings will likely be the washout of all washouts.  According to FactSet Research, during the period through May, estimates for the full year fell from $177 per share to $128 per share.  Sadly, this is the largest decrease in annual EPS estimates for the index since FactSet began tracking in 1996.  The good news is the cuts to estimates have largely run their course and we have seen a larger than normal number of companies withholding forward guidance.  The difficulty here is the highly uncorrelated behavior of stock prices going up, while earnings forecasts are going down.

The approach that has been working well for us continues to center around growth companies with high free cash flows and strong margins.  These have been the driver of returns for the last few years, and I expect this to continue.  We have also been taking advantage of a surge in interest in more cyclical (economically sensitive) companies, many severely punished in the downturn.  I think we will see a continued snap-back, driven by pent-up demand.  There is a good chance the recovery will usher in a period of secular growth along with some inflation, historically a favorable backdrop for stock prices.

While I think the recovery will be stronger than many fear, I’m not sure which letter of the alphabet it might look like.  I also think we need to brace for fits and starts along the way.  We need to be aware and open minded, as there will be a lot of change; think about public transportation, travel by plane, professional sports and college (according to National Student Clearinghouse, college enrollment since its peak in 2011 has fallen 10.6%).  In a curious way the pandemic has amplified change.

Finally, I am hopeful the most recent crisis over racial injustice will raise critical awareness and allow fairly elected representatives to begin to effect constructive reforms.  At the moment, the market’s only concern is the virus and nothing else.  I view the current protests as a window into the need for attention to far larger concerns, such as the health and sustainability of our social-economic fabric, and the future security of the global environment.  We will work through this pandemic, but we need to attend to more to insure vibrancy of the markets into the future. 

Though we continue to work remotely, please do not hesitate to call or email, as we are all available for you.  Please take good care.  


Bruce Hotaling, CFA

Managing Partner

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

Like a Lion

March was one of the most challenging months I’ve experienced as an investor.  As measured by the S&P 500 stock prices fell 12.35% for the month.  In ordinary times, a daily price move greater than 1% is worth paying attention to.  There were 22 trading days in March, and on all but one, prices moved up or down by more than 1%.   March 16th was the champion down day, with an eye popping 11.98% drop.  March 24th won the up-day trophy with a 9.38% positive move.  Year to date, stock prices are down 19.6%, the first time the S&P has been down three successive months since 2008.

The coronavirus is dominating the lives of most people around the world at this moment.  It is extremely difficult to estimate the scope of the virus’ impact and the immediate concern is its containment.  Social distancing clearly has a positive impact.  The virus is however putting immense pressure on the health care system across the globe.  We anticipate the day when our doctors and researchers will be able to accelerate a therapeutic or a vaccine.

A second lesser known crisis is the oil price war.  On its own, this would be wreaking havoc in the markets.  On March 10th, Saudi Aramco announced it would dramatically raise crude production, pushing Russia to take similar measures as the Russian Ruble tanked in value.  As seen in 2016, low oil prices imperil countries and businesses dependent on oil revenues.   With the global economy on idle, the resultant demand shock has forced prices to lows not seen in 20 years.  S&P 500 earnings from the energy sector will likely go to zero.

To stem the impact of the economic fallout, on the corporate level and on the individual level, both the Federal Reserve and Congress have acted with unprecedented speed and intensity.  Congress has approved $2.3 trillion in bills to enhance unemployment benefits, paid sick leave, and direct payments to families, in addition to payroll support for small businesses.  Separately, the Fed has slashed interest rates, flooded banks with liquidity, opened unlimited quantitative easing and opened U.S. dollar facilities for other central banks.

Our immediate work centers on several important matters.  Foremost, we have to make sure you have enough cash on hand to manage your household for roughly 9 months.  If we need to raise more cash, there will be opportunities along the way.  Patience at this point is imperative; this will not be an aspirin and a good night sleep event.  It’s going to take a good deal of time and focus to work through what is likely to be more challenging news.  The markets will continue to be volatile and driven more by fear than fundamentals.  Our main effort is to screen for any hidden risks or credit issues among the companies we own.  Our focus is on high quality stocks and bonds, ones that can continue to maintain a high level of earnings through the economic downturn.  These are the types of companies, and there are many of them, that have successfully come through prior economic crises.

When the virus is stabilized, we will be able to better assess earnings and the guidance companies put forward.  At that time, our fundamental analytical tools will regain focus.  This will help us establish a new baseline, and get a better sense for the potential returns for stocks for the remainder of 2020, and more importantly 2021.  We are expecting there to be some interesting changes to the economic fabric.

While stock and bond prices today represent far better values than they have over the prior 10 years, prudence has us putting money to work judiciously at this time.  We are seeing signs of a potential transition to more value stocks, stocks that perform best in a cyclical upturn.  In my opinion it is too early to make this move.  We will continue to own stocks that will emerge from the economic downturn earliest with strong profitability and liquidity.  These have been our bread and butter factors for some time now.

Finally, we want to talk with you, if we have not already, to review your asset allocation, your cash needs and to share our views on the unfolding health and economic crises.  We do not have all the answers but we do have a breadth of experience in traumatic points in time for the stock market.  Please feel free to reach out to us.  We are as busy as ever at work every day from our home offices.  Please be safe.


Bruce Hotaling, CFA

Managing Partner

Ignoring Bad News

Stock prices, measured by the S&P 500, fell 7.48% in February.  This leaves them down 7.52% year to date.  While a difficult start to the year, these figures mask the true story.  On February 19th stocks set a record high and by month end had dropped nearly 13%.  According to Bespoke Research, the S&P 500 fell over 12% in the six sessions ending on Thursday February 27th, its fastest drop from all-time highs, ever.  The selling volume was the highest since August 2011, when Standard & Poor’s rating agency cut the U.S’s credit rating to AA+ partly due to dysfunctional policymaking in Washington.

As you know, the panic in the markets is tied to the coronavirus.  A dozen epidemics have struck, dating back to the HIV/AIDs crisis in June 1981.  All induced immense fear and reciprocal selling on Wall Street, but within 6-months the stock-related implications of the epidemics had been resolved.  What we saw in February is a market that had gotten ahead of itself, largely through ignoring bad news, forced to re-price as the fear of the epidemic to both the supply side and the demand side of the economic equation began to pencil out.

It is interesting that over the last two years, stock prices have produced some alarming volatility.  Back in the early days of 2018, prices fell roughly 10% due to the imposition of Trump’s tariffs.  Beginning that fall, prices began an extended downslide, falling nearly 19% by Christmas.  This was primarily attributable to the Federal Reserve as it was attempting to normalizing interest rates.  Then, just last week, prices fell nearly 13% in less than a two week span over fears of the global spread of the coronavirus.  The volatility does not seem as though it will abate any time soon, and investors will likely begin to lower stock exposure, or demand higher returns, if these dramatic price swings remain this challenging.

The recent price swings are investor’s attempts to price in the longer-term impact of the virus.  Investors overcome with fear are using worst case assumptions.  On Wall Street, fear is contagious.  There are several things we can observe from the market’s recent behavior.  First, stock prices tend to rise gradually and fall quickly.  We are in a computer driven world and much of the trading that takes place on Wall Street is handled by algorithms, versus pencils and green eyeshades.  Also, the recent prevalence of ETF’s creates a flywheel effect and both selling and buying become accentuated well beyond what the market might normally dictate.  It’s impossible to accurately link the potential severity of the coronavirus with future stock market levels.

I expect the fear factor will crest and countries will better implement mechanisms to defend their populations.  Sadly, this may exacerbate the already anti-globalist tendencies.  There will be an impact on the stock market, separate from the recent emotional rash of selling; analysts’ earnings forecasts will come down as expectations are lowered.  This will be due to supply chain disruption and demand reduction (airlines, for example), putting a fundamental cap on expected returns from stocks in 2020. 

Going forward, we should anticipate increased pressure on the Federal Reserve to lower interest rates in an attempt to spur economic growth –primarily by boosting stock prices.  As we saw in 2019, forced liquidity can artificially lift the market multiple, pulling prices up, without any underlying change in business economics.  Investors had been hoping a 10% surge in corporate earnings would drive stock prices to new highs.  Now, with the unknown scope of the virus weighing on investors, the market is discounting low to no growth and the focus will shift outward to 2021.

Our efforts are focused on identifying and owning companies that can thrive in the current investment landscape.  The strength and momentum of US high growth, high free cash flow companies has been impressive.  Further, the gap in returns to growth stocks over value stocks supports our work going back years.  We are also seeing strong market interest in ESG-type stocks which includes certain utilities, and stocks of companies in pursuit of global environmental sustainability.  We are pleased to see this evolution of the application of technology finally beginning to take hold. 

Please do not hesitate to check in if we have not been in touch recently.   


Bruce Hotaling, CFA

Managing Partner