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