THE SPRING LETTER
Panic is not an investment strategy.”
Market Thoughts
The year opened with a euphoric rush. Many stock market participants (one hesitates to call them investors), who had missed out on the startling gains in 2019, adopted a fear of missing out mentality. Complacency reigned. The party ended February 19. The ensuing carnage amounted to the swiftest, sharpest stock market correction on record. Value investors hesitantly bought only to be wounded by falling knives. The major US stock market indices may have put in a low March 19. Then a buying stampede ensued.
A hundred years after the misnamed Spanish flu pandemic of 1918-19, investors are grappling with a similar phenomenon, with little sense of the magnitude or duration of the financial fallout from closing the “non-essential” sectors of most of the world’s economies. While Chair Jay Powell proclaims the Federal Reserve will do whatever it takes, political leaders only spoon feed fiscal assistance to the economy. The cost of unpreparedness and dilatory response by the Trump administration will be gargantuan.
Stocks returned to an approximation of fairly priced in a hurry, but high growth technology stocks have temporarily galloped ahead of their medium-term business prospects. Investors have rotated out of energy and cyclically sensitive sectors and favored those essential businesses with pristine balance sheets or in the hunt for a Covid vaccine (Gilead Sciences).
In an effort to navigate the challenging equity markets, we emphasize sectors like: consumer staples (Smucker’s, Nestle, Procter & Gamble); manufacturers (Boeing, ITW); medical equipment makers and pharmaceuticals (Alcon, Bristol-Myers, Eli Lilly); entertainment (Comcast, Disney, Liberty Media); selected technology (Microsoft, nVidia, Palo Alto Networks); insurance (Alleghany, White Mountains); and, dividend plays like ProLogis (warehouses) and ONEOK Inc. (energy pipelines).
Economic Perspective
Closing down most of the US economy has resulted in an avalanche of unemployment claims being filed, over 26 million year to date. And with the shriveling of demand (and a supply glut), oil prices plunged. Other commodities followed suit. GDP declined 4.8% in the first quarter of 2020. And coming quarters, with the full effect of the pandemic, will show greater contraction. However, ours is an incredibly resilient economy, and no later than the introduction of a vaccine, will resume expansion.
As a once in a hundred-year phenomenon, the Covid virus pandemic challenges the ability to make forecasts. While some states are gradually opening up for commerce, renewed outbreaks of Covid infection will slow economic stabilization and eventual recovery until a reliable vaccine is introduced. Economic forecasters must now rely on epidemiologists for their predictions on the timeline of economic recovery. Initially hopes that the economic consequences of the pandemic would result in a dramatic V shaped recovery have given way to forecasts of a jagged sawtooth pattern of expansion and contraction mimicking the likely outbreaks of infection.
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Stephen K. Bache, CFA
Sources: BloombergBusinessweek, The Economist, New York Times, The Wall Street Journal, Kim Ghattas, Black Wave: Saudia Arabia, Iran and the Forty Year Rivalry That Unraveled Culture, Religion and Collective Memory in the Middle East, (NY: 2020); Steve Inskeep, Imperfect Union (NY: 2020)
