Quarterly Investment Outlook

June 30, 2020

Are Investors Too Optimistic? 

The market’s March decline was on rampant fear without any real data.  As we saw the initial wave of COVID-19 cases stabilize along with widespread financial support from the government, markets rebounded strongly.  Now we are hearing about rising cases, particularly in areas that were previously not as badly affected, and markets are not sure how to respond. 

COVID-19 will not disappear until there is a vaccine and that will come in 2021 at the absolute earliest.  Until then, there will continue to be rising and stabilizing waves of cases.  The goal of the lockdowns and other social distancing measures was to draw out the cycle of the virus so as to allow healthcare institutions to better handle cases- that is what we have done so far.  There was never a realistic prediction that cases would rise then fall and disappear. 

Recently, we have had a wave of dramatically positive economic reports as businesses have started to re-open, but these only just made up for the historically dismal data from March and April.  Retail sales, for example, plunged over 16% in April and were up a whopping 17% in May, but were still down 10% (over $50B) from last year.  There are still so many unanswerable questions as to how this virus affects our economy today and in the future.  When will consumers regain the confidence to return to their pre-COVID lives, be it going shopping, eating out, going to the movies, or traveling?  How many businesses will fail because of limited operations or cautious consumers?  How many jobs will be permanently lost? 

In the short-term businesses will re-open and try to be profitable at lower capacity levels.  Many of the businesses that could still fail will be small and midsized companies that are not part of the S&P 500.  This is an important economic distinction because the markets may justifiably do better than the overall economy, offering investment opportunities even through the uncertainty. Large public companies are better positioned to weather the economic slow-down and may report a faster return to profitable growth.   

This may be one reason the S&P 500 has rebounded sharply from its March lows and is currently barely down for the year.  Additionally, the S&P 500 is a market weighted index in which the largest companies have the most influence on performance.  Ned Davis Research estimates that 33% of the stocks in the S&P 500 are well positioned to thrive in our COVID-19 threatened economy, and due to their size, they make up almost 60% of the market-cap of the index. 

While we believe the market rebound is ahead of itself for now, the markets seem to be focusing on available data- and that data is short-term.  Efficient markets reflect all available information and discount future expectations.  Today, there is little long-term data; health experts and corporations alike are reluctant to suggest any clear insight into what the future looks like.  In this environment, it seems markets are moving on short-term information only until there is reliable information to assess the future.  This vacuum may be another reason we have a strong market today that does not yet reflect the potential months or years it could take for our economy to return to previous levels of both absolute output as well as ongoing growth.  

We wouldn’t be surprised to see continued volatility as investors cope with the many uncertainties that lie ahead this year, including ongoing outbreaks of COVID-19hopes for another round of fiscal stimulus, social unrest across the U.S., increasing tensions between the U.S. and China, and the upcoming presidential election. 

For now, we continue to invest portfolios to participate in current strength as well as hold investments that can grow steadily in an uncertain economy.  We used opportunities this past quarter to add to positions in areas that are current and long-term winners such as the Communications sector in which streaming and gaming services will continue to thrive and  the Healthcare Supply and Device sector in which demand will soar for products and innovations that protect workers and patients alike. 

We urge everyone to stay thoughtful in their activities and wish you a safe and happy summer!