It’s been quite a ride this year, with the Dow Industrials reaching an all-time high in February, then plummeting 35% to a low point late in March as the pandemic took hold, only to rebound in April and May so far. We’ve seen the unemployment rate spike from a 50-year low of 3.5% to a frightening 14.7%, as the government and the Fed try to counter the breakdown with unprecedented fiscal and monetary stimulus. Meanwhile, most of the states mandated lockdowns, now being partially unwound.
Our macro view of the landscape hasn’t changed from a couple of months ago: that a floor is being built on the economy and the investment markets; that the news will continue to be bad, though get gradually less so; and that we’ve seen and worked through crises before. And so how do things look right now?
From Horrendous to Less Bad
In the words of John Traynor, our Chief Investment Officer, “we think the economy is moving from a horrendous place to one that’s less bad.” Those words are more encouraging than they sound. For example, industrial production fell 11.2% in April—the biggest monthly decline in the 101-year history of the data series! Retail sales plunged by 16.4%, and J. Crew, Neiman Marcus, and JCPenney filed for bankruptcy. Data like that are “horrendous.” But we think that while risk is still high, we’ll see “less-bad” going forward—that we’re probably past the worst times. This is courtesy of the stimulus programs I mentioned above, the experience of 50 states that will be testing strategies for reopening the economy, and some promising news from drug research on the virus.
The markets have taken note, with value and small-cap stocks beginning to rally along with large growth companies, bond credit spreads narrowing (meaning that bond investors aren’t as nervous as they were), and oil prices back to near $30 per barrel after actually going negative for part of one day last month.
Perception vs. Reality
But the situation is highly nuanced; different data sets on the same topic are telling different stories. For instance, the headlines on the housing market are dreadful—but when we looked closer, we found that mortgage originations, construction activity, and home-buying sentiment painted a more positive picture. At the same time, we have less data than usual in some key areas. For one thing, fully 25% of the companies we cover have withdrawn their forward-looking guidance because of their uncertainty.
The Economy vs. the Markets
However, the economy and the markets have been out of synch of late. While the economic data suggest disaster, the market has been moving in an upward trajectory since late March. Consider that most economic data describe what did happen, while investors are interested in what will happen. And the recent market gains tell us that investors are cautiously hopeful about the economy in the near-term future—even though we’ll surely continue to see pronounced market volatility in line with a slow-moving and uneven economic recovery.
At the same time we’re seeing some good results in the biotech industry, the dominant FacebookAppleAmazonNetflixGoogle (FAANG) stocks, and in some retail companies as well—all beneficiaries of new, virus-related economic and behavioral paradigms. The key in choosing securities is selectivity: For example, while the retail sector is generally suffering, Target and Walmart have built up their on-line capabilities and are taking advantage of the boom in Internet sales—which we don’t see as transitory. Similarly, we don’t expect the popularity of curbside retail pick-ups, virtual business and social meetings, streaming entertainment, and the like to fade out after the virus is gone.
This isn’t to say that we’ve turned our metrics upside down—we still rank thousands of companies on classic factors such as stock-price momentum, valuation, and quality including profitability. Our task is to find companies that rank high in this new landscape.
Munis Yielding More than Treasuries
We’re carefully evaluating opportunities in municipal bonds, a perennial favorite of private investors. On the one hand, the stress of the pandemic on the muni market is unprecedented, the result of much-reduced tax revenues—the mainstay of muni-bond support—and in many cases high virus-related spending. On the other hand, the Fed is helping provide a backstop via muni-bond purchases, and just as important to investors, some bonds are positioned better than others.
We’re looking for Munis in states with well-stocked rainy-day funds (Connecticut is at the top of the national list, by the way) and favorable business mixes, which in the current environment typically include significant exposure to health-care bonds. While the yield spreads of munis against Treasuries and other bonds have come down in recent days, they’re still unusually high. Indeed, on average, munis today are yielding about 0.5 – 1.0 percentage point more than Treasuries despite munis’ extra tax benefits. This is very unusual, and appealing. But again, making the right security choices is critical.
Talk to Us
This is a time when strong professional investment advisory and management can be the deciding factor in creating a successful portfolio. We’ve been helping our private clients for scores of decades; we’ve steered them through many economic and market crises. If you have any questions or issues, let us know. And as always, thank you for your continued trust.