Market Strategy 6/15/2020

Key Takeaways

• Investors start the week with a pickup in Covid-19 virus cases among a number of locales that are in the process of reopening around the world.
• Concern raised by the Fed Chairman last week in the press conference after the Fed’s FOMC meeting rattled investor confidence that had driven stocks higher over the past few months.
• Anecdotal evidence and reports in the media indicate that consumers are eager to do what they do best as restaurants and many stores begin to see evidence of pent-up demand.
• Last week economic data continued to show signs that things are beginning to improve if not as fast as we would like.
• The biggest challenge appears to be managing the process of responsible reopening of shuttered economies. 

As we prepared to go to press with this week’s MSRS on Sunday night the tape was buzzing with concern on news that Beijing had shut a wholesale food market after a rise in Covid-19 cases. Equity market futures declined ahead of global market openings on the new week.

Such news and response shouldn’t come as much of a surprise considering what the world has been dealing with in battling Covid-19.

The good news is plenty of progress has been made in Asia, Europe and in the US in stemming the spread of the virus. Sheltering in place, social distancing and economic shutdowns as painful and disruptive as they are have been proven to have been effective in combatting the virus. The bad news is that with re-openings underway stateside and across the globe—even as some other regions of the world are just getting underway in battling the cursed virus—the process of re-opening brings uncertainties and risk of over-reaching early on in trying to achieve normalcy.

A jump in Covid-19 cases in Georgia, Texas, Arizona, Florida and many other states is believed by many health care professionals to be attributed to folks rushing the process of re-opening or failure to adhere to social distancing and mask usage in public.

One very positive thing that appears evident from our observations of the stateside re-opening as well as other restarts around the globe is that most folks really want to get out of the house, back to school, back to work, back to play and to all the many facets of normal everyday life. That desire is good for the individual, society and the economy. It’s how the process of the reopening is executed that will make the difference between success and failure.

Anecdotal evidence as well as news reports indicates that bars and restaurants in many communities are not finding it as hard as they might have imagined to get their customers back. Some retail establishments are seeing early signs that customers would really like to shop the goods in person rather than peruse them online. The problem lies with the reality that most locales have yet to arrive at a post-Covid 19 status. Any resurgence of the virus appears not so much to come from “a second-wave” but as a result of people simply coming out of the proverbial “bunkers” with too much enthusiasm and not enough precaution.

Even in New York City which early on became the epicenter of the pandemic stateside not everyone is adhering to wearing face masks and practicing social distancing when in public. In calls to business colleagues, other friends and family members who reside around the country we find a dispersion of opinion about the virus, how contagious it likely still is and even pockets of genuine resistance to considering that a healthy degree of caution in participating in the re-opening process is necessary if somewhat inconvenient.

Time will tell all soon enough what the right approach is.

Equity markets had enjoyed an outsized series of rallies from the low on March 23rd through the first week in June. By June 8th the S&P 500 had erased its 2020 loss and rallied some 44% from its low reached on March 23.

Last week investor sentiment that had driven the rally was challenged by societal issues tied to race discrimination, a pickup in Covid-19 cases in states that were in the forefront of reopening, and comments from the Fed Chairman that suggested a longer road to travel before a sustainable economic recovery can be achieved. In aggregate the challenges to investor sentiment were enough to become a catalyst for a quick sell-off in equity markets stateside and abroad, giving back some of their prior gains. Nervous investors, bears and skeptics who had participated in the bull rally found opportunity to take some profits without FOMO (fear of missing out) last week and the oft derided by the press zero commission retail investors in speculative issues had opportunity to learn a lesson about what it’s like to get a haircut on Wall Street when gambling instead of investing.

Presidential election year political wrangling stateside and geopolitical dysfunction added to a spell of investor discomfort and resulted in market crankiness that prevailed last week and could remain into the start of the new week.

Investors will have plenty to ponder and sort out as trading opens this week. From our perch on the market radar screen the US economy and much of the world’s economies are working their way out of the mess caused by Covid-19 and the various methodologies deployed by health officials and leaders around the world. Plenty of rescue programs, magnanimous monetary policy, and the willingness to cooperate by the public are likely to succeed if not at no small cost.

In our view technology and the global consumer are likely to be at the center of what drives the recovery process along with technological advancements in pharma, biotech, diagnostics and medical equipment.

Unlike traditional recessions the current one is selfinduced. In a way the creators of the response knew or at least had some feel for what would likely come to pass as shuttering of economies to stem the cursed virus was undertaken. The next steps are unraveling the shuttering process, reopening without causing a dangerous flare-up of the virus, and moving toward an economic recovery.

With so much uncertainty in the how-when-and-if category of possible outcomes and near half of the S&P 500’s companies not able to provide guidance, investors, analysts, economists and strategists have been forced to make projections without many of the traditional points of reference they usually rely on. In a way it’s like flying without instruments. In such situations experience, keeping things in historical context and perspective can be helpful.

In our view the GFC (Great Financial Crisis) added significantly to the collective experience held among: policy makers at the Federal Reserve; and among corporate executives across all the sectors in companies privately held and publicly traded.

The longer one is active in the life process the more likely one arrives at the conclusion that trouble is always around whether it is sought or suddenly appears out of the blue. How the individual, an institutional entity or the society itself meets the problem is key in making the difference between failure and success.

While the US and much of the world were taken by surprise by Covid-19 the response so far has been remarkably quick and effective. In just one hundred days the US went from having a shortage of ventilators for health care facilities to becoming an exporter and even a donor of the devices. Much like in the GFC the devastation was swift and shocking but the response was quick enough to stem the tide and right the ship.

On the home front we don our mask when we exit the apartment, practice social distancing on the street and in the stores. We’ll take that practice back to the office when we get the “all clear” signal.

We remain diversified in our investment portfolios; maintain an overweight in equities versus fixed income; and favor cyclical sectors over defensive sectors.

Our favorite sectors remain: Information technology, consumer discretionary, industrials and financials (our contrarian pick).

From a global perspective we remain overweight US equities while maintaining meaningful exposure to both developed and emerging markets on expectations that an economic recovery stateside coming out of the Covid-19 shutdown will help boost economic growth around the world and lead to a global economic recovery (similar to the one the world was experiencing just prior to the trade war between the US and China).

We expect that a post-Covid environment will see a diversification away from what has become a Chinacentric global supply chain. Such diversification will likely position the world better in facing future challenges to disruptions like those experienced due to the pandemic and better position the economic perspective for many countries around the world.