Warm summer greetings!
Some days it feels like six months and some days six years, but we are indeed now just over halfway through this historic year of 2020. So much for perfect (20/20) vision. Who could’ve guessed what life and the market would’ve presented to us in the coming months when we welcomed this new year and decade back in January? More than anything, we hope this finds you and yours well, healthy, and hopeful.
It feels near impossible to do justice to the complexity of the current market environment—it’s simply staggering the myriad ways that the COVID-19 pandemic has impacted our health, families, communities, politics, economy, and businesses. On the face of it, the current stock market and economic data would suggest that we are already in recovery mode after the shortest and deepest recession in history. Since mid-March, we’ve had nearly 50 million people in the United States file an unemployment claim and yet we’ve seen hiring and jobs begin to come back as the economy slowly reopens. Broad measures of U.S. economic activity and business profits have yet to be reported for the second quarter though they will most certainly be ugly. Again, prospects for both appear to be improving despite the current threat of another wave of infections. The market tends to reflect future prospects, which is why it’s not currently worried about these terrible economic and earnings reports we’re about to witness. Those are in the rearview and the market cares more about what happens next. In our view, much uncertainty remains as we look to the second half of the year and we maintain a generally cautious investment stance.
After a breathtaking, panic-filled, short-lived, and historic dive in the first quarter, the U.S. stock market has roared back to close the first half of the year not far from where it started (-3% for the S&P 500 index). However, we would point out that the recovery in stock prices has been very uneven. Technology stocks and other companies that benefit from work-from-home/stay-at-home trends have been on a tear while others have severely lagged. For illustration, the tech-heavy NASDAQ composite index posted a total return of +13% while Berkshire Hathaway—which in our view represents a solid collection of operating businesses and investments, though more cyclically exposed—declined 21% over the same period. In fact, we haven’t seen such a divergence in the market since the late 1990s. Thankfully we have a sizable allocation in our strategies to companies benefitting from these positive near-term trends: Microsoft (MSFT); Apple (AAPL); Google (GOOG); Intel (INTC); and Spotify (SPOT), to name a few. We also own Berkshire Hathaway and other companies that are weighing on near-term portfolio performance but we believe have excellent long-term prospects.
We’re seeing many investors become convinced that high-flying tech companies are “easy money” and should be owned at any price and indeed in recent months portfolios loaded up with these stocks have raced ahead. However, as we noted in our a market update in May , we’ve seen that movie before with the dot-com bubble and resulting crash. As disciplined long-term investors, we are mindful of near-term trends but remain primarily focused on owning a portfolio of companies with good long-term business prospects that are trading at reasonable prices. So while we are actively looking for opportunities to further participate in the accelerated digital transformation that is currently underway, the second qualification keeps us from rushing headlong into the current tech frenzy.
Finally, we can’t overstate how powerful the influence of government and central bank stimulus has been in supporting and rallying the financial markets. Unprecedented in its scope and scale, we’ve seen roughly $8 trillion in support from the U.S. government and the Federal Reserve through a combination of grants, loans, and liquidity guarantees. Not to mention the widely accepted view that the Federal Reserve will do everything in its power to keep interest rates low, and credit flowing and cheap. We have every expectation that this support will continue as long as necessary, which provides a strong tailwind in an otherwise highly uncertain market environment. However, we are watching closely the implications for future taxes and how that could affect individuals and businesses alike. Presidential candidate Joe Biden recently released details of his tax plan , which would roll back Trump-administration tax cuts. More on that in another letter perhaps.
Let us end by saying that we’ve never been more convinced of the value of our disciplined long-term fundamental approach to investing. We believe the market exists to provide opportunities for your hard-earned savings to be matched with worthwhile investments that will provide rewarding returns over the long run. Unfortunately, we see too many examples of blind allocation of capital to companies and projects that don’t deserve to be funded. As fiduciaries, we’re committed to ensuring the market serves our clients by seeking out the absolute best the market has to offer. And we remain firmly optimistic, convinced that every season of challenge bring opportunity for progress and growth!
As always, please don’t hesitate to reach out if you have any questions about the market, our strategies, or your portfolio. And we look forward to the next time we’ll get an update from you on life, family, and whatever else matters most to you. In the meantime, enjoy the summer sun!