Life with COVID-19

Even those who do not follow the economy are acutely aware of the current driving force behind markets. COVID-19 has affected us all and needs no introduction; however, we would love to throw it a going away party (of course, at an appropriate social distance). The common question is, “Why is the market recovering while companies less money?”  

This quarter’s chart should provide some clarity. For the last month, the deaths per day trend is decreasing while the case per day trend is increasing. While investors’ logic might not be perfect, a lower death rate implies lower risk. Lower risk implies more economic activity. The market is doing well because investors are interpreting a lower risk to mean there will be future opportunity for jobs and company profits. Hopes of a vaccine also helped prop up stock prices. This dislocation between pricing and our current environment is another reminder that today’s market price is prediction of the future economy. Do we need the reminder

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U.S. Equities

Large companies came back very strong from the historic decline in Q1 of 2020, and are now within 10% of their all-time highs already. The heavy weighting in large technology firms boded well and has been the strongest sector to date this year.

Foreign Equities

Foreign equity markets participated in the global rebound from the COVID-19 pandemic. While not quite as strong as their U.S. counterparts and not as close yet to all-time high prices, it’s still an encouraging sign.

Fixed Income

The only bond sector that wasn’t negatively affected in the COVID-19 pandemic that began during 2020’s first quarter was U.S. Government bonds. In the second quarter, an impressive rally of almost the entire bond universe happened with extreme support from the Federal Reserve, which bought bonds and bond funds to keep liquidity strong. Many have said this buying by the Federal Reserve was one of the primary reasons for the impressive rally, signaling the Federal Reserve’s willingness to use whatever tools necessary to combat the crisis.

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Summary

Good planning eliminates the need for market predicting. We have been pleased with our portfolio managers through this crisis. Focusing on businesses with strong balance sheets (less debt, strong earnings) has helped weather the storm. A few important statistics: U.S. housing starts are down over the last year by 23.19% while up 4.28% for the last month. Manufacturing orders are down 15.84% for the year and up 7.99% for the month. U.S. personal consumption expenditures are down 9.32% for the year and up 8.17% for the month. Retail sales are down 1.4% for the year and up 16.79% for the month. You can see the theme. The market is assuming the theme is a trend

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