Pressing Onward And, Eventually Upward.
April 2020
March was a stressful and taxing month for each of us to varying degrees, on a professional level for sure, but particularly so on a personal one. As COVID-19 cases have climbed in the U.S. over the past month, requirements to ‘shelter in place’ and calls to ‘social distance’ from one another have upended our daily lives and ushered in a ‘new normal’ of unknown duration. While a return to life and business as usual will likely remain elusive over the coming month(s) and near-term uncertainty will undoubtedly remain, it is during moments like these that the adage “tough times don’t last, tough people do” gives us some degree of comfort. Resiliency is a word that remains top of mind for us when constructing investment portfolios for the long haul, and is the word that comes to mind when thinking about how best to weather our current situation, while at the same time keeping an eye on the future, preparing and positioning to thrive in the environment we expect to materialize over coming quarters.
As the 2nd quarter begins, uncertainty remains a constant, with little clarity expected near-term. As the U.S. economy remains shuttered throughout the coming month(s), additional layoffs and further declines in consumer confidence will decrease demand for services, which accounts for two-thirds of consumer spending. When the U.S. economy will re-open for business remains the $64,000 question, but what that might look like also remains up for debate as corporations will attempt to adapt to a fluid and unfamiliar operating environment. Evaluating and rationalizing ever-changing demand for real estate and technology, among other areas, will be by-products of the current environment, and we expect these decisions to have ramifications, and in many cases unforeseen ripple effects throughout the economy and our daily lives over coming years. Change, while unsettling and often scary for those incapable of or unwilling to adapt, provides opportunities for focused long-term investors and portfolio managers to invest capital alongside best-in-class operators and visionary management teams capable of weathering the current environment and emerging stronger and in a leadership position on the other side.
While early, April is setting up to be a continuation of March’s volatile market backdrop, providing a less than hospitable environment for stocks to make a sustained move higher. Our ‘base case’ for April calls for the S&P 500 to remain choppy as tactical trading strategies, i.e. renters of stocks, dictate market action as long-term investors remain comfortable holding cash until economic clarity is attained and corporate fundamentals improve. We believe 2,650 will continue to act as a ceiling of sorts and mark the higher-end of the S&P 500’s trading range, while a successful re-test and bounce off of the 2,191 March low would provide us with some confidence that at least near-term support has been found. While we expect a re-test of the March low over the next month, we’re aware that the ‘re-test thesis’ appears to be one widely shared by the investment community as it is a common characteristic of bear markets as the bottoming process plays out. The contrarian in us wants to believe that because many are already positioned and prepared for a re-test that it might not actually materialize, but as economic fundamentals deteriorate further over the coming month, we suspect a re-test is all but inevitable.
While the short-term backdrop remains challenging for equity investors, over the intermediate and long term those disciplined enough to stay the course or average-in as stocks hit lower levels will likely be compensated handsomely for putting capital to work during this uncertain time. The fundamental underpinnings of corporate profitability are increasingly unstable but shares of many quality and durable franchises capable of managing through the current economic malaise have already fallen drastically, pricing in a dire economic scenario of unknown duration playing out. As of market close on April 1, nearly 22% of the companies in the S&P 500 were trading 50% or more below their 1-year high, while over 77% were down by 25%-plus. There are no guarantees in investing, which is particularly true of the current market, and more downside may be in the cards before stabilization and/or a sustained rebound can develop, but we continue to believe that long-term investors will be rewarded as fortune favors the bold, or, perhaps in this case, the less timid. We remain relatively constructive on U.S. stocks over those trading in international markets, with a focus on high quality large caps with strong secular growth prospects and/or stable dividends in the current environment. These names should hold up better if additional market weakness and heightened volatility comes to fruition, while also leading the charge higher as the U.S. economy turns the corner over coming months and quarters and investor confidence returns.
Source: Bloomberg, Factset
