It has been a little over 5 weeks since you last heard from me. That is usually good news, meaning that we have been seeing more stability in the markets. As of Friday June 5th, the S&P 500 had gained 43.4% from its March 23rd low and had a positive return year-to-date, so it was no surprise to us to see the market begin to pull back as the week progressed. By the end of the week we saw investors starting to take profits from the June high which prompted many others to panic sell due to concerns about renewed volatility, a potential second wave of COVID-19 infections and the news of protests and riots in most major cities throughout the country.
Last week was a good reminder of why we work with active money managers that emphasize a buy and hold strategy. Panic selling, while concerning, creates opportunities for long-term investors. This is especially true for a recession caused by a voluntary global economic shut down, not by economic imbalances. There are several reasons why the market has been able to recover the way it has-- including monetary policy from the Federal reserve (Jerome Powell’s unlimited balance sheet), fiscal policy from the federal government ($3 trillion in stimulus with potentially more to come), and finally the biggest driver being the theme of digitization (just because consumers have to stay home does not mean spending has stopped completely). COVID-19 has only accelerated the adoption of digitization across a variety of different industries. E-commerce sales in the U.S. have increased from 4.2% of total retail sales in 2010 to 11.8% in 2020.
Consumers are not the only ones adopting digitization. Employers have begun to adopt software like Ceridian and Paycom to provide digital payroll services for their employees as they work from home. Even healthcare providers have begun to adopt new technology such as Teladoc to host virtual doctors' appointments. For every company that is struggling right now, there are others that are adapting and thriving in this environment. It is abundantly clear that the COVID-19 virus has catapulted the widespread adoption of new technology and methods of communication and has probably changed the way we do business forever.
Fundamental research when selecting securities to add to our portfolios is imperative, now more than ever. Included in fundamental research is the process of screening leadership teams, both for stock and bond investments. Our portfolio managers spend years getting to know these leadership teams of publicly traded companies and local governments before making investments. For holders of tax-exempt municipal bonds, there has recently been talk of concern around municipalities and their ability to pay debt payments in light of reduced revenues due to the national shut down. Specifically, many had concerns about the restriction on flights and the effect it would have on an airport’s ability to service debt. This is not an issue when you have the proper business leadership team in place. For example, Chicago O’Hare International Airport has two years of cash flows set aside for potential emergencies and could run for that period of time without any revenues, should that become necessary. This is a prime example of the type of local government leadership team that our investment managers seek out when investing.
As we enter the second half of 2020, we are still on the lookout for opportunities, but we also need to be ready for continued volatility. Here at BF&A we are monitoring client’s accounts, and having conversations with investment managers about the best ways to achieve our client’s goals without taking on excessive risk. We are continuing to modify and rebalance portfolios. Two current themes are--the ongoing refinement of our bond portfolios, as well as the exposure to emerging markets. Rather than high levels of direct emerging market ownership, we are seeking funds that invest in companies receiving a substantial amount of their revenue from countries with growing populations of middle-class consumers. The largest grossing Domino’s franchise on the planet is in India, proving there are ways to capitalize on the emerging market middle class without investing directly in companies that are domiciled in those growing countries.
We have a couple of events coming up that I would like to make you aware of. We will be sponsoring a webinar on Wednesday, June 24th at 11:30 CDT, featuring Neal Rosenburg. Neal is a portfolio manager on the Baron Growth Fund, working alongside Ron Baron. You will receive a separate email to RSVP, should you want to attend. We will be hosting a shredding event on a Saturday morning at our office in the near future. It seems that a lot of us have been purging our files during quarantine, so we will have a large shred truck in the parking lot where you can drop off your bags or boxes, grab a breakfast taco and go. We will have details soon.
While much has been done to stabilize our economy, there remain areas of ongoing uncertainty such as the Presidential election and the wildcard of COVID-19. For those reasons we expect to have continued volatility in the markets, so try not to be surprised or too alarmed when it occurs. It can be a challenge to find peace right now, but we have plenty of reasons to remain hopeful. As always thank you for your continued trust, stay safe, and please do not hesitate to call with any questions or concerns.