Weekly (distribution list)
The best-performing stocks since the beginning of the pandemic have had one thing in common — a high degree of financial flexibility. The worst-performing stocks were the least flexible. Before we start, it is important to define “flexibility.” For us, it has always meant low debt and high profitability. These characteristics tend to build buffers that help ensure survival during difficult times. Where to Find Flexibility Technology stocks, for example, have been a good place to find flexibility lately. The average technology company is very profitable, with very little debt. The sector’s return on assets (10.6%) is higher than any…
Negotiations over a second stimulus round are underway, ahead of Congress’ early-August recess. News reports suggest President Trump’s team may be looking for a $1 trillion package focused on payroll deductions and support for unemployed workers that does not create “disincentives” for returning to work. By contrast, the House of Representatives advanced the $3 trillion HEROES bill in May. That bill seeks more significant direct cash payments to individuals, aid for states, and other measures. The GOP is expected to release details of its plan over the next few days. Whatever the final number, this will likely be the last…
Executive Summary: The second quarter brought a surge in stock values predicated on three critical assumptions. First, fiscal and monetary measures would be sufficient to support an economy suffering a tremendous hit. Next, the economy could begin a process of “reopening” and avoid a second wave pandemic shutdown. Finally, progress will be forthcoming toward a treatment or vaccine for COVID-19. While the future could always play out differently than expectations, equity markets seemed willing to focus on positives, rather than lingering unknowns, throughout most of the second quarter.
The second quarter saw stocks roar back from March losses. Global shares rose 38%, and high yield corporate bonds rose 20%. Long-term Treasury bonds were flat, and gold was up 15% (chart, below). The rally began after global stocks fell by one third from February 19 through March 23 as COVID-19 spread outside China, and shutdowns began. Since March 23, markets focused on measures taken to deal with the pandemic and its effects on the economy. A $2.2 trillion stimulus package and extraordinary central bank actions triumphed over fear and uncertainty. Volatility reigned throughout the first half of this year….
This week closes out a most volatile quarter. Stocks are on track to rise by the most during the quarter (+19% as of this writing) since 2009 despite a sharp contraction in the economy. The powerful rally leaves many wondering about valuations amid a pandemic and recession. Even though price is important, we should avoid relying too heavily on standard valuation metrics such as price-to-earnings multiples because this economy is far too volatile to assess business prospects accurately and because stock values are determined mostly by long-run, rather than short-run, earnings power. Price is Important Overpaying for stocks can take…
A significant shift in financial markets occurred roughly twenty years ago. It was June 2000, and Federal Reserve Chairman Alan Greenspan had just raised the short-term interest rate to 6.5%. Within months, a falling stock market would lead the economy into a short and shallow recession. Unbeknownst to anyone at that time, the central bank would soon begin cutting rates further than they ever had before. In so doing, they would usher in a new era of easy credit. In this commentary, we make a case for investing in quality, especially during this ultra-easy credit era. Why do we call…
Last Monday, the National Bureau of Economic Research declared the longest economic expansion in U.S. history over. After beginning in June 2009, the expansion lasted for 128 months through February. Born in the depths of a severe financial crisis that started at home, many worried the U.S. would suffer a long decline. In the ten and one-half years that followed, the U.S. economy and markets outpaced most others, leaving domestic stocks with premium valuations. Even though U.S. stocks appear relatively expensive, we should remain tactically overweight domestic assets for now because dollar-denominated assets can convey significant benefits during times of…
Reopening the economy has stirred some optimism amid a wash of depressing forecasts. The Federal Reserve Banks of Atlanta and St. Louis have a model that estimates the U.S. economy may contract at a 42-48% annualized rate in Q2. For a more optimistic read, the Federal Reserve Bank of New York “Nowcast” estimates a 31% pace of decline in Q2. Thirty-six million lost jobs and record drops in both industrial output (-11% April) and retail sales (-16% April) are driving the slump. The second quarter is going to be a bad one, but recently markets seem to be looking beyond…
Some companies are cutting dividends as the economy weakens. A recent Barron’s article lists about sixty firms that eliminated, suspended, or cut dividends since February. We decided to look at the fundamental characteristics of the companies cutting dividends. To do this, we created an equally-weighted portfolio comprised of the stocks in the Barron’s article and asked several questions. What was the dividend yield at the end of last year, before coronavirus hit? What was the financial profile of the dividend cutting firms based on profitability, leverage, and dividend policy? Finally, what happened to the stock prices of those firms which…
Before we can hope to see a turn for the better, we must first see signs of stabilizing. For the most part, this is what we see in the most recent data. We try to discern the path to recovery in the week-to-week data: virus trends, by looking at cases and deaths across the United States; economic trends, by looking at mobility and reports of real economic activity; and market trends, by looking at the response of key financial indicators. This week’s analysis showed us that the economic hole is deep, but the rate of falloff is slowing. Slowing Spread…
Stocks rallied last week on talk of reopening the economy and the S&P 500 is about half way back to February highs. The lockdown is helping to slow cases of coronavirus, but the economy is taking a beating as a result. Judging by recent data, the U.S. economy is likely contracting at an annualized pace in the range of -15% to -22% (chart, below). Over 10 million Americans filed for unemployment insurance in the past month. Estimates of potential job losses range from 23 million (Goldman Sachs) to 47 million (St. Louis Federal Reserve). The speed of the present downturn…
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