SAM Monthly Market Commentary & Forecast – June 30, 2020
Up, up and away – only Icarus has to worry
June 2020 Market Review
The markets continued their seesaw activity and yet managed to eke out the month with more positive gains and one of the best quarters in decades. The S&P 500 Index was up 1.84% for the month and a staggering 19.95% for the quarter giving it its best quarterly return since 1998. Let us take a trip down memory lane to 1998. The top grossing films in 1998 were Armageddon, Saving Private Ryan and There’s Something About Mary! The largest market capitalization companies in 1998 were Microsoft, General Electric, Exxon and Shell. As of June 30, 2020, Amazon has added $210bn in market cap year to date, which is more than the current market cap of ~95% of the S&P500. This market recovery comes only three months after investors were lamenting the end of the bull markets as equities had plunged 35% in less than 6 weeks. The subsequent rebound has been just as brisk. The MSCI World Index gained 2.51% in June and 18.84% for the quarter. The Dow Jones was up 1.69% in June and 17.77% in Q2 and the Nasdaq led all markets with a 5.99% jump in the month and an astounding 30.63% in the quarter.
The TSX also kept pace with a 2.12% gain in June and 15.97% gain in Q2. This is a remarkable comeback as the nation went from a full shutdown to a gradual reopening. As is most often the case, Canada’s diverse sectors led to a mix of returns. The best-performing sector was the information technology sector with a 13.52% gain in June and a remarkable 68.2% move in Q2. Shopify, now the largest publicly traded company in Canada, has seen its shares skyrocket as the lockdowns have forced businesses to use their software to create an online presence. The materials sector was strong with a 4.32% gain in June (and 41.6% gain for the quarter) led by the gold sector rally. The virus outbreak and resulting money printing by central banks have pushed investors into safe haven assets such as gold. The yellow metal is up 17% for the year. The heavyweight financials sector had a 3.44% jump in June and 4.85% gain for the quarter. The lagging sectors include energy (-5.28% for June), communications (-3.55%) and utilities (-0.99%).
Market Returns (price returns as at 06/30/20 in native currencies)
With over 40% of US companies pulling their forward guidance for earnings outlooks, the market really is walking a dangerous tightrope. Just a reminder of the multiple steps in our wall of worry: US-China tensions, poor economic data, COVID-19, civil unrest, US elections and lack of clarity on corporate outlooks. The market is either resilient or delusional.
The COVID-19 data and news continue to worsen in certain populous states such as Florida, California and Arizona, and Latin American countries are seeing an explosion of new cases. Whether we call it a second wave or just a continuation of the first wave, the data is not good. Re-openings are being either shut down or paused in these areas of concern, especially for high-risk places such as bars, restaurants, and beaches. This grueling marathon of a pandemic feels like we are in a 15-round heavyweight boxing fight. At best it is a classic tug of war with vicious COVID-19 flareups and reclosures on one end, battling against lavish policy spending on the other end. The US election has an unending amount of hot-topic issues both old and new. One of the more interesting debates surrounds Trump’s desire to preserve statues and monuments as part of American history at a sensitive time with an intense pandemic and race relations. Trump hopes to protect the nation’s iconic markers and the pro-American voter.
The economic picture continues to be bleak with 20 million people losing their jobs in the US and retail sales suffering a deafening blow compared to pre-pandemic levels. Even though there was an uptick in the job creation figure in the past month, the risk is that the recovery will get cut short with the number of new COVID-19 cases on the rise. The volume of bankruptcy protection filings is staggering and across multiple industries – Hertz Car Rental, JC Penney, Chesapeake Energy, Whiting Petroleum, 24-Hour Fitness, J-Crew and Neiman Marcus, just to name a few.
This is certainly not the way we or many other experts expected the markets to perform – Nasdaq hitting new highs (and S&P only off 3% from highs) while a once-in-a-lifetime global pandemic shuts down the global markets and changes the way we live our daily lives. It is almost as if any type of news is good for the market. Bad news on the virus or the economy prompts elicit fiscal/monetary response while good news is also good for markets. One certain thing is that the digital adoption by the consumer has been an overwhelming success. From work-from-home to working-out-from-home to online shopping and video-streaming services, people have been forced to adapt and they are doing so with alacrity. Some of this consumer behaviour is likely to stick after the pandemic and that is why we are seeing companies invest millions into this growing sector of the economy. One example of this move is Lululemon buying home fitness platform company Mirror for $500 million. Investors have correctly rewarded companies – from technology adopters (Amazon, Netflix, Zoom, Square, Apple, and Microsoft) to grocers (Amazon, Costco) and exercise & lifestyle companies (Peloton, Lululemon).
The markets may be close to all time highs, but the market internals are painting a different picture. While the S&P 500 Index is above its 200-day moving average, we have mentioned before that it is just a handful of stocks that is driving the markets higher. In fact, only 27% of US companies are above their 200-day moving average, reflecting a very select market. This two-tier market would have to expand to the lagging equities such as value and cyclicals for the market to be more convincing.
Stone Asset Management Limited Private Client Update – July 2020
In addition to our regular update, we’re sharing our recent commentary to our Private Clients. This includes an overview of SAM’s critical thinking as it relates to preserving our investors’ capital.
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We hope you enjoy our insights and perspective.
All the SAM-managed Stone portfolios have been structured with a bias to preservation of capital. We believe the best way to invest in these markets is to have a total return focus. Investors should be rewarded by buying companies with strong balance sheets, the ability to sustain a reasonable level of growth during difficult times, and sufficient free cash flow to sustain dividend payments.
We use our proprietary investment process daily and in volatile market conditions such as these, we seek to ensure that we can manage downside risk and adjust the portfolio accordingly while seeking to achieve our long-term investment goals for our clients.
We remain invested and are committed to companies that provide revenue growth, improving free cash flow and higher earnings per share. We are active portfolio managers with a disciplined investment process including the implementation of various risk management tools to benefit our investors.
Stone Asset Management Limited
Richard G. Stone, Chief Investment Officer