In this week’s blog, Andy Kaufman, CCM’s chief investment officer, shares his thoughts on the markets for the first half of the year and what to expect for the remainder of 2020.
“As we approach the close of the first half of the year, what many expected to be a low-growth, low-volatility environment was turned on its head due to a global pandemic that largely shut down the global economy. We believe that the Fed and Chairman Powell have done a commendable job getting ahead of the economic crisis by unleashing every tool in their arsenal. Many say Powell threw the kitchen sink or used a bazooka at the problem. I believe that strongly understates the effort. The Fed has taken unprecedented actions to stem the pain from this black swan event. The financial system is flush with liquidity and financial support, which in turn has caused equity markets to reverse a large amount of their losses and treasury rates to remain near historical lows. This, in turn, has allowed governments, corporations, and consumers to borrow at historically low rates. Investment grade corporate issuance for the year has already surpassed last year’s total in roughly five months.1
However, what is happening on Wall Street is very different than what is happening on main street. Much of the economic data we are seeing is poor, which is expected, but what lies ahead appears even more murky. Many states have started a phased approach to help turn the economy back on, but data from Johns Hopkins is showing that there is an uptick in new COVID-19 cases for many of these areas. This is a big concern as the likelihood of a “V-shaped” recovery is not remotely close to an option. While many businesses can open, it does not mean that consumption trends will return to the same levels they were pre-pandemic. Sectors reliant on business travel, such as hotels and airlines, will likely feel pain for a while. Entertainment sectors such as movie theaters, live concerts, or sporting events are going to continue feeling financial pains. While these are obvious impacts, there are less obvious concerns such as small businesses and their employees that rely on these activities to earn a living. The restaurants, Uber drivers, merchandise sellers, and parking attendants that will likely be out of work as a result. This can lead to a downtrend in consumption and hurt top line revenue growth for companies large and small. Even with herculean monetary and fiscal policy efforts, I am skeptical that economic data will improve anytime soon unless a vaccine for COVID-19 becomes readily available.
So, what does this all mean for how we are looking at portfolios and risk management for the remainder of the year? We believe it is prudent to own: (1) sectors directly supported by the Fed, (2) higher quality assets that have consistent cash flow predictability, (3) sectors with stable balance sheets and clear revenue growth, and (4) securities that are higher in the corporate capital structure such as preferred equities. Finally, asset allocation was critical when the market turned down, and it remains just as critical as the market continues to rebound. Understanding the correlation of equity and fixed income returns is equally important and something all investors should pay close attention to in their portfolios”.