Markets around the world recovered sharply in the second quarter of 2020, a welcome relief after the precipitous, pandemic-driven declines suffered late in the first quarter. Frankly, we have been surprised by how sharply, and swiftly, the market has recovered, given that the economy is still reeling. Clearly, investors are willing to look past not only current economic weakness, but also the uncertainty surrounding the severity and duration of the public health crisis, seemingly betting on a full recovery to pre-pandemic economic conditions. In the interim, an unprecedented $1.6 trillion stimulus package from the Federal Reserve and Congress has provided something of a backstop to the market. With ample liquidity and interest rates near zero, the TINA trade (There Is No Alternative) is once again alive and well.
While we are as relieved as you are to see portfolio values recover much of their losses, we have some concern that it’s too soon to signal clear skies ahead. COVID-19 remains, for us, an analytical challenge. While we remain ardent believers in capitalism, in the resiliency of the U.S. economy, and in stocks as the asset class of choice for long-term investors, we expect some changes in behavior will be profound and permanent, and the effects on the economy remain to be seen. Not all will be negative. There will be winners and losers. We don’t pretend to know the long-term implications yet, but, for example, we think it is unlikely that all jobs lost will be recovered, or that restaurants, retailers, hotels or airlines will enjoy anything close to pre-pandemic activity anytime soon. Unemployment remains high, and in just the past few days we’ve seen significant new announcements of store closures (Bed Bath & Beyond), bankruptcies (Brooks Brothers) and layoffs (United Airlines). And, importantly, spikes in new cases of coronavirus in places have raised concerns, not only about reopening plans, but about our ability, as a nation, to effectively contain the spread of this virus. Add to that a coming presidential election that is likely to be contentious and controversial, and it becomes evident that caution is warranted and choppiness is to be expected.
Despite our caution about the current levels of the major market averages, we can always find things we want to invest in. As you’ve no doubt come to expect from our contrarian nature, we sometimes find our best opportunities among those categories with the worst recent performance. In a market that has been dominated by U.S. large-cap growth stocks, our small-cap value funds and international funds have lagged, but they may be better positioned for the months and years ahead.
Please let us know of any changes in circumstances that would be material to the way we manage your investments, or any change in address, phone number, or email. As always, we appreciate your continued confidence in us.