Investors reconsidered the emotionally-oversold market in the month of April and bravely pushed the market higher by 12.7% even before news about the virus infection curve flattening. Since the “shelter-at-home” policies have reduced the infection rate, government policymakers are announcing dates for re-opening the economy. After an economic full-stop and 26 million Americans losing jobs, an economic restart will be a slow process. By staging a deliberately slow ramp-up in economic activity, the government hopes to prevent the healthcare system from being overwhelmed. While Wall Street and the markets are anticipating a “V-shaped” economic recovery, Main Street may experience more of a Nike “swoosh-shaped” recovery.
When the economy is fully open, several factors will accentuate the speed of the GDP growth. First, the federal government CARES Act and Paycheck Protection Program has provided a stimulus which should expedite the return to normal consumption activity. Second, the Federal Reserve’s proactive purchases of all classes of fixed income has flooded the markets with excess cash. Third, with crude oil trading at less than $20 per barrel, consumers and businesses have lower energy costs and more discretionary income. Fourth, the lowest interest rates that the U.S. has had in years will stimulate borrowing and new business activity. In short, economic growth is poised to reignite when people can safely return to the workplace and productivity can resume.
As corporate earnings are released, company management teams are warning investors that they have limited visibility for future revenues and earnings for the year. One CEO used the analogy of flying with no visibility through turbulence in an airplane at 600 MPH without knowing how long it would last. With little means of knowing when a normal economy can be anticipated, no guidance can be provided on earnings, so we can expect equity valuations will remain volatile. The leading market sectors so far this year are information technology, consumer staples, healthcare and consumer discretionary. We have favored these sectors and tend to own the highest-quality leaders in each of these. The real leadership has been concentrated in the five largest digital growth companies: Amazon, Apple, Alphabet, Facebook and Microsoft.