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Strategy Update

Investing During a Pandemic

The spread of Covid-19 has grown exponentially in the last few months.  The virus has affected millions of people and burdened healthcare systems.  Nearly every country was late to adequately respond to the outbreak, and draconian measures have been required, effectively shutting down large swaths of the global economy in the process.  Stock markets crashed and credit markets froze, imperiling many large companies, while untold small businesses shuttered.  Nevertheless, there are small reasons for optimism now and investors, who peer as far as they comfortably can into the future, have begun buying stocks again.

There are signs that the global quarantine is working.  Rates of infection and morbidity are starting to decline in countries and states that were first to enforce social distancing policies.  Healthcare systems have been stretched thin, and overburdened healthcare workers are among the casualties of Covid-19, yet the curve has been flattened and much of the world is past the devastating first wave of the outbreak.  For countries that were ill-prepared, which certainly include the United States, critical extra weeks have been won to prioritize diagnostic testing and production of essential safety products.  That process still feels painfully slow, but it is catching up to what will ultimately be required.  Lastly, governments and central banks around the world are infusing their economies with trillions of dollars in an effort to offset the tremendous amount of lost economic output and assist the newly unemployed.

That economic assistance is not a panacea, and it also likely cannot continue for many months longer.  Millions are financially stressed, and it is our view that the country will soon start to emphasize economic priorities over healthcare priorities.  We will not come close to stamping out Covid-19 completely in the months to come. But states are likely to begin allowing people to return to work where it makes sense, with most hopefully taking precautions to avoid a resurgent outbreak.  Our country can borrow on what has worked abroad, like widespread use of face masks, staggered business hours, large-scale testing and continued distancing of high-risk cohorts, among other policies.   

The question for investors now is what might the recovering economy look like?  Travel will be curtailed and swaths of the retail industry may not survive in this new world.  Small businesses, many of which have less than one month of capital available to them, have borne the brunt of the decline and will continue to be stressed.  Large public companies will have to grapple with an immediate recession followed by an uncertain return to normalcy.  Other businesses will be relatively immune, and even benefit as the world changes.  Our prognosis for the broad U.S. economy is neither fatalistic nor particularly optimistic.

Current Strategy

In the decade dating back to the financial crisis, the stock market has fared far better than the average business in America.  The market has been fueled by the success of the technology and healthcare sectors.  Today, the respective size of these companies dwarfs that of all retailers, general manufacturers, and energy companies.  This changing balance means that the stock market today in the United States is better suited for a world surviving amidst the Covid-19 outbreak, a world reliant on technology to connect us and likely directing even more money to the healthcare sector.  Add to this mix the massive companies producing consumer staples and selling them, such as Proctor & Gamble and Costco, and one can envision a large portion of the Standard & Poors Index faring reasonably well within this otherwise difficult economy.  In such a scenario, the stock market is less of a proxy for the overall economy and more reflective of the strength of U.S. medical, technology and consumer staples companies.

As the market reached its lows in March, down some 30%, many of our investments in healthcare, technology companies, and consumer staples companies held up well.  We are satisfied with the performance of our stock investments during this market rout and partial recovery.  More than adhering to any fixed and firm forecast, maintaining flexibility has been critical for us during this period of extreme volatility.  Flexibility derives from an openness to change course as information changes rapidly, and from maintaining suitable levels of cash to deploy into new opportunities.  As uncertainty is likely to reign for some time longer, we will emphasize a flexible investment approach rather than reaching for a bold forecast that rests on potentially thin conviction.

The decline in stocks, and the volatility that accompanied it, garnered most recent attention.  But the bond market has been no less interesting during the last month.  The yields on Treasury bonds collapsed to new historic lows, as investors rushed to find safety.  This came at the expense of municipal bonds and corporate bonds, where the panicked selling led to a temporary price collapse.  During this brief stretch of time, we bought debt instruments in companies we view as particularly well-positioned to navigate this challenging climate.  The panic was ultimately short-lived, as the Federal Reserve’s new stimulus was quick to assuage bond investors’ concerns, and the municipal and corporate bond markets are now fully priced in our view.