Pawleys 2020 Mid-Year Actions

Hopefully everyone is staying safe and healthy during this challenging time. The toll of the quarantines and shutdowns from covid-19 has been significant – physical, psychological, emotional, and financial. But I have also witnessed amazing acts of kindness, paired with people re-evaluating priorities and coming together in ways that had perhaps been missing.

Most of you know I am not an advocate of timing the stock market unless we have a significant pullback when the underlying economy is expanding. In 2011, 2015, 2018, and now in 2020 I recommended that clients with the means and fortitude add to equities by purchasing shares of SPY, the S&P 500 Index ETF. On March 19th I stated that we needed two things to signal some type of bottoming in the markets – better news on the medical front for covid and 2 consecutive solid up days in the markets. We quickly saw initiation of vaccine trials, and those two solid “up” days occurred on March 24th-25th. Adding to SPY is a quick and cost effective way to increase equity exposure. But you all know I am an active manager who invests in individual stocks of companies with little or no debt, good earnings growth and solid cash-flow. We have seen Q1 earnings and are soon entering Q2 earnings season. So what are our next steps for 2020 and reasons for mid-year portfolio changes?

DEBT: I am monitoring our holdings to see if companies are adding to debt to finance operations, and what impact that has on their overall financial health.

EARNINGS: There are, in my opinion, two important ways to look at earnings during this unique time. First, I am evaluating current stock prices relative to full-year 2019 earnings. Second, I am looking at the speed and amplitude of Q1 and Q2 drops in earnings, and will also monitor the speed and amplitude of Q3-Q4 recoveries.

NEW LANDSCAPE: The quarantines and shut-downs forced our economy into suspended animation in a severe but temporary way. After indiscriminate asset liquidations in late March, the US Government stepped in to back-stop the economy (as did Central Banks across the globe). The yield curve is upward sloping, and in May the Leading Economic Indicators advanced +2.8% (following the covid-induced drops in March and April), both indicating a healthy economy in this opaque time. That being said, the new landscape we are entering will affect companies in different ways. The strong will get stronger, some will not survive, and many will fall somewhere in between.

For the second half of 2020, we will be making adjustments to individual stocks based on clarity that starts to reveal from the above, and shift SPY monies over into individual stocks. It is so important to act with a clear head during challenging times such as these. But we will come through this difficult time and enter our next great economic expansion…and we will grow as individuals and communities in amazing and meaningful ways.

Please see below for more detail above the above references and my complete stream of communication about the markets during covid-19:

Pawleys Covid Market Communications 2020

New Stock Market Update from Pawleys

Our hearts continue to go out to everyone during this tough time.  Fortunately, early glimpses of light are illuminating the end of the tunnel.  We have seen both things I believed had to occur in advance of the markets finding some footing: two consecutive solid “up” days (March 24th and 25th), and good news on the medical front.  Last week the S&P 500 jumped up +12%.  So at this point our relative “bottom” of the current downturn occurred on March 23rd, only a few short weeks after the all-time historic high on February 19th.  The markets have never fallen so far so fast, thus the sharpness of last week’s rebound is not surprising.  News of planned business re-openings on the West Coast and a flattening of medical numbers in New York is very welcomed.  Companies like Starbucks, Apple, and Nike have re-opened stores in China, and have shown promising recovery numbers.  Europe and the U.S will follow.  That being said, short term numbers around earnings, employment, and other economic markers will be dizzying, yet should be taken with a grain of salt.

Many of you who are able have taken advantage of these lower levels and added to your stock allocations over the past few weeks.  We are, though, by no means out of the woods, and it is impossible to predict market bottoms.  Earnings releases for the first quarter started this week, and the range of estimates vary wildly.  Governments across the globe have sent crystal clear messages that they will step in and provide whatever support is needed, and the Central Banks are in solid positions to fulfill that.  Their policy response in providing liquidity while simultaneously back-stopping the credit markets has been key, and will ultimately preserve the financial health of individuals, small businesses, municipalities, and corporations.  The monetary and fiscal programs are very complex, but banking systems are structurally sound and married with thoughtful public health responses, will lead us through this more quickly than many anticipate.

As I have said, I will be watching earnings very closely and assessing how the shutdowns will affect results.  The supply/demand impact will vary industry by industry, and I believe valuations will be influenced more significantly by sentiment than by earnings projections.  There is a decent amount of health to the recent rally and despite near-term challenges, high-quality U.S. stocks of companies with strong balance sheets will remain, in my opinion, the single best place for investment dollars.  With the yield on the 10-year U.S. Treasury hovering at just 0.6%, equity investments remain the optimal vehicle in which to grow wealth.  Now is the time to maintain a coordinated, disciplined, and patient approach to investing.  Please continue to reach out with your questions and concerns – we are working very hard to keep communication flowing with everyone.  And most importantly, please stay safe and healthy, and thank you for your continued trust and confidence.

Portfolio Actions from Pawleys

The fixed income and equity markets continue to change very quickly, and in unexpected ways.  Governments across the globe have sent very strong messages that they will take whatever steps are needed to support economies through this difficult time.  Having a solidly structured portfolio of high-quality investments, married with proper financial planning, is key to navigating uncertainty.  Now is the time to avoid making mistakes.  I recently spoke with a client who noted that now, everyone is talking about the importance of having high-quality stocks and bonds, specifically those from entities with low debt and good revenue growth.  It is with intention that we have consistently recommended securities with solid financials to be prepared for difficult times in advance.  We have never recommended high-flying investments, as they struggle to survive difficult times.  It is almost impossible to predict the end of event-driven market drops that have started when economies have been very strong, but I thought it would be helpful to share some key points about what we are doing:

1.  Today represents, in my opinion, one of the best opportunities in history to buy stocks.  If it is suitable for your situation and you are able, please add extra cash to your portfolio for us to invest.

2.  Proper diversification and asset allocation continue to be key – these lower levels represent great opportunities to buy stocks, but trying to predict daily market movements can hurt returns since the biggest down days occur right next to the biggest up days.

3.  People are living longer, yet the supply of available shares in publicly traded companies continues to shrink – I believe stocks are still the single best way to transfer earned income into wealth.

4.  The current yield on the S&P 500 is around 2 1/2% while the 10 year U.S. Treasury is at 0.6%, so stocks continue to be the best way to generate income from your savings.

5.  Finding yield in fixed income investments has been incredibly challenging because supply is very low, but we have been able to fund some decent rates on very short term CD’s.  Short-term high quality tax-free municipal bonds have been very difficult to find.  There is an abundant supply of short-term fixed income with poor credit ratings at very high yields as companies scramble to raise cash.  Yesterday I saw an offer for 8.2% for 1 year – in my opinion, these types of junk bonds carry way too much risk in any type of environment, especially today.

Now is the time to be making the very best financial decisions that are based on tried and true principles.  The current quarter will be very important as we assess how changes in earnings will affect the overall financial health of companies.  Over the past several years, we have worked very hard to be prepared for this exact type of environment.  Difficult times ultimately lead to meaningful, positive changes.  No doubt the current situation will catalyze dramatic improvements in how services such as healthcare and education are delivered, and will also make all of us hone in a little more closely on the important things in life.  We thank each and every one of you for your ongoing trust, and hope that everyone stays safe.  Please keep your questions coming – we are working very hard to help everyone during this challenging time.  

Thank you very much,