Thoughts on Building a Business

These days are challenging for many businesses, but some are getting super-creative and trying to take advantage of our new “covid-induced” environment. I am continually amazed when I see what businesses are doing to not just survive, but thrive. Some people thought I was foolish to launch Pawleys Investment Advisors on the tail end of the 2008-2009 recession, but I saw the timing as just right. Here are some thoughts I shared in a podcast interview with last month on delivering good results and great service to clients – I believe they translate across into just about any type of business:
ETF Working Lunch – Kathryn Schwartz

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.