October 13, 2020 - Monthly Update

Dear all,

The stock market continued its zig-zag in large point-numbers during the third quarter. Technology sector was the primary driver of market movement in both directions. Work-from-home, online shopping, and remote learning continue to grow and expand their reach towards becoming our new normal. The knowledge and familiarity with remote technology are speeding-up the trends and processes that existed already. They obviously benefit the economic participants who were on the cutting edge of harvesting those new technologies and making their use a competitive strength. The magnitude of the change is difficult to measure now, although increasing profits of some companies which embraced the new technology are good examples of benefits in expansion of the “remote economy”. In addition, the pandemic and social distancing rules have compelled corporations to accelerate plans for digital transformation, reduction in office space cost, and decisions on mergers and acquisitions related to the changes in their specific sectors. We continue to look for sectors and companies that stand to benefit from this trend and overweight them in our growth allocations.

With current, unprecedented, low interest rate environment, the U.S. corporations issued a record $267 billion in investment grade corporate bonds in just the third quarter. The opportunity for refinancing outstanding debt, or increase funds availability on the balance sheet is not being passed on by CFOs. Due to a range of possible outcomes of the consequences of this pandemic, there is a range of possible inflation and interest rate levels expected in the future. However, chances are that we will be seeing a “lower-for-longer” interest rate environment, where possibility of negative real returns in some parts of fixed income market are expected.

Municipalities have been especially faced with challenges resulting from costs associated with COVID. Social distancing has shut down many businesses and heavily impacted the hospitality industry, which is a source of large tax revenues for the cities. Only the low interest rates and Federal aid have helped municipalities cope with challenges of the pandemic. We believe that this support will continue and that additional aid and strategic refinancing will allow most municipalities to honor their commitments and continue to pay the income on outstanding debt.

The global recorded deaths from Covid-19 just surpassed 1.08 million. It is widely believed that another 1 million has gone unrecorded. The virus is spreading fast through the emerging world, with India registering 90,000 cases per day*. European countries that thought that they created some positive impact in the fight against the disease are experiencing the second wave and are going back to reactivation of emergency powers used through the spring. Israel has invoked blanket shutdowns based on the regions or even neighborhoods**. Government actions in fighting the disease are hard to judge now, but we do see some differences in control of the spread and in the impact on the economic activity to date. The problem is that it is hard to escape a trade-off between shutting everything down to save lives and staying open so economic life goes on. I hear many pointing to Sweden as a success due to the policy of controlled heard immunity, but looking at the numbers the results are not so spectacular. Sweden has a fatality rate of 0.058% (number of deaths per 100,000 residents) and it saw it’s GDP fall by 8.3% in the second quarter (not much better from the U.S. with 0.06% fatality rate). That is worse on both counts than its neighbors, Finland, Norway and Denmark. On the other hand, New Zealand shut down completely and had 0.0005% fatality rate with an economic contraction of 12.2% in the same second quarter, causing their government to rethink their current policy. Comparing the same data, Taiwan seemed to have the best response with 0.00003% fatality rate and a 1.4% fall in its GDP*.

Some statistics contain good news. Treatments and medicines are making COVID-19 less deadly. The basic public health, individual responsibility, and contract tracing are improving. Extra testing is one of the reasons why the fatality rate is falling**. However, only a safe and effective vaccine will help to get us on our way towards going back to normal with our life and our economy Every step towards progress or a difficulty in this process in securing an effective vaccine is closely followed by all market participants***.

The U.S. Presidential election seems to be at the top of the minds of individual investors. Please keep in mind that the pace of legislative change will provide enough time for corporations and individuals to absorb the changes. Our Constitution inherently provides checks and balances. This has reduced the probability of sudden and extreme changes to the laws of our country during its 244-year history. Short-term, sector based, reactions to the results of elections are possible and historically happen often. The long-term impact to corporate profits depends on many things, as well as on the degree and pace of the legislative changes. The U.S. firms most impacted by social distancing are awaiting the next package of aid to come from the government. Market is pricing the arrival of that additional spending into January and is expecting that additional fiscal policy expansion regardless of the election results.

We are hopeful and optimistic about the ultimate resolution to the COVID-19 Pandemic Crisis. We are grateful for your confidence and support as we continue to make every effort to provide you with the highest level of service while striving to meet your investment objectives and life goals. Please do not hesitate to reach out to any of us with questions and comments you may have. Stay safe and healthy!

Data sources: *, **The Economist, ***The Wall Street Journal

All the best,

Emir Culov

Partner, Portfolio Management Director