Q2 2020
July 6, 2020
I’ve been sitting in front of my computer for some time now, not writing a thing. Where exactly do I start?!
My experience these past few months although hardly unique, begs to be recounted. It’s all been too surreal to ignore.
Starting in late March, I drove to work with virtually no one else on the road. Our downtown Minneapolis parking ramp, which is always full during the workweek, had maybe 6 to 8 cars. This was our “work” experience for the next two months.
Roll forward to late May. As I drove to work, I would pass National Guard troops surrounding the Federal Reserve’s building. Up 1st Avenue I would pass the Minneapolis Police’s downtown precinct. A concrete barrier had been erected topped with barbed wire. The road in front of the precinct was closed with police and armed troops guarding access.
When I got to the office, our windows were covered with plywood.
Several times in May, we had to monitor the movement of protestors around downtown. A couple times we shut down early to avoid being trapped by a crowd. Never did we really feel at risk, we just felt better staying out of the fray - too unpredictable.
In mid-June, we moved our offices to the North Loop area of downtown Minneapolis. Our original May 1st move in date had to be pushed back because the furniture manufacturer was in Michigan, a state with more restrictive rules surrounding businesses being open. To get our furniture manufactured, we had to send a letter indicating we are an “essential business”. We are, by the way, considered an essential business according to the Department of Homeland Security’s definition. We sent a letter and our furniture was put in the que.
The furniture arrived in June and as it was being installed, we prepared to move. One thing on my “to do” list was to get insurance for the new office. I contacted our agent. She told me that major insurance companies had placed moratoriums on underwriting new property and liability policies in the City of Minneapolis. Just before our scheduled move date, the underwriting prohibitions were lifted, and we moved.
Minnesota’s staged reopening started in June. I decided to split our office into two groups that are now rotating days in the office and days working at home. The greatest risk to our business is that we all get sick simultaneously. With things opening and more people coming downtown, I felt we needed to be more cautious.
Now that we are seeing spikes in Covid-19 infection rates, I will likely keep this rotating staffing plan in place for some time. We, like most Americans, have become accustom to new working arrangements. Its functioning well, but I cannot wait to return to the “old normal”.
Through all this turmoil, replicated throughout the country, the stock market staged a remarkable recovery. The market’s recovery reflects two things. The government has made it clear they are going to do whatever it takes to support asset prices. They are committed to preventing panic selling from further undermining a difficult situation. Add to this, investors now believe the economic recovery will be swift once the shut-downs end.
We are skeptical. We expect the economic and financial effects of the pandemic to be longer lasting. We believe there are structural hurdles that will dampen the rate of recovery.
For example, since the shutdowns started, companies have made drastic cuts to their spending plans. Those cuts are unlikely to be reversed as the economy reopens. Spending by companies will not help support growth until next year at the earliest.
Smaller companies, especially those in retail businesses, are going to have a difficult time recovering from the shutdown. We are very concerned many small businesses will not survive. This will unfold over a longer timeframe impacting longer term job creation.
Consumers are going to remain cautious with travel and entertainment spending. That change in behavior is going to be with us for a while.
Should we be selling into the market’s strength? The answer is “no” but let me clarify. The past 4 months have again demonstrated how difficult trying to trade the overall market can be. Emotions get in the way and often lead to the wrong actions.
We can try to be logical (maybe better stated “unemotional”) by relying on data and historic valuation metrics, but that will not help. The data is not going to be useful for a while. This event is not measurable by historic financial metrics because it is not a typical economic event.
The current tough economy is not the result of financial excesses, the economy was in very good shape when all this started. For that reason, the market’s current view that the economy will recover quickly is not a stretch. We are just more cautious.
And finally, certain powerful business trends have been accelerated due to the pandemic. The most obvious is the shift to online retail. In short, some companies are now more valuable as a result of what is happening; higher prices for these companies is perfectly reasonable.
So now is not the time to trade the market, it is a time to assess all that has happened and make investment decisions for the long-term.
Stay safe,
Mark Hoonsbeen, CFA
Principal