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The COVID-19 pandemic and far reaching government response have touched all aspects of life – at home, our families, communities, how we work, small and large businesses and society broadly. Over the past few months, we’ve witnessed the resiliency of our fellow Americans – most people and many leaders mobilizing to adapt, protect the vulnerable, support the disenfranchised and prevent virus spread. Sadly, the situation at hand has also brought out the worst in some people.
Since late March, the federal government has unleashed unprecedented fiscal stimulus and the U.S. Federal Reserve acted quickly and decisively to pump massive amounts of liquidity into credit markets and provide exceptionally broad monetary stimulus to support the economy during this compressed economic contraction. Governments and central bankers worldwide followed the U.S. lead. Economic data clearly shows that the expected recovery is well underway.
Stocks began the year with a positive tone and then COVID-19 emerged mid-February, took hold and spread quickly. Stocks worldwide tumbled sharply. U.S. stocks fell a record-setting 34% in the four weeks ended with the low set March-23, followed by an equally incredible rebound. In Q2, the S&P 500 Stock ETF posted a gain of +20.2% (a 20+ year record). That followed a decline of -19.4% in Q1 and a gain of +31.2% in 2019. With the first half of 2020 in the history books, we head into what will surely be an interesting second quarter earnings reporting season. Volatility should be expected.
Investment grade corporate bonds continued the rebound that began late in Q1. The high-yield bond market (HYB) rebounded sharply to recover most of the historic Q1 loss. HYB mutual funds saw multiple weeks of record inflows. Safe-haven Treasuries posted modest gains on top of an exceptionally strong first quarter driven by a flight to quality.
GPM has a disciplined and unwavering dedication to a consistent investment process and exceptional client service. Our investment philosophy is built with long-term perspective and a commitment to investing in high quality, growing businesses with sustainable competitive and value-creating advantages - profitable companies that we believe, can over time, provide attractive returns with less risk than the overall market. Consistent with our communication since the pandemic began, we sold out of three of the twenty-nine stocks held as the quarter began and added one new portfolio company. We believe the companies sold were our most vulnerable to longer-term negative demand impacts. We increased the size of multiple positions in companies that we believe are well-positioned with the agility to work through COVID impacts, capitalize on opportunities and come out sustainably stronger. Portfolios hold a modest amount of cash earmarked for stocks. We remain laser focused on our companies and opportunities and see a favorable environment ahead for high quality stocks as the economy rebounds and adjusts to COVID’s residual norms.
Politically, COVID-19 will remain front and center. Virus developments may worsen materially, and headlines will surely add great drama, but COVID’s ability to shock us will probably diminish.
GPM team members continue to work remotely from our homes and will continue to do so for at least the next few weeks. We are all safe and healthy. Feel free to contact us as usual and we are available for video conferencing anytime.
Be safe and stay healthy.
The GPM Team