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Message To Our Clients: Early Thoughts In July

Posted on July 20, 2020 in: General News

Message To Our Clients: Early Thoughts In July

I write an essay of 750 to 1,000 words each month to take a look at contemporary issues facing the economy and to distill those events with respect to various parts of the capital markets. On rare occasions, I have sent something out between these monthly essays and these “off-cycle” pieces are reserved for when we see something we want to discuss with clients and friends of KoCAA.

As I write this, there are reemerging flare ups of the COVID-19 virus and concerns on slowing the re-opening of local economies. To be sure we have had an increase in testing, but the increase in cases seems to be outpacing any logic to explain away case growth merely by increased tests. At the same time, we have been witnessing some resurgence in economic activity. We have posited from the beginning of COVID-19 that the immediate panic in the markets was virus driven and not a result of economic missteps so on that basis, an atypical recession/correction/depression would be followed by an atypical recovery.

As one would expect, with all of the lockdown activity, employment fell off of a cliff with the Unemployment Rate rising from 4.4% in March to 14.7% in April and receding to 11.1% in June. We had initially thought double-digit unemployment would be with us until 2021 but based on the pace of hiring and the open jobs, the likelihood seems that we will break through double-digit unemployment to something in the higher single digits. But like everything else these days, this forecast is serially dependent on whether or not we get a resurgent virus.

These thoughts have been swirling around my head at the same time we have been watching some extreme things in the markets. I was speaking with Matt Malgari of L2 Asset Management, the sub-advisor of our Long/Short and U.S. All Cap Index Fund(s). He and I discussed that, Amazon[1] announced the opening of several new Whole Foods stores and their market cap increased by about 3 times the size of Kroger[2]. Kroger has a 10% market share of groceries in the U.S. and a few Whole Foods stores are equal to 3 times the value of Kroger. Hmmm! Another case in point is Zoom[3], which has a forward P/E Ratio of 189 times, and I’m not even sure how to contextualize that except to say we will never have a meeting in person ever again! 

And this really brings me to the reason I wanted to send out this note. I have been increasingly concerned about all of the money chasing into index funds and index tracking equity exchange traded funds (ETFs) that has led to bigger names, well, getting bigger and stretching valuations. I am going to sound like an old guy again, but I am harkening back to the late 90’s when value investing was said to be dead and you needed to get with the tech wave. I guess not much of a spoiler alert, but oh did the tech bubble burst. I am not predicting a melt down in tech or other high growth stocks. I am saying that at some point, fundamentals do matter, and we all need to be focused on fundamentals and the long term. JDS Uniphase was a tech darling in the late 90’s traded to over $150 per share until it traded at $2 per share. These rallying stocks are great, but as investors we need to take profits and rebalance. Love your spouse. Root for your favorite sports teams. Be rational about your investments.

Ultimately, we are recommending to all of our clients to focus on internal disparity between growth and value and look for the opportunity to rebalance. Small cap has also lagged their large cap brethren, and this also has a way of correcting. The point of all of this is to remind us to focus on the long term and rebalance to targets; specifically, within equities, keep a balance between growth and value strategies. Lastly, please make sure that the asset allocation truly represents the risk tolerance of the underlying individual investor, yourself, or the organization you represent.

If you have any questions or would like to speak with us about your investments or portfolio, please reach out to us.

[1] Knights of Columbus Asset Advisors does not have exposure to Amazon.com, Inc. (AMZN) in any of its portfolios, as of June 30, 2020.

[2] Knights of Columbus Asset Advisors does not have exposure to Kroger Co. (KR) in any of its portfolios, as of June 30, 2020.

[3] The Long/Short Equity Fund owns Zoom Video Communications (ZM) as a short position totaling -1.29%, as of June 30, 2020.

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