With markets apparently becoming tired in their post-COVID-crash reality, confusion reigns in many investors’ minds. The market has, according to many observers, become detached from underlying economic realities. Many companies have withdrawn their guidance for the second quarter and often for the rest of 2020. That absence of visibility, coupled with sometimes alarming macroeconomic news, will likely lead to choppy markets as the current situation develops and is digested. Between stimulus and harsh reality, there will be vacillation.
With all that said, however, investors should remember the dictum “Don’t fight the Fed.” The Fed, and other central banks, have offered the world a monetary lifeline. Fed Chair Powell’s actions on April 9 will likely be seen from a future vantage as the equivalent of Mario Draghi’s 2012 pledge that saved the euro in the depths of Europe’s sovereign debt crisis: that the central bank would do whatever it takes, and that it would be enough. Mr Powell’s comments on Wednesday, though, underscored the responsibility that still lies with fiscal authorities to address the economic damage done by the pandemic shutdowns.
We note that even though the monetary and fiscal authorities have unleashed unprecedented support, the real story of the virus response and recovery still rests with private companies – particularly technology and biopharmaceuticals, but many other industries as well – who have spearheaded advances and adaptations at a pace that would make most government functionaries blush.
Economic damage there may be, but it is the response of private enterprise that will provide the needed solutions. Monetary and fiscal largesse will create some moral hazard; some “zombie companies” will be enabled to continue a shambolic existence. But there are also many good companies for investors to find. The massive liquidity created by central banks in response to the crisis will find its way to the places where it sees the best prospect for returns – and we believe that will be, preferentially, the stocks of companies who provide growth amid the slowdown and solutions to the woes of pandemic and shutdown.
China and the U.S.
Here as elsewhere, disruption is creating opportunities. One set of opportunities arising from increasing Sino-U.S. tension is in the area of cybersecurity. China surely will not be afforded much due process in the court of global public opinion; that distrust will certainly accrue to cybersecurity spending by global corporates.
Areas of Clarity
If confusion reigns in the vacillation between stimulus and reality, there is some clarity to be found. That clarity, though, is now often expensive on a historical basis. Clean investment stories are now found at premium prices, particularly in the areas we have mentioned: software; cybersecurity; healthcare broadly and biopharmaceuticals specifically; semiconductors and other selected hardware and components.
Although such stories may be expensive on a historical basis, now more than ever, stocks that seem cheap, may not be… and stocks that seem expensive may not be either.
Now is certainly a time for bottom-up research and an identification of the companies that will thrive in a radically changing environment. With companies suspending much of their quantitative guidance, the qualitative statements being made on earnings calls are important to interpret and understand… and that is something that an index or an algorithm will be challenged to achieve.
Gold
Of course, we would be remiss not to mention gold. The argument for gold in an environment of truly unprecedented deficit expansion is straightforward, and we agree with it. Gold should not be thought of as a substitute for stocks, to which a great deal of liquidity will flow. Still, we believe that a neglect of gold would be foolish for investors at this juncture. We remain bullish on gold.
We look forward to hearing that you are staying safe and healthy, and taking good care of yourself and your loved ones.
Thanks for listening; as always, we welcome your calls and questions.
Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
