Market Commentary: Q1 2020
2020 probably feels like the longest year on record and we’re only half way through… it must have been because of the leap year. Warren Buffett said during his annual shareholder meeting that Berkshire Hathaway sold all of its airline holdings because of the coronavirus outbreak. This shows his concern that the pandemic has changed certain industries permanently and could be a sign that other investors are too optimistic about the economy returning to normal quickly. Although we have never owned airline stock we agree with Mr. Buffett that a number of industries will be permanently changed in a post-corona world.
REITs and fossil fuels are industries we see as either changing permanently or have years to recover their losses. Retail real estate had already been challenged by online shopping and the low end has especially been hit hard; think of a mall anchored by a K-Mart (what’s a “K-Mart”?). The high end, while still struggling was doing a decent job of reinventing itself by making the shopping experience more enjoyable and experiential. With COVID-19 we feel that things are now changing so fast that the high-end operators will have trouble adapting and better investment opportunities lie elsewhere.
Certain long-term trends have also accelerated in other industries like technology and health care. The long-term trend in ecommerce has provided companies like Amazon (AMZN) and Shopify (SHOP) with the perfect environment to flourish and will likely continue to be dominate. Companies like Walmart (WMT) and Costco (COST) look to become “too big to fail” and have become considered essential services. A question we ask ourselves is what the Coronavirus pandemic would have looked like without these four companies?
Another consideration for us is one of valuation, not just of individual companies but of the market overall and how recent capital market behavior relates to today’s new “locked down” economy. The simple answer is that it does not. Markets are pricing in recovery expectations well into 2021 that have yet to be tested or proven, and the unprecedented emergency stimulus measures will likely support risk sentiment for some time. In the meantime, as economies plan to reopen consumer behavior and COVID-19 incident rates very likely hold the key to the continued market rally. With the S&P now trading at a 19X PE multiple, we believe it probable that markets have, in a short period of time, traded ahead of themselves in the absence of tangible results & reduced corporate guidance. We understand the optimism of the market looking ahead and you will not find us arguing with the FED either. But with events happening very fast and information changing even faster, the Team at Aura Wealth Management are committed to following our proven portfolio discipline.
One has to be careful when predicting the future, especially when you’re in the middle of world changing events. Our goal isn’t to be fortune tellers but stewards of our client’s wealth and managers of risk. Any recommendations we make on our client’s behalf always has this in mind.