Second Quarter 2020

This comedically profound and famous quote has been attributed to physicist Niels Bohr, movie mogul Samuel L. Goldwyn, and the usual pithy quote suspects Yogi Berra and Mark Twain. No matter who coined it (most likely a Danish proverb used by Bohr), investors are certainly experiencing its truth in real time as we deal with the intersection of COVID-19 and the future of asset prices. How fast will the economy recover? When and how will the virus be contained? How will the government and consumers react? With these and so many more uncertainties, where will investors look for return and for income?

The most powerful fiscal player in this unfolding saga, the Federal Reserve, has been extremely aggressive since the COVID-19-related shutdowns hit the US economy. The Fed’s comments on April 29 and subsequently make clear that it will continue to be so until the US economy is back on its feet. The announcement also confirmed that short-term interest rates will stay near zero, the balance sheet will expand with purchases of Treasury debt and mortgage-backed securities, and facilities to maintain liquidity and the flow of credit to households, large and small businesses, and state and local governments will continue. Chairman Powell said that the Fed will use the full range of its legal powers “forcefully, proactively, and aggressively” and wants to see an economic recovery that is “as robust as possible.”

With this strong fiscal backing from the Fed, the second quarter of 2020 featured one of the most dramatic recoveries in stock market history, following the fastest decline in stock market history. The US stock market is “predicting the future” as being one where the virus is conquered in relatively short order and economic activity resumes at or near pre-virus levels. Most of the market’s predictive recovery has been concentrated in a small group of technology and related companies, led by the largest – Apple, Google (Alphabet), Amazon, Facebook, and Microsoft. The market’s internal volatility remains high as investors struggle with the growing conflict between rising future valuations and the reality of recessionary business conditions, with attendant slower economic and, ultimately, slower future earnings growth.

Here at Arlington, we remain aware of the pitfalls of predictions, and the necessity of making them despite their inherent difficulties. We can cautiously predict that there will be more short-term upheavals and surprises, both positive and negative, as the news continues its inexorable flow. We also continue to think that owning well run businesses will provide superior long term returns over lending money at exceptionally low rates of interest.