Short-term Perspective/ Long-term Optimism 

The market continues its recent sideways trek. The S&P 500 closed roughly 2.5% lower on the week and has effectively made no progress for the month of June. Participants find themselves grappling with a wave of alarming headlines about the re-acceleration of the virus around the country. Florida, Texas, Arizona, and California are the current hotspots, and each of these states has taken steps to slow down or stop their re-opening process. This appears to have cast doubt on the ability of the economy to sustain a V-shaped recovery, even with recent data indicating a strong initial bounce off of the bottom. The market’s current path is not unusual. Historically, strong rallies off of major market lows have given way to a few weeks or months of consolidation. However, the long-term picture tends to be bright after strength off of the lows. Looking at the ten best 3-month moves in history, the average performance over the next year has averaged 12.2%, far above the 8.8% average for all observations. We’d argue that the current narrative looks to be shaping up much the same. 

As we’ve recently said, the next few months could be difficult for the market. States will be fighting a resurgence, the election trail will be heating up, and companies will be digging into their Virus Crisis results. This is not necessarily a recipe for short-term success, especially with some of the leading sectors looking a bit tired. Tech and Communications have historically carried big weight, and both are starting to develop pockets of weakness. With an abundance of uncertainty, it wouldn’t be surprising to see profit-taking ensue at these levels. We continue to see the formation of a trading range for the S&P 500. We believe that 3200 looks like the potential limit to the upside with good technical support at 2900 on the downside. 

We are careful to temper our short-term caution, though. We must not forget that the Fed stands ready with a seemingly endless arsenal of weapons at their disposal. We are confident they will act as appropriate to sustain the economy’s momentum. The Powell put continues. It is hard to be overly negative with that level of force behind the market. 

Also, we are beginning to see the fruits of some of our companies’ labors, despite incredible challenges. Nike reported earnings today and fell sharply as the market reacted to the quarterly loss it posted. Profitability was hindered by the virus to a much greater degree than expected with inventory piling up and production inefficiency. However, there is a reason for optimism when digging further than the headlines. As a strategic initiative, NKE has been looking to grow its digital sales as a percentage of total. The previous goal was to get digital sales to 30% of total sales by 2023. Today, the company announced that it will get there well ahead of plan and is now on track to hit 50% digital penetration in the near future. The virus has accelerated a long-term strategic goal despite short-term profitability issues. We see this as an opportunity and a reason for long-term optimism. This is one example, but a subtle reminder that great companies find a way to win in all environments. There will no doubt be an adjustment period, but we invest in companies for what they will be in 5 years, not just the next quarter. 

As a final temperament, we must remind ourselves that the market dislikes uncertainty above all else. In less than five months, we will know who will be in the White House for the next four years and who will be in Congress for at least the next 2. There will obviously be winners and losers, but that impact could pale in comparison to the benefit of knowing who holds the keys. Investors have plenty of excuses to stay on the sidelines right now, but they might be more willing to put their chips down if they at least know who is playing. 

Thanks,

Preston May, CBE®
Research Analyst