Markets Recover. We See Further Upside.
Since our last update, equity and fixed income markets around the globe have exhibited breathtaking volatility as the dislocation caused by the COVID-19 health crisis impacts not only most segments of the global economy but also all facets of political, social and cultural life.
We at Roanoke Asset Management are deeply grateful for our long-standing client relationships which, in many instances, have endured through multiple market cycles of extreme euphoria and prognostications of certain ruin. We sincerely hope that you, your family and extended networks are safe and sound. Please reach out to us if we can assist in any way with your financial needs.
The depth and duration of what most likely will be a period of severe economic contraction will rest upon compliance with social distancing and other containment measures and the level of stimulus provided by central banks around the world. Drawing from the playbook written in the depths of the 2008 financial crisis, the Federal Reserve and the United States Treasury, have done, in our view, an outstanding job introducing liquidity into the fixed income markets while orchestrating the largest stimulus package in American history.
These steps had an immediate positive impact. Investment grade credit spreads, which had quadrupled in late March to nearly 400 basis points, returned to more normal levels while equity markets rebounded sharply. In our last note, we anticipated downside potential to 2142 for the S&P500®, the March 23rd intra-day low was 2197; since then, the S&P500® is up 27% and now stands 18% below its all-time high recorded just eight weeks ago on February 20th.
Our current investment posture is informed by a constructive view on American ingenuity, the power of innovation to overcome challenges and the record commitment of resources dedicated towards both mitigating the economic impact of this crisis and developing a successful combination of medical approaches and social practices that enable a resumption of more normal business and consumer activity. At the same time, however, business prospects will change and companies’ ability to sustain growth will be impacted, both positively and negatively, by this transformative period. Shelter-in-place orders, social distancing and widespread business location closures will accelerate the trend towards digital transformation. Fortuitously, many months before the Corona crisis, we had added to or established positions in select consumer and technology companies that have the financial strength and business positioning to prosper from this trend once the economy regains more steady footing.
We also have an important exposure to the healthcare sector which includes companies like Gilead, Abbott, GlaxoSmithkline, Lilly and Amgen, which are working on testing, vaccines or therapeutic solutions to the Covid Pandemic. From current levels, with the market up nearly 30% from the March lows, we see upside over the next 12 months to 3515 for the S&P500® Index, representing a further 25% appreciation. The market’s move to the upside will undoubtedly be punctuated by downdrafts as the length and depth of the contraction is debated.
We approach this volatility which characterizes the current environment as an opportunity to make marginal changes to the portfolios which will position them to best perform in the post pandemic market, which we think will offer above-average return prospects in the following twelve to eighteen months. We would be delighted to share the details of our perspective at your convenience.
We take our role as stewards of our clients’ financial well-being seriously. We look forward to reconnecting soon. In the meantime, stay safe.