To Our Investors and Friends,
The S&P 500 increased 12.7% in April as massive monetary and fiscal stimulus helped the markets rebound from the disastrous COVID-19 pandemic. Oil prices (WTI) continued to decline, down 8% to approximately $19 a barrel, as oil demand/supply remains imbalanced. The 10-year was little changed from last month, ending at 64 bps, while the spread between the 2- and 10-year ended at 44 bps. Difficult environments for both energy and financial companies helped growth’s dominance remain intact. The Russell 1000 and Russell 2000 Growth index both rebounded approximately14.8%, while the Russell 1000 Value Index increased a less robust 11.2%, and the hardest hit index, the Russell 2000 Value, recovered 12.3%.
It may be surprising to hear that COVID-19 is not a Black Swan, meaning an unexpected event that changes our perception of the world. In a recent CNBC interview, Mr. Taleb pointed out that we have had many pandemics in the past, including several since the turn of the century. Many Asian countries were well prepared for the crisis and appear to be recovering after a less severe disruption. A decade of cost cutting in the U.S. (including at the CDC itself), and outsourcing production of everything from medical equipment to drugs, left this country in an unusually vulnerable position, for which we are now paying a high price in both lives and dollars.
We believe there are a few points worth mentioning from The Black Swan. In the book, Taleb writes, “In the last 50 years, the 10 most extreme days in the financial markets represent half of the return.” With this in mind, we will resist calling a bottom in the market and missing these rare return days. It is best not to have a firm opinion on how this plays out. There are simply too many unknowns to try to guess the outcome. Along these lines, we are struck by Talab’s lesser accepted 50/1 rule, which is a more extreme version of the 80/20 rule. The 50/1 rule states that 50% of performance, economic growth, wealth, etc. is generated from a mere 1% of participants. This may explain why, as many have noted, the market value of the top 5 companies in the S&P is a rough match to the market cap of the bottom 350 companies. We believe it is a sign that our economy may be at an inflection point and is why we will continue our hunt for rare, outsized opportunities.
We believe the 50/1 rule is the best explanation for the wide disparity in fortunes of companies during this downturn. It may explain why 20%+ of the population is unemployed, and the stock market is off a mere 14% from the high. The Federal Reserve and Washington are pumping a lot of money into the economy right now to both dampen the impact of COVID-19 and strengthen financial markets. Let’s hope the end result isn’t a real Black Swan that reshapes our country to something unrecognizable. Nevertheless, we will be preparing for an uncertain future, and change in the direction of where the economy is heading.
All the Best to You,
AKW