Market Update: June 2020

July 03, 2020
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As the first half of the year comes to a close, the economy remains in an uncertain state and the fate of displaced workers is perched on a knife’s edge.


The resurgence of COVID-19 has once again taken center stage, as has talk of what stimulus will next be passed through Congress to help spur continuing demand. Many cities and states have peeled back re-opening plans as cases and hospitalizations have risen higher. After the peak in early April, the seven-day moving average for new cases bottomed on June 9th at 21,282 per day. Since then, they have risen higher, hitting 43,271 per day in the seven days through July 1, 2020. (Daily volatility in the data, especially over the weekend, makes it important to look at seven-day moving averages.)


The increase in new cases can partly be chalked up to more testing, but certainly not all of it. A chart below we have been regularly monitoring is equally both concerning and encouraging—concerning to think the daily death rate will turn up sharply, but encouraging because cases are increasing while deaths are declining.

Source: The COVID Tracking Project; Corona Virus Dashboard: Viz Author: Connor Kelly; March 1-July 1

It is indisputable the global effort from public entities and private companies to innovate vaccines and therapeutics is equivalent to a modern-day moonshot. However, despite the increased risk of mistakes and /or clinical trial setbacks from this expedited pace, analysts at Alliance Bernstein believe the discovery, development, distribution and access to a COVID-19 vaccine to significantly beat the prior record set in the 1950’s (4.5 years for the MMR vaccine.)


In fact, just this week an experimental vaccine being developed by the drug giant Pfizer and biotech firm BioNTech encouraged immune responses in healthy patients. While the news was taken well by market participants, the clinical data has not yet been peer-reviewed or published in a journal.


According to the Milken Institute, there are fourteen COVID-19 vaccines in human trials, with more expecting to start soon. In total, 178 vaccines are in various stages of development.


As you may recall, the stock market peaked February 19 and then proceeded to bottom on March 23rd after falling 34%. Initially, the safer sectors such as consumer staples and healthcare held up reasonably well along with the communications and information technology sectors. Soon after the initial recovery, punished cyclical sectors such as financials and energy began to take a lead for a while, but have since rolled over.


This dichotomy and progression of growth versus value sectors is illustrated below. The higher the ratio, the better performance of the Russell 1000 Growth Index versus the Russell 1000 Value Index.

What we wanted to highlight in this chart is that relative performance of growth stocks (higher sales and earnings growth/higher price-to-earnings, price-to-book multiples) and value stocks (lower sales and earnings growth/lower price-to-earnings, price-to-book multiples) is reaching late 1990’s tech bubble extremes.


Now, there is certainly a case to be made for a continuation in earnings growth and secular tailwinds for companies in the technology, communication services, consumer discretionary, and healthcare sectors; however, there does come a time when an investor can pay too much for a company’s projected future cash flows, and may be humbled should the tides turn.

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