Time To Look To Cyclicals?
Much of the heavy lifting in the markets’ breathless recovery from March’s lows has been performed by the mega-cap growth companies such as Microsoft [NASDAQ: MSFT], Facebook [NASDAQ: FB], Apple [NASDAQ: AAPL], Amazon [NASDAQ: AMZN], and Alphabet [NASDAQ: GOOG].
We believe that the overall recovery of risk assets has been driven primarily by the epochal Fed support for capital markets, which we have described for you since it began in March. Now, that support is being joined by optimism surrounding the tentative reopening of the post-coronacrisis economy as it gains steam — and as infections refrain from spiking and it looks as though re-opening economies are avoiding the dreaded “second wave.” The mega-cap tech stalwarts that have propelled so much of the rally also happen to be natural beneficiaries of a world suddenly and freshly aware of the need for and benefits of business digitization, remote work, and e-commerce. Secular trends that were already in place have been accelerated.
However justified the acceleration of these enduring themes, it behooves investors to remember that an economy cannot live on FAAMG alone. Let’s take cars — powered by much-maligned internal combustion — as an example.
The coronacrisis was a body blow for the automotive industry. April’s seasonally adjusted auto sales in the U.S. were down 50% year-over-year. May came in down 29%; but the fact that sales beat expectation was enough to drive a strong rally for automakers long left for dead such as F [NYSE: F] and General Motors [NYSE: GM], as well as car dealers, parts manufacturers, and auto financers.
The automotive sector and its tributaries are one example of the industries which have been pummeled by the crisis, and yet which remain deeply rooted and in-demand components of the U.S. economy; travel stocks, such as airlines and cruise lines, have also seized investors’ imaginations of late. These beaten-down sectors of the economy will recover and will continue to generate profits.
The Fed’s put does not apply only to the mega-cap tech masters of the universe; its purpose was to undergird U.S. and global financial systems, and the beaten-down cyclicals will also benefit. Seasoned investors will know that the upturn from a recession bottom is usually strong for these companies, which investors will want to own just when their prospects are most dismal.
The coronacrisis has been very unusual in many respects. It may also be that it is unusual in this respect, that the recession it occasions may be one of the briefest in U.S. history. We do not know, but we believe investors should not lightly spurn the upside risk. Cyclicals are worth your attention.
The U.S. Dollar
Some are beginning to ask about the recent behavior of the U.S. dollar. In our view, global asset allocators, and therefore currency markets, will increasingly start focusing on the upcoming U.S. election — trying to handicap the outcome… and how much change it might cause in how capital (ownership/wealth) will be treated in years to come.
Gold
We noted above that we believe inflation is not the clear and present danger that some investors believe — and certainly that hyperinflation is not. However, we also noted that gold can advance in a disinflationary environment, especially one in which global central banks are collectively wading into uncharted policy waters and stoking an underlying sense of worry and skepticism among market participants. Thus, even if inflation does not take off, we still believe that gold can perform well during the rest of 2020, and we become even more sure as that timeline extends.
Thanks for listening; as always, we welcome your calls and questions.
Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
