Another interesting day, yesterday!  How are you doing?

We started the day with some exciting news. Moderna announced positive results for the first phase of human testing for its coronavirus vaccine.

We have many vaccines in testing, as well as treatments.  Meanwhile, testing is ramping up very sharply. Our knowledge improves daily as we reopen our economy, state by state, step by step.

A little context 

This year, after the virus struck, we instituted a massive lockdown which torpedoed our economy, particularly services and manufacturing and anything requiring people to cluster together to work. 36 million people have filed for unemployment.[1]

To make it even worse, the oil situation created a crisis in energy beyond the effects of the economic shutdown, as we described in our last letter.  Oil prices collapsed and the energy sector went into a crisis. All this, plus even lower interest rates, hammered the banks and financials.

FAAAM stocks are doing very well!  Facebook, Apple and the rest of the household “big tech” names have excelled, in relative terms.  Less affected by the issues and given new opportunities in this situation, things have gone very well for them.  They are now more than 20% of the S&P 500.[2]  Therefore, Large Growth has continued to dominate the equity index returns.

Meanwhile, small cap and value stocks have been hit hard.  Perceived as riskier in general, more vulnerable to breakdowns in credit markets, and less well capitalized (not to mention more likely to need workers on site instead of at home), these stocks fell sharply, creating historic spreads in valuation between large growth and large value.  It has gotten so extreme that naysayers are now questioning whether the value and size premiums are gone.  We have heard this before.

So, what is happening now?

  • Oil over $32![3] Amazing how fast the price adjusted back up to something we would consider “low but reasonable.”  It appears the shutdown of a lot of production plus the promise of increasing demand as the economy opens again did the trick.  There will likely still be pain, but not the catastrophe many feared a few weeks ago.
  • Announcement of Phase II testing of vaccination by Moderna. We may beat this thing sooner than we thought.
  • The Fed’s commitment to credit markets and the economy. Maybe many fewer companies will go under, fewer people thrown permanently out of work.

Have we turned the corner?

We had a big day yesterday.  When I turned on the news on my iPad early yesterday morning (Eastern time), the Dow futures were up 800 points as the Moderna news hit.  Are we seeing the light at the end of the tunnel, and will many “regular companies” get to survive and return to work soon?

By the end of the day:

  • Dow up almost 4%
  • Russell 2000 (small stocks) up over 6%
  • Value up a lot, energy doing well. Russell 2000 Value +7.82%.[4]

In other words, value and small cap stocks did better than the large tech names.  Of course, we are still waiting to see the banks come back, and this is only one day.  But I am reminded of the year 2000, when we hit the peak of the dot.com bubble and people thought growth/tech was all that mattered, until they collapsed for a decade and value and small stocks returned big time.

Obviously, it is too soon to reach any big conclusions.  We are observing events day to day and hoping for the best, even as we remember that this may continue to be a bumpy road, and more can go wrong.

Over time the factors that add value will probably work, as they have for so long, and things that get out of line will probably fall back into line, like the relative valuations of growth and value stocks.  But we never really know what the next step will be.  Let’s stay safe and be ready for any outcome.

Best Regards,

Roger Hewins

Roger Hewins

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[1] Jeff Cox CNBC. “Weekly Jobless Claims Total 2.981 Million, Bringing Coronavirus Tally to 36.5 Million.” CNBC, CNBC, 14 May 2020, www.cnbc.com/2020/05/14/weekly-jobless-claims.html.

[2] Source: Morningstar, Inc.

[3] Stevens, P., 2020. Oil Jumps 8% To Two-Month High Above $31 As June Futures Contract Nears Expiration. [online] CNBC. Available at: <https://www.cnbc.com/2020/05/18/oil-news-crude-wti-brnet-prices-today.html> [Accessed 18 May 2020].

[4] Morningstar, Inc.

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