Investment Climate July 2020: Making History...While Looking Ahead

The second quarter of 2020 will go down as one of the best quarters in the history of the stock market. The unprecedented and swift recession that was “self-inflicted” by government responses to COVID-19, the world over, bottomed during the quarter and stock markets sensed that turn and rallied fiercely. On average, markets made up most of what they lost in the first quarter, ending June 30, 2020 with year-to-date returns down only a few percentage points after being down around 20% in the first quarter of 2020.

It is hard to believe so much has happened in such a short period of time. The crisis industry (otherwise known as the media) had endless crises to highlight given the COVID-19 response and then the civil unrest that spread across cities around the United States. Nonetheless, the market action is testimony to the importance of staying fully invested in times of extreme volatility and crisis. Simply put, it has been our view for decades, and we have regularly pointed out, that trading-based strategies are hazardous to most investors’ lives, and that was proven handily this year.

As we pointed out in our last Investment Climate, our view has always been that it is crucial to look at investing in the context of the business and not the stock, or the stock market. Our TFCM Core Growth Strategy experienced the best two months in its history and finished the first half of 2020 up over 23%. This was the result of painstakingly applying our narrative-based investment approach.

Many of our clients have asked us what specifically drove this significant outperformance. We believe what we are witnessing is a recognition, in difficult times, of real and sustainable businesses in core technology, medical technology and financial technology. Frankly, while we certainly don’t expect this type of performance every quarter (or year for that matter!), we believe we are in the early stages of growth for most of our companies. And while we have certainly outperformed in our growth strategies over the years, we believe the market focus on trendier themes such as social networking, “green” industries, and app-based software (as opposed to platform software), resulted in an undervaluation of the types of businesses we favor (and the narratives which apply to those businesses) over the past several years. There is nothing like real concern on the part of investors to cause them to seek out sustainable business models.

As for the overall economic and market environment, we believe the world overestimated how many businesses were “shut down”. We mentioned in our previous commentary that we spent a significant amount of time speaking to company management teams during the dark days of the downturn and, in general, they were reporting that they were still functioning. The fact that the hardest-hit businesses were those that were the most consumer-facing, and thus visible to the average person, gave the impression to most observers that things were far worse than in reality. This is not to suggest that the downturn was not significant, it absolutely was and still is, but it was not quite as bad as was expected -- and that is the primary reason that the markets have reacted so positively and swiftly. In our view, the reaction has been quite rational.

Going forward, we believe there are important challenges to overcome. We have never witnessed such actions from government as we have experienced in the current situation. The massive amount of spending gives us serious concern, not to mention the more philosophical, yet pertinent questions surrounding the role of government in society. These issues go beyond the scope of what we address in our commentaries, and yet have real implications for the free enterprise system in which we live and which are required for our companies to thrive.

These days, it is more important than ever to have a very solid sense of the trends that will drive business in the coming years. It is imperative that investors pay attention to those who run the businesses in which they invest to be certain they are up to the challenges facing them in the twenty-first century. Now more than ever, predicting the business is far more important than predicting the market.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.