Market Update September 2020
There is a lot of buzz around IPOs recently, the initial public offering of privately held companies that are becoming publicly owned. It reminds me a lot of the IPO heyday of the late 1990s, which proved to be the end (for a few years, at least) of the tech boom. The great companies survived, but many weaker ones could not weather the storm that came to internet stocks in the following years. I think it’s good to remember that in an IPO, the owners of the company are selling their shares of ownership to the public. In many cases, they are trying to raise capital so that they can grow the company faster, but I sometimes find myself wondering that if the company were so great, why are the owners selling it?
I’m also reminded of the high relative valuations that many technology stocks enjoy right now, and how there is often a difference between a great company and a great stock. An example is Microsoft in 1999. No doubt, Microsoft is a great company. But, in 1999, the stock got as high as about $38/share (split adjusted). It didn’t reach that price again until 2014! Over that time, Microsoft’s corporate earnings roughly tripled, but the stock was flat! How can this happen? Well, likely the stock was overvalued in 1999, and then, of course, we entered a couple of bear markets, the tech bubble burst and the financial crisis. My point is, while Microsoft was a great company, and continued to earn more and more money, the stock was flat for 15 years. So, it was a great company but not a great stock. This is not a prediction, a recommendation to buy or sell, an endorsement, nor an indictment, of Microsoft’s stock. Just a cautionary tale of the distinction between great companies and great investments.
Overall, we are still optimistic about stocks. We think recent volatility has been due to technical factors, rather than fundamental ones. And, unlike many of the technology companies in the late 1990s, most tech companies today have great balance sheets and lots of cash. With bond yields so low, many investors will likely continue to favor stocks, which should help markets.
On the virus front, we have gotten smarter about preventing and treating it, and there is anecdotal evidence that a vaccine (maybe several) will have completed trials within the next few weeks. That should also be good for markets, especially the stocks that have been left behind over the past 6 months and stand to benefit from a less restricted economy.
There is some event risk, especially with the virus and the election. Regarding these, we are identifying some investments that we think might mitigate election risk, and we are advising that clients improve the credit quality of their bond positions. Also, we are hosting an election webinar on Tuesday, September 22 that may answer some of your election/portfolio concerns, should you have any. Here’s a sneak peek…it has been, historically speaking, a mistake to make big portfolio changes based around an election. There are many variables that go into stock market pricing, including, but definitely not limited to, elections.
We still prefer the technology, health care, communications services, and consumer discretionary sectors. Industrials and basic materials look interesting, though, both as turnaround stories and as beneficiaries of a weaker dollar.
In the short-term, don’t be surprised by pockets of weakness in stock prices. There is a lot going on, and news could cause fluctuations. We suggest accumulating stocks if these pullbacks do occur.
As always, past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected.