Alger in 5: Market Update


Interestingly, and while we've been dialed in, there's been even some more breaking news on some treatments. I think that the most promising may be chloroquine, which is an anti-malaria drug. Bayer is donating 3 million tablets. Teva is donating 6 million tablets. While we were on the phone and dialing in, the French Infectious Disease Board said the combination of that drug and another is working extremely well. There was recently a trial that showed extremely strong results. And there were other drugs as well that are showing some promise. We're looking at the curves very closely and we certainly would not count out American and global innovation to stem this disease. Finally, I want to tackle what to do with your capital, where valuations are, what areas of the market we think are attractive, and how to look at capital markets right now. In terms of valuation, the earnings yield, if you look at it on a trailing basis – we don't really know what forward earnings numbers are right now because of the changes in the economy. But if you look at trailing earnings yield on stocks, that's just the inverse of the price earnings multiple, so earnings divided by the price. That trailing earnings yield is exceeding Treasury yields by about as much as it did in the Global Financial Crisis, nearly six percentage points. And that's about three times as long- term average. Stocks based on trailing earnings, or we'll call that earnings power, look attractive in our opinion. I'd also take the long-term view for your clients and your outlook. In the long term, stocks are much more likely to outperform than in the short term, obviously, they're much more volatile. According to our analysis of Morningstar data, stocks outperform two-thirds of the time on a one-year basis when we've looked over the past (from 1950 – 2019), but they've outperformed bonds 100% of the time over 20 years. In fact the worst 20-year rolling return for stocks is still a mid-single-digit type of return.

mentioned earlier. So one is that growth is much less cyclical than value stocks. We've gone back and looked at the past couple of recessions. And while value stocks have seen their earnings decline approximately 40% in recessions, growth stocks were able to hold their earnings relatively constant. The second reason is growth stocks traffic in much more digital areas of the economy than physical. And, of course, physical goods are subject to border closings etc. In fact, right now, while the production of automobiles and other industrial equipment has come to a standstill and supply chains are, of course, very adversely affected as goods are having trouble going around the world, internet traffic is surging. It's up 60% and 90% in the UK and Italy, respectively. The fourth reason is growth stocks have dramatically better balance sheets. They're much less levered than value stocks. And we think having a strong balance sheet is really the key to getting through this crisis. Large companies that don't have to compromise on their growth initiatives and don't have risk of restructuring their debt because they are cash rich. Those are the companies that we believe can survive and thrive in the future. So it’s an important point. And I mentioned earlier that levered companies are underperforming and they underperformed significantly in the Global Financial Crisis. And then finally, growth stocks are more innovative and we've written a lot about that. I invite you to look at Alger Insights page for more information. But basically growth and value stocks are typically divided up by the price-to- book value ratio. And we think that that ratio is structurally flawed, given that most companies are investing in innovation, R&D and tangible assets these days, which are not reflected in the balance sheet. Third reason is that growth is less exposed to low interest rates. Value stocks have a lot more exposure to financials that struggle with lower interest rates.

In terms of where to invest? We favor growth for several reasons. And growth is dramatically outperforming, as I

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