Large Cap Investing During Volatile Markets
Here's a maxim that Fred Alger and Dan Chung have taught Alger analysts. They say high quality companies benefit disproportionately in good times and in bad times. In today's volatile markets, we feel the quality of our portfolio holdings, particularly those innovators with unique intellectual properties or unique business models are ideally positioned to substantiate that Alger belief. In fact, if you listen carefully today, you might hear that the coronavirus could actually be accelerating the pace of innovative technological adoption in the economy today. Brad, would you like to make some comments on the macroeconomic environment? Brad Neuman : Thanks, Kevin, and good morning. I want to comment a little bit on what's happening in the economy and a perspective on the stock market, what we're seeing in terms of sentiment amongst investors and executives and what valuation looks like in the equity relative to interest rates in the bond market. So, first off, you know, it took us 16 days to enter a bear market in this period of a pandemic and that's faster than 1929. Peak to trough, the S&P 500 fell 34% and in our view, that prices in a recession. We say that because the average decline around recessions since World War II has been 22%. The peak lost wealth around the world is $30 trillion in market cap globally. Now, from those lows, we've bounced back about 10% or 12% and economic estimates have been pretty volatile. They've moved around and are now down about low to mid single digits in terms of GDP for the first quarter, expected to be down double digits in the second quarter, followed by a strong second half rebound beginning in Q3 or Q4. There's some good geographical and historical analogies for such a rebound. For instance, the last time that GDP was down double digits for a quarter, as it's projected to be in the second quarter of this year, was the first quarter of 1958, which happened to be during the Asian flu pandemic, which killed about 1.1 million people globally and 116,000 people in the United States. Interestingly, the next three quarters of GDP were up 3%, up 10%, and then up 10%. A geographical analog may come from China, which obviously is handling the virus somewhat differently but while those numbers showed a worse contraction in February than the Global Financial Crisis, numbers released this week for China show that
the economy is bouncing back and may indeed be growing in the near future.
In light of all this economic turmoil, the stimulus that the United States government and governments around the world is providing is very strong. Fiscal stimulus passed was over $2 trillion, which compares to the $800 billion in the Global Financial Crisis and in our view that $2 trillion could really be something more like $4 trillion once the Federal Reserve is done leveraging the funds that it receives from the Treasury. On the monetary side, the Fed is doing open ended quantitative easing, buying Treasuries, mortgage-backed securities, even corporate bonds and some ETFs. The pace of their buying is about–last week was $600 billion, which, to put it in context, is faster than the average they did per month during the Global Financial Crisis. So it's going to be a sharp downturn in the economy and some of the estimates for unemployment range into the double digits. That would be higher than what we saw in the Global Financial Crisis. In terms of duration, we're very focused on looking at the virus and the virus transmission rates to figure out how long this will last. Obviously, some eastern countries have already seen declines in transmission rates and now we're beginning to see the same thing in some western countries. In fact, Italy looks like its new cases peaked about March 21st and are now down. As of yesterday, new cases are down about 38% from that peak. When we look at the country curves, the U.S. appears to be about two weeks behind Italy. In terms of sentiment, obviously investors and market participants are extremely anxious. We measure that in a couple of different ways. One, we look at the VIX Index, which is the implied volatility on S&P 500 options, often called the “fear index.” That index recently hit a record high, even higher than during the Global Financial Crisis. We also look at money market funds, which are now over $4 trillion in the United States, up nearly 20% from last year, with the highest monthly inflow ever at $600 billion, which compares to the Global Financial Crisis' largest monthly inflows to money markets of less than $200 billion. So, extreme fear and liquidation of risky assets resulting in a massive buildup of cash.
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