Quarterly Update

Quarter Ending June 30, 2020

Performance

The Whistler Asset Management (WAM) Tactical Equity Portfolio finished the second quarter with a gain of 21.4%. Microsoft Corporation and Simulations Plus Incorporated were the strongest performing positions during the quarter.

Market News

As discussed in the prior update, even though the first quarter was one of the worst in decades for stocks, the last week of it was one of the best weeks in decades with a massive rally off the lows. That rally continued through the second quarter making it one of the best quarters in decades. With the stock market moving higher there was a large and noticeable disparity between the real economy and the stock market. The unemployment rate reached its highest level since the Great Depression and second quarter GDP was tracking to be the worst on record. Yet, the market was moving higher which was only made possible through stimulus.

The U.S. government passed multiple relief packages totaling nearly $2.8 trillion. This stimulus was different from the past. The last major stimulus package before coronavirus known as TARP, which was passed in 2008 during the Great Recession, lent money to banks and the banks were expected to lend the money to consumers. The problem was banks were slow in lending. This time around much of the stimulus went directly to many of the households and businesses that needed it. This allowed the money to enter the economy more quickly. Even though unemployment was the highest since the depression of the 1930’s, with the substantial stimulus which included increased unemployment benefits, direct checks to households, moratoriums on evictions, and mortgage forbearance, many households and businesses managed to survive the abrupt closure of much of the economy.

Along with the fiscal stimulus the Fed continued its incredible monetary stimulus. On April 9, the Fed announced additional support for existing and new programs totaling $2.3 trillion. Some of the moves were truly unprecedented. The Fed began buying corporate bonds, municipal bonds, and bond funds to lower interest rates and keep bond markets functioning. The Fed also guaranteed loans banks provide to small businesses as part of the Paycheck Protection Program. Because of the Fed’s guarantee, banks did not hesitate to continue providing financing to small and medium size companies which helped keep workers paid.

There was also some positive economic news which helped the rally. Over 2.5 million jobs were created in May when economists expected job losses. It was the first time jobs were added to the economy since February. Economists seemed to underestimate the effect of the economy’s reopening, as well as stimulus, which provided incentives for rehiring employees. Although it was great that jobs were added in May, even after the positive jobs report the number of unemployed persons was up 15.2 million since February.

Top Performing Stocks

Microsoft Corporation, a software services company, was a top performing stock. Growth in the company’s cloud businesses remained strong as the work from home environment increased cloud demand. Microsoft’s Teams collaboration platform was especially successful as the technology is well suited for remote work.

Simulations Plus Incorporated was another top performing stock during the quarter. Simulations Plus makes software that lets drug companies simulate tests of their products in the virtual world before undergoing human or animal testing. Strong demand continued for its products. Additionally, there was an announcement that the stock would join the S&P 600 stock index which increased institutional demand.

Bottom Performing Stocks

The Vanguard Short-Term Treasury ETF was the worst performing position in the portfolio even though it did not suffer a loss during the quarter. Since short term Treasury rates remained stable during the quarter the position was flat which made it the worst performing position given that every other position in the portfolio was up.

Walmart Incorporated was another bottom performing position in the portfolio even though it was positive during the quarter. Coronavirus related costs were higher than expected which caused some selling pressure. Even though coronavirus related expenses were high, the stock has performed well relative to overall markets this year.

Going Forward

There’s an old saying on Wall Street, “Don’t fight the Fed.” When the Fed provides stimulus asset prices typically move higher. When the Fed reduces stimulus asset prices tend to falter. With the massive stimulus provided by the Fed the most likely path forward is increasing asset prices. Bond yields are at record lows which means excess cash will be more likely to go into stocks than bonds. That bodes well for stock markets.

A sharp rise in unemployment has yet to produce problems with mortgages, delinquencies, or consumer confidence thanks in large part to stimulus. Thus far, serious delinquencies (greater than 90 days) are the lowest in two decades. However, loan delinquencies of 30 to 60 days are the highest in two decades. Delinquencies can lead to insolvencies and may lead to deeper stress in the economy. This will be monitored going forward and the portfolio adjusted accordingly if needed.

There is risk that a surge in cases completely shuts down the reopening of the economy. But by the end of the quarter markets reacted less and less to the number of covid-19 cases and seemed to be more focused on stimulus. Given that the covid-19 related stimulus was more effective than past economic crisis efforts, a discontinuation of stimulus is a large risk to markets.

Markets are forward looking. We should continue to see equity markets look past the current economic conditions as investors anticipate a vaccine and the full reopening of the economy sometime in 2021. That’s as long as some type of fiscal stimulus stays in place or there is hope for more stimulus. Without stimulus, as mentioned above, the probability of deep stress in the economy will increase and markets may start to falter. Provided some stimulus continues, at the end of the pandemic pent up consumer demand should help the economy grow rapidly.