Two days ago, on June 10 of this week, the Federal Reserve met and proclaimed their intentions: they plan to keep interest rates at or near zero for the foreseeable future. There will be little to no rate increase until at least 2022. And, according to Fed Chairman Jerome Powell, “We are strongly committed to using our tools to do whatever we can and for as long as it takes to provide some relief and stability.”
Along with this encouraging news, high unemployment was projected to continue for several years. It was also reported that U.S. gross domestic product (GDP) fell nearly five percent in the first quarter, and according to the “GDP Now” model a steeper decline is likely in the second quarter. Further, consumer spending, which accounts for about two-thirds of the U.S. economy, slid 13.6 percent in April, the steepest decline on record. (US Bureau of Economic Analysis)
Powell’s statement concluded that the extent of the downturn and the pace of recovery remain “extraordinarily uncertain.” On Thursday, the Dow plunged more than 1,800 points and the volatility index, or VIX, spiked more than 33 percent.
Although some still see the U.S. stock market as priced for a quick recovery, our team at FourThought has expected a more gradual “U-shaped” recovery with bumps along the way—and that hasn’t changed with Wednesday’s news. We discussed the U-shape during our Thursday market update webinar on June 4 (please emails us if you would like a link to the replay).
Given the economic news and market volatility, what are we doing? Nothing different. We are sticking with our fundamental strategy of finding and investing in quality companies.
Quality companies can and have weathered rare but consequential events and severe market downturns. Some have actually been born or reborn at the worst of times.
Disney, originally founded in 1923, gained its footing in 1929 during the depth of the Great Recession.
Walmart was opened on July 2 of 1962. Just prior to that was the “Flash Crash of ’62” (also known as the Kennedy slide), when the S&P 500 dropped 22 percent between December of 1961 and June of 1962.
Both Starbucks and Microsoft were founded during the stagflation era of the 1970s; Starbucks on March 31 of 1971, and Microsoft on April 4 of 1975.
What is our definition of quality, and how do we know a quality company when we see one?
We have specific filters or screens that we have developed over time to look for these companies. We use our tools and resources to research companies and identify the most promising based on our filters, and then we dive even deeper to gain a true understanding of what is going on inside their walls and the minds of their leaders. Some of the questions we seek to answer are:
- Are they a market leader in their industry?
- Do they have strong balance sheets?
- Do they have consistent cash flow?
- Are their management teams and boards strong?
These are the same questions we have been asking for years—long before the coronavirus crisis and current market downturns. Although the world has changed suddenly, our strategies have not. We believe they are more valuable now than ever.
In our view U.S. markets and the economy will continue to see volatility before we hit the upside of the “U”—despite unprecedented government support. Staying focused on “Q,” for quality, is they key to weathering the storm.