A Short Comment on the Bull Case

We have been stuck in a range-bound territory for broader market indices since the beginning of September. The election is imminent and the virus activity in many parts of the world is returning. The lack of the stimulus plan and potential monopoly regulation adds to anxiety, understandably so. Despite all of this, we see a positive road ahead for investors who take the longer view. Here is why the bull case is intact.

Bond market and the Fed

The 10-year treasury at .75% is at its midpoint of the last six months, with a high of .91% and low of .54%. Our interpretation is that the bond market is pricing in a modest new fiscal stimulus package well below the 2.3 trillion Cares Act. While we wait for the stimulus, the Fed has repeatedly stated that interest rates will remain low for an extended period of time. Most interpret this to mean that rates will stay near zero until 2025. Furthermore the Fed continues to aim for its inflation target of 2% or more, something it has tried repeatedly to achieve for 10 years. This Fed activity supports higher stock prices even more than it did six months ago. The combination of zero interest rates, more stimulus, and a goal of 2% inflation means the bull case is intact.

 Less sensitive bond markets and the Fed’s balance sheet

The high yield spread – a recession and recovery indicator – has moved even farther into recovery territory since April. Despite all of the virus, financial and societal stress, high yield spreads are relatively low. A higher high yield spread would indicate fear and tension in the bond market. The bond market is typically more sensitive to upcoming issues.

It’s likely that the high yield spread and bond market in general is less sensitive due to the Fed’s balance sheet. The Fed’s balance sheet reached $7.2 trillion as of 10/21/20, up from $4.2 trillion as of 3/09/20, largely due to purchases of Treasuries and corporate bonds. There is no indication that the Fed’s balance sheet is running out of room for more purchases. The prices in the bond market seem to support this. I think that it’s safe to say that the Fed is prepared to support bond markets at a moment’s notice.

Vaccine news will eventually arrive

There is no vaccine available, although many companies are testing and working on one. There are currently about two dozen major public companies working on treatment or a vaccine. What is different today is that we still have high rates of infection, second and third waves, hot spots and lockdowns. Most experts agree that widespread vaccination, herd immunity, effective containment are at least 18 months away. Whether the vaccine is 2 months away or 18 months away doesn’t change the overall trend towards cloud computing, e-commerce, AI and the rest of the digital revolution.

Resilience

The fundamental story remains that technology and innovation are leading us into the future. When everything went on sale in March, those companies were the first to bounce back. Only six months later, if the same selloff were to happen, it’s reasonable to believe that the technology and innovation leaders would be the most resilient and first to bounce back, again. We believe that most investors will use market turmoil as buying opportunities for the highest quality technology names, both large and small.

We continue to invest in areas that benefit from growth and the overall trend of the digital transformation. These companies are full of intangible assets which have produced extraordinary returns over the past decade. Intangible assets are an increasing part of the overall investment picture in 2020. Our major themes are the digitization of finance, artificial intelligence, the public cloud, the battle for our attention, digital health care and ecommerce. The short-term trend may be down for obvious reasons, but the long-term trend remains up. As big as these sectors are and as valuable as the companies are, it is still early days for long-term investors.