July 2020 Market Commentary

Eric Davis
Chief Investment Officer
August 12, 2020

This is the first installment of our quarterly Market Commentary series. In this reading, we cover our approach and findings in making decisions for our clients. The following information was provided to our clients on July 17, 2020, and is for educational purposes only.

In a world full of commentary, it’s easy to believe our voice will fall into the void. But fear of not being heard should not be a deterrent. Yes, we are a group of nerdy mission-driven financial advisors, and yes, we are going to talk about our view on the stock market. But our goal is not to simply state our opinion and walk away. We hope that our quarterly views provide the launch point for new ideas and dissenting opinions. Our welcoming of all viewpoints is something backed up by our core purpose to help clients invest with their values, not ours. If you find our commentary full of financial jargon, challenge us to talk more like a human and less like your typical advisor. You may not agree with all our viewpoints or analysis, and that is okay. We hope by the end, you can make your next financial decision.

Before we dive in, we need to take a moment to explain our process of studying the markets. The approach is a combination of our internal research and interpreting the opinions of those who are smarter than us. If you’re unfamiliar with Howard Marks, CFA, he is the founder of Oaktree Capital Management, and has written the Most Important Thing – Uncommon Sense for The Thoughtful Investor, among other great books. We value and respect his opinion and want to make sure we recognize him for his indirect contributions to our analysis.

Marks suggests asking big picture questions to determine where we are today as opposed to predicting where we might be tomorrow. For each indicator, we use a combination of metrics and judgment to identify, “is it this?” or “is it that?” Each descriptor represents the extremes of that measurement. The idea is to identify the risks that may lay ahead and have a portfolio prepared for those risks. As investors, it is critical to be in the best position possible for bad times, survive, and springboard your portfolio as good times come back.


Highly frothy, overvalued markets will have more indications on the left-hand side of the list.  In these conditions, we need to be careful and judicious with stock selection. It might even make sense to pull money out of the market and take profits as needed.

We add up all the indicators on the left-hand side (the frothy overvalued, overconfident side) of this exercise and circle the appropriate area. The most recent metrics used were done so by our internal staff and Chris Bacella, CFA. The zone selection isn’t the end of our analysis, but it provides us an anchor for further investigation. We chose the names below because many of our clients value the importance of sustainable, equitable farming. So, if today’s stock market was today’s harvest, how much did we yield?

Some people call acting in the opposite direction Contrarianism.  However, our approach is more nuanced than counteraction. We recognize that almost all investors transact on fear or overconfidence, so to think we can’t fall into these traps is hubris. We do our best to take the 2nd-level thinker’s approach to today’s reality.  This disciplined approach is a foundational piece in Revalue’s culture and decision-making. Each quarter we have a round table “Trust Review,” in which we measure each other against our core values, including 2nd-level thinking. It can be uncomfortable to call each other out, but we do so from a place of honesty and respect.

In our interpretation of the chart, we are in the “Poor crop” territory. Despite the recent weak economic performance and long-term uncertainty, investors continue to purchase more than they sell. The swings in stock prices are still above average, possibly signaling that buyers and sellers are restless. In general, money continues to flow into the economy from the Federal Reserve, enticing investors to take more risk at a low cost. A concern is that if money is saved instead of being put to work, the road to economic recovery may be slower than expected.


Now that we have gathered our metrics, what are other people saying? There is not a single “optimist” or “pessimist” but a representation of viewpoints from both sides. We need to understand both sides of the equation to provide quality analysis. These points are by no means everything, but here is what we have heard through the grapevine.

What the “Optimists” are saying

  • There are positives in response to COVID-19 is showing signs of improvements, including testing procedures.
  • The likelihood of a second wave of COVID-19 cases and deaths is unlikely, which means the economy is likely to fully open soon. Improved testing procedures and over-reporting by hospitals may have caused the recent spike in cases.
  • The Federal Reserve has and continues to inject money into the market effectively. The cash keeps companies afloat and economic activity moving forward. Much like previous collapses, the Federal Reserve provides a backstop before we reach a total market meltdown.
  • As the economy reopens, the jobs people lost may more than likely be there. Also, people will be eager to go back to work.
  • Individual’s spending and other habits may likely go back to the way it was before COVID-19.
  • The stock market already priced the impact of COVID-19 back in March of this year. Companies reporting earnings in mid-summer and mid-fall may demonstrate that the effects of COVID-19 were not significantly adverse.
  • By 2021, our economy may have fully adjusted to the pandemic and return to normal.
  • The rise of digital currency and the injection of funds by the International Monetary Fund may help emerging markets survive the COVID-19 crisis.


What the “Pessimists” are saying

  • Consumers and businesses will save more and spend less than before the COVID-19 crisis. Along-term trend of increased savings may result in a stagnant economy.
  • The Federal Reserve’s policies may increase inflation significantly above wage increases,resulting in a loss of purchasing power for consumers.  
  • The latest rally does not signify that the economy is back to normal, just a last-ditch effort to prop up stock prices. The term we use for this is called a “dead tennis ball bounce” (There's an industry-standard term, but I couldn’t look my cats in the eye after typing it out).
  • The second wave of COVID-19 case and death increases may come, which may mean another shutdown of state and federal economies. There has already been a retraction by states and municipalities due to spikes in cases and deaths.
  • The economy may have changed significantly, which may result in a dramatic change in which all companies will operate now and in the future. The adjustment period may likely extend over the next few years, resulting in a 5+ year recovery.
  • Earnings reports by companies in mid-summer and mid-fall may be worse than expected.
  • Earnings reports may be overly optimistic due to lax reporting standards. An example of this is Uber presenting their earnings as if COVID-19 didn’t happen.
  • Unrest in the United States and abroad may prolong economic recovery, as shifts of political and social structure may create adverse short-term effects or conflicts among nations (in exchange for long-term social benefit).
  • Federal, state,and city governments’ ability to generate tax revenue may be substantially affected in the short- and long-term. A drop in taxes may mean less government investment into the economy, or unforeseen consequences.
  • Given the economic impact of COVID-19 and the potential US onshoring of manufacturing sources, bankrupt Chinese companies may accelerate, creating a cascading negative effect in the global economy.
  • Measures to improve emerging market economies may not be enough during the COVID-19 crisis.


Let us reel it back in to highlight some unique points about today’s stock market.When we look at what is driving positive returns despite uncertainty, there are numerous factors. However, there are two specific ones worth noting:

  • Companies that were in a strong financial position and had a business model minimally impacted by COVID-19 contribute significantly to market gains.
  • Speculation from a new investor class is pushing prices up on relatively overvalued companies.

Let us address the first point. From its low on March 23, the S&P 500 has increased by approximately 34.5% as of June 26. As of April 27, Microsoft, Apple, Amazon, Alphabet (Google), and Facebook market share increased to 20% of the S&P 500. From a profit perspective, these companies have been able to build cash and invest in digital technologies. Also, while industries like retail have been significantly affected, these companies’ workers and the usage of their products rely much less on physical location. Although this is a positive sign, if fewer companies are driving more of the market’s advances, the gap between the entire economy and how well it is represented by the stock market widens.

During the COVID-19 crisis, individuals may have found themselves with more time, more money from their stimulus check or unemployment benefits, increased boredom without sports gambling, enticed by the simplicity of trading through the Robinhood app, or other reasons. In any case, an unusual amount of brokerage accounts have opened up in the past few months. The low in March may have been considered the market bottom, so new retail investors jumped in on the action. This influx of market participants may have resulted in a surge of stocks that are fundamentally unsound.

One example is Chesapeake Energy Corporation. Below is a highlight of their stock price volatility:

A quick look at Chesapeake’s financials would have shown that even if there were signs of revenue increases, it likely wouldn’t be enough to get the company out of potential bankruptcy. As of their 2020 Quarter 1 financial reports reported on May 11, they had negative $687 million in free cash flow, 117 times more long-term debt than available cash, and reported approximately $8.5 billion in impairment charges. Highly-skilled or lucky investors coming in at the right time may have been able to recognize the potential pump-and-dump strategy noted above in its prices. Inexperienced and unlucky investors not educated on bankruptcy procedures and financial statements may have seen good news as an indicator of even better times to come.

It is almost impossible to predict when a market may crash. A brutal comparison in nature is the plight of the walrus, as seen in the Netflix documentary “Our Planet.” As walruses crowd themselves on land, they become agitated. Unrelated disputes turn into a massive stampede. In this exodus, some escape to the flat beach, while others flee to the cliffs. Unfortunately, the walruses on the cliff eventually panic and fall to their demise.

No one can point to one specific moment that triggered the stampede. Once it does happen, hindsight shows the warning signs were all there, but the magnitude of their impact was unknown. In these times, all we can do is ask ourselves, “can we survive a worst-case scenario?” For our clients, this means enough cash on hand to survive uncertainty and long-term protection in their portfolio. The trade-off is potentially missing out on maximizing short-term profits, and most of our clients are okay with this opportunity cost.

How do we ensure that? For specific actions, you will have to be a client. This statement is not a cop-out or an enticement to join our community; it is us upholding our fiduciary responsibilities via the Know Your Customer rule. We understand that everyone’s situation is unique, and so our advice to each client is such. However, here is some guidance that may apply to investors reading this:

  • Ensure  you have at least six months of available cash. If something unexpected happens to your income stream, how will you survive in the short-term? Total your expected monthly expenses and multiple by at least six. This total is the minimum amount of cash we recommend.
  • Review your exposure to the stock market. It is difficult to know what is best for your portfolio. Perform some research on what people in your situation typically have as their asset allocation. In this uncertain time, it may make sense to reduce your position by a few percentage points. You may want to sell your most overweight companies or funds first.
  • Explore “market insurance.” If you have significant exposure to the stock market, you may want to invest in a protective put strategy. It may seem overwhelming, so do not feel bad if you feel uncomfortable executing it. However, if done correctly, it can provide minimum value to the stock portion of your portfolio.
  • Learn about precious metals. In times of market stress, historical data shows that precious metals like gold and silver perform relatively better than stocks. Also, gold and silver are considered protections against dollar inflation. Many investors prefer buying physical as the first option through a reputable dealer. If that’s not feasible, there are other options like Gold Exchange-Traded-Funds, mining stocks, or royalty companies.
  • Check out inflation-protected securities. In the possible event of considerable inflation, some funds specifically invest in inflation-protected bonds. These investments rise and fall with the purchasing power of consumers.
  • Learn about diversifying into your local economy. Although there are increased risks for private investment, there are diversification benefits from the stock market and other asset classes. In other words, the success of private investment may likely not depend on more unique factors than the stock market.

A successful portfolio is not about maximizing returns. Success is meeting your base hierarchy of needs during good and bad times while building towards your dreams. The allure of exponential returns can attract investors to satisfy their aspirations. But a neglected bottom of the pyramid creates an unstable structure that may crumble under stress. Please review this information,consult professionals or trusted people in your network, and take actions that fit your reality. Investing is not a one-size-fits-all endeavor.

If you are looking for a financial advisor, our e-book is a fantastic guide to finding an advisor that’s right for you. Our doors are open (figuratively in this time), so if your journey to finding an advisor crosses our path, take the opportunity to learn more about how we can help.

Here are additional resources we used to support our research

Eric Davis


Chief Investment Officer

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