MARKET COMMENTARY

Staring Down Volatility

As the COVID-19 pandemic drives change worldwide, history says mistakes do occur during such transitions. To us, that means volatility ahead. Here is our approach to this reality.

11.02.2020 - Vincent Tonietto - Vice President, Portfolio Manager

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change…“so says Charles Darwin.”1

We have all had to adapt during the COVID-19 pandemic and that process continues. Investors have watched as governments and central banks worldwide have injected unprecedented amounts of stimulus into their respective economies. Businesses have had to find new ways to reach their customers as a means of survival and to grow market share.

We are all in the middle of a tug-of-war between how things used to be and how things are right now. There are also a lot of questions about what might become more permanent than expected at the pandemic’s outset. Markets are reflecting this debate and have been rewarding those sectors and specific mega cap companies that are changing with the times. For example, like it or not, the markets are saying the digital transformation theme (i.e., virtual meetings, telemedicine) is not going away anytime soon and digital tools will likely have a greater presence in our future life. We are also seeing investor sentiment being supported by unprecedented monetary and fiscal stimulus.

History has taught us that no adaptation process is ever totally painless, as mistakes do occur during transitions. From our vantage point, mistakes ultimately spark market volatility as investors realize some trends have gone too far, some risks have been underrated, or upcoming uncertainties outweigh current available information.

We also know the fall season is traditionally associated with volatility. Some of the most important market pullbacks have occurred during this period. In today’s environment, with the risk of a second COVID-19 wave, the US election, civil unrest, geopolitical uncertainties and a frothy market, investors have reasons to be jittery.

Investing Through Volatility

We believe the key to managing through this opaque environment is to ensure our portfolios are prudently adapting to the times. For us, this means basing decisions not on sentiment, but on the business fundamentals of the companies we own, while keeping an eye on the market valuations being assigned to them. As always, we are focused on firms with high-quality balance sheets, which continue to demonstrate their resilience to the pandemic and other major headwinds.

Returning to our comment on the significant support some mega cap information technology stocks garnered earlier in 2020, clearly the accelerated adoption of digital tools creates new investment opportunities. However, we also believe it is imprudent to ignore the basics behind overly expensive stock prices or to buy shares blindly. Our job is to help ensure portfolios are not overly exposed to such stocks when—as experienced in September—investors turn their attention to another theme or factor in more risks.

In addition, we are always working to be well-positioned to take advantage of opportunities volatility creates. Within our discipline, decisions based on effective research and analysis of the fundamentals always prevail over sentiment.

 

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FOOTNOTES:

1. Leon C. Megginson, Professor, Social Sciences, Louisiana State University, introduced the streamlined version of Charles Darwin’s ideas. http://thepeoplewhoshare.com/blog/what-is-the-sharing-economy.

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