NorthStar Capital, Inc.  - Investment Managers
 Company Background Invetment Professionals Investment Philosophy Investment Solutions Holdings & Performance Client Service Investment Review/Outlook

 Investment Review/Outlook  Market Highlights Current Investment Outlook Stock Highlights
Investment Review/Outlook

Current Investment Outlook

Long term investors recognize that markets don't ever move in a straight line. Over multiple years, however, stocks can produce dramatic increases in wealth. While every investor might wish to avoid market declines and then re-invest at market lows, the practical reality is that the absolutely worst thing to do - of which many are guilty - is to sell after the market has declined and to remain on the sidelines as it continues to rise and reach new successive highs. Most investors would admit that this happens all the time. It takes intestinal fortitude to stay invested in the face of disappointing news, and it takes both wisdom and a little luck to recognize when markets have sold off too far. In that spirit, we feel blessed to have encouraged our clients to hold an optimistic view from the double lows in November, 2008 and March, 2009 (yes, that seems an awfully long time ago) all the way to the current day, and to argue for confidence at the recent market lows of January, 2019 and March, 2020. Along with finding securities with superior future prospects, the long term market trend has been and will continue to be a primary focus of what we do on behalf of our clients. With a few risks that have been gifted to us this year, we expect this upward trend to continue.

While every year is unique, there has never been a year like 2020. It is difficult to know what to say about a year in which almost all commerce and much of our normal activity has been mostly or completely shut down. While we know that any view on this subject can be debated, we think the shutdown restrictions have been a little draconian, as this virus has the following characteristics: it is incredibly contagious (even with people who take reasonable precautions), it is often asymptomatic, and it poses little to no risk for the very young - and only a modest (less than seasonal flu) risk for healthy adults below the age of 70. The non-Coronavirus health risks of an extended shutdown are profound in terms of depression, alcoholism, family violence, and suicide. As an interesting anecdote, we spoke a week ago with a Rabbi who grew up in the Orthodox Jewish community of Brooklyn. This 250,000 population community is very close and was hit hard by Coronavirus cases. Deaths were confined to the elderly, and mostly because they did not receive proper care in nursing homes where they were put. But, now, there has not been a new case in over four months. So, it would seem to be completely proper to let this community get totally back to normal.

With the nearly complete shutdown, the economy collapsed. In the U.S., we lost 22 million jobs, our second quarter GDP declined 31.4%, and corporate earnings fell by 37.6% in the first half of 2020. Our unemployment rate rose to 14.7% in April. Since then, we have regained 11 million jobs, unemployment has dropped to 7.9%, and GDP is likely to have recovered by 30-35% in the third quarter. The savings rate peaked at over 30% and has dropped to 14%, with much more room to fall - and propel retail sales. Housing is booming, except in major cities, with mortgage rates as low as 2.8% for a 30-year. And, amazingly, 800,000 new businesses have been started.

In the absence of returning to normal right now, it is useful to consider our national response to the economic downturn. The key elements have been extraordinary amounts of Fiscal relief - and maybe more to come. This relief has clearly been uneven - enough for some and not for others. But, it has allowed the economy to bounce off the bottom. Monetary policy has been similarly generous, if not more so. The Fed has made it clear that they would support asset prices to prevent deflation and economic collapse. Keeping rates at close to zero through 2022 is a strong signal that their efforts are long-standing. And, finally, the FDA and the Warp Speed program have made it clear that vaccines and therapies would be given every chance for review as rapidly as medically practical. These steps are all strongly supportive of higher prices for investment securities.

It is difficult to discuss any current outlook without beginning with an update of the Coronavirus. In the U.S. and Europe, we are seeing another rise in cases. This seems to be related to the virus reaching more remote areas that had not been hit before, the openings of colleges and universities, and an increase in testing. For the most part, hospitalizations and deaths are not rising as rapidly. What we can see with its broader spread is that the virus is extremely contagious, but that the risk of death is very low except for those people, by age or illness, who have a compromised immune system. In contrast, the costs of a protracted shutdown are profound in economic and health terms.

The Coronavirus world has changed how we live. Businesses have learned how to work remotely, and most of us have encountered the joys and challenges of "Zoom" communications. Students at all levels are struggling to learn in distanced, remote, often solitary circumstances that hardly anyone could have imagined. Restaurants have discovered takeout or have substantially or permanently shut down. Everyone has learned how to adapt. Where does all of this lead and what will the world look like after the virus is gone or cured? For one, there will be vaccines that begin to be approved soon - and although millions of doses will be produced in advance, the roll-out across the country and around the world will take considerable time. Beginning in the Fall of next year, we expect a combination vaccine that will be a Coronavirus booster plus a protection for the Winter flu.

When restrictions are lifted, what will happen? Hotels and restaurants will come back- if they have survived - relatively quickly. Air travel will recover, but take years to return to 2019 levels. Cruise lines will resume their activities, we believe, with an even slower recovery, as customers value a little separation from others. Offices will re-open, but remote activity will remain a significant feature. While we now have a mini housing boom, we also have a significant decline in commercial demand. Many major cities have already seen a large degree of out-migration, and they will continue to do so, due to reduced services, higher taxes, and increased crime. This is a vicious cycle, as the most wealthy leave first, taking away their tax base, and leaving the pleasure of paying state and local taxes to the much less affluent. On the other hand, online businesses will continue to thrive, as at-home shoppers have learned to adapt in the shut-down world. And, businesses like cloud computing, which supports online activities and general business efficiency, will continue to thrive and grow.

In recent years, the disparity has grown between growth stocks and value stocks. Over time, these groups tend to trade positions, with one outperforming for a while, and then the other. Growth tends to do better over the long term, but they do go back and forth. With a rapid pace of discovery and invention, growth has been on a long winning streak, and value has been moribund in the shutdown environment. We keep looking for this to change, but it may not happen for a long while. In the meantime, we continue to look for superior companies that are reasonably priced. Similarly, we see that international stocks are cheaper than our domestic stocks. But, their fundamental trends are weaker. So, for the time being, our focus is on domestic growth and success, rather than just the lesser valued offerings.

In a week, our Presidential election will be held - or more properly come to a close, with so much early voting. While the Sages would advise us not to comment on the candidates, we feel compelled to make one point. Most of us - perhaps all of us - have political views. We do too - strong views - but we do not seek to persuade anyone to our side. We would only note that we have a choice of the devil we know - and many of you may consider him to be the devil - who has governed over great prosperity until the Coronavirus, progress with employment of Americans of every ethnicity and gender, energy independence, and dramatic steps toward peace in the Middle East. His opponent presents himself as a seasoned moderate - which he may well be. But, his Party Platform is radical and, unless it is mere hyperbole, would have a negative effect on market values. This is the caution that we want to raise. To cite two examples, we have concerns about the energy and taxation plans. First of all, it is just not practical to end, eliminate, or transition from fracking and the oil industry. Our domestic energy industry has made us self-sufficient, reduced our reliance on unpredictable foreign producers, and given us low-cost sources of energy. Our energy produces little pollution, and we put less carbon into the air than any other major nation. We rely on fossil fuels for all forms of transportation, manufacturing, heating, and the production of electricity. We make untold numbers of byproducts like plastics. We grow corn to mix into gasoline. We employ millions of people in all of these activities. The alternative is unfathomable. And, second, the tax plan would reduce family incomes by the amount they have grown since 2016. The effect on small business, the lifeblood of our economy, would be severe. The hit to national prosperity would be unmistakable. Markets would take note. If you would like to learn more about our views, give us a call. But, for now, this is the end of our sermon. We hope you will not take offense!

The stock market continues to be characterized by narrow leadership, with the top ten stocks comprising 28% of the S&P 500. The market is now trading at 21 times earnings, which is high but reflective of extremely low interest rates and currently depressed earnings. Fixed income yields remain so low that money is being pushed from bonds into stocks. With $5 trillion still sitting in cash on the sidelines, this pattern is likely to continue, and we remain cautiously optimistic. Consumer discretion, materials, and industrial were the best performing sectors in the third quarter. Individual stock selection is the greatest service we can provide to our clients.

top of page