Hall Capital “Market Views” Newsletter July 2020

This is the 41st edition of Market Views from HALL CAPITAL marking 10 years from when we started these letters. Our aim is the same as always: to provide concise views of where we see risk and opportunity for investors.

A Trillion Here, A Trillion There
- is tonic for asset prices

Between Congress and the Federal Reserve the US government pumped some $7 trillion of liquidity into the US economy last quarter in response to the pandemic -- fully one third of our GDP. That is, dollars were showered like a spring rain onto the population in the amount equivalent of every car made, airline ticket booked, shirt bought, home built, meal consumed, bushel of corn harvested, movie produced etc etc in the entire nation for FOUR MONTHS!  $7 trillion is 14x the total credit card debt outstanding in the country. As a consequence of Fed action short term interest rates were set to zero.  If you are wondering why the stock market rebounded so much in the face of the worst global economic collapse since the Great Depression, this tsunami of liquidity is why.

While this government aid was tonic to asset prices, we don't yet know if it was sufficient to fully revive the economy. We are likely to muddle through the health crisis but it will be messy and inhibit growth into 2021. Economists have a wide range of projections for the recovery described in an alphabet soup of letters. A distinct minority still cling to the "L" scenario – little to no recovery for a long time. Some see a rebound and then a second wave giving us a "W". My best guess is that we see something resembling a reversed "square root". That is, a sharp rebound but not up to where we were in February, and then slow growth from there. Until we have a vaccine, it may take several quarters for consumers to adopt normal behavior. And at some point taxes will be raised to pay down debt and that will take its toll on growth.

Developments On the Health Front
- are mixed

The country is no longer in a strict lock down but the re-opening has not been well managed. Daily new cases in Europe are down 90% from the peak. Our new cases are still INCREASING. Nevertheless, the progress on therapies and even a vaccine is promising. The chances of rolling out a vaccine to the population this year are slim, but the chances that several medicines will be produced that will considerably lower the mortality rate are high. By fall we are likely to have enough therapies such that people feel less threatened by the virus. That is, the chances of getting sick may be just as high, but the chances of dying from it low.

As noted, the government aid has been like tonic to the markets. And more may be on the way. If the past market response is any guide, asset prices will move higher as the aid comes into view. However, there is uncertainty associated with this next wave of stimulus. Will it even happen? Will the market become like a opiate addict and require more and more? Will there be a hangover?

All this leaves us with a cautiously optimistic outlook. Equities remain our asset of choice but with ample reserves. We would be willing to be more aggressive if stock and bond prices were not as elevated.

Focus List Celebrates its 10th Anniversary
- averaging 15.6% average annual return

The Focus List turned in a respectable 15.5% in Q2, which, not surprisingly, lagged the very strong S&P 500. The FL is not meant to outperform in a quarter when the market turns in a total return of 20.5%. We are ok with lagging in those unusual times in exchange for comfort that this list will survive the worst economic crisis and make us a decent return long term. 

If you consider five years to be "long term", the return has been more than decent averaging 12.7% for the last five years vs 10.8% for the S&P 500. Or for an even longer time horizon, we now have 10 full years of returns which show the FL providing 15.6% on average vs 14.0% for the S&P 500. Returns for both looking forward to the next 10 years will be no doubt less. 

Note the Focus List is void of the industries hardest hit by the pandemic: airlines, hotels, retail, energy, banks, cruise lines.  Not that there aren't opportunities there, but we are content to stay conservative for the time being. No changes to the list.

For individual stocks as well as selection strategies, past performance is not necessarily indicative of the future.

Hall Capital Focus List

Verizon - largest cell phone service provider in the US. Some debt but safe 4.3% dividend yield.
S&P 100 - largest 100 companies by cap. Large scale in their industries provides strong competitive position.
China Mobile - largest cell phone operator in the world with 942 million subscribers. 5G adoption should edge up growth. 4.71% yield.
NovoNordisk - Danish company has 50% of the global market for insulin. Strong balance sheet.
Alphabet - Google is the "oxygen of the internet." Leader in AI and other forward technologies. Net cash >$100bil to use for add on acquisitions.
CVS Health - with Aetna insurance and growing in store clinics the chance to become the most integrated health care company.
Apple - brand with 1.4 billion users providing new growth opportunities in service revenue and wearables.
Corning - leader in glass for fiber optics and displays.
iShares Gold Trust - hedge vehicle against uncertainty and potential lower US $ down the road.

Follow Up – from our letter one year ago

"How important are interest rates? Very, very important."
- A key driver in the recovery in stock prices from the March low is extremely low interest rates.

"How important is tax policy? Very."
- While there was no change in tax policy since shortly after the last administration change, we are likely see some changes next year to pay off debt.

"The impact of raising the national debt is a problem for someone down the road."
- Yep.

"Expect in the next year a global pandemic which will cripple our economy."
- Just kidding. Was clueless about the coming pandemic.

NOTE: Now in addition to ALL our quarterly letters, on our website is a tab with just the Follow Ups.

About HALL CAPITAL

HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com

HALL CAPITAL | 199 S. Los Robles Ave | Suite 535 | Pasadena | CA | 91101