2Q 2020 Quarterly Letter

April – June, 2020

Together, we are facing a truly unprecedented situation.  The coronavirus is impacting our families, businesses, communities, and even our way of life.  Our hearts go out to anyone who has been impacted by the virus, either directly or indirectly.  We hope this letter finds you well and we wish you and your family the best of health in this difficult time.
Before we discuss our thoughts on the financial markets, we would be remiss not to thank our employees at McRae Capital Management.  Working remotely is not as easy as it sounds.  Our staff worked tirelessly over the past few months to ensure all procedures and processes that we use daily worked with the same success and security as we shifted to working from home.  We are lucky to have the talented and experienced professionals who work at the firm.  We can’t thank them enough for their efforts during this crisis.
As we turn our attention to the financial markets, we want to address the question we are being asked more than any other: “With everything going on in the world, why is the market going up?”  We believe the answer is fairly straight forward.  Government stimulus is being injected into our economy at a level which we have never seen before.  Congress passed the CARES Act that pumped over $2 trillion into the economy in the form of stimulus checks and business loans.  In addition, the Federal Reserve lowered short-term rates to basically 0% and implemented an open-ended bond buying program.  It is our view that this amount of stimulus and liquidity has a drastic positive impact on stock prices.
The next question we get is: “What is the market going to do from here?”  We believe this is almost impossible to answer with any certainty.  Therefore, we prefer to view the current situation in a different way by asking a more appropriate question: “Are my assets appropriately balanced and do I own quality companies at reasonable prices?”  As we have written many times over the years, it is vital to “know what you own”.  Not all companies will be impacted by the virus in the same way.  Stocks of companies that benefit from remote work and remote learning will react much differently than a company whose business is based on people being in close proximity.  It’s been proven in the past that companies with strong balance sheets, quality management, and solid fundamentals will navigate tough environments much better than others.  We believe it will be the same this time around.
Looking forward, there are two major events that we think could cause substantial volatility in the market.  First, how the virus progresses will have a major impact on the reopening of the economy.  Recent data shows that it will not be a smooth process as the spread of the virus is accelerating in many states.  Second, we have elections in November that will decide the direction of Congress and the Presidency.  As with the past few elections, this election looks to be emotionally charged as the results will have a material impact on the country moving forward.
If the past few months have shown us anything, it’s that trying to guess what the market is going to do over a few days, weeks, or even months during a crisis is extremely difficult.  To get through these times, we suggest you take a step back and think about your assets in their entirety.  Make sure you have the right balance of stocks, bonds, and cash to weather the volatility in the markets and to meet your income needs.  And most importantly, take a longer-term view and stay invested in the companies that will come out of this stronger on the other side.
As for fixed income, interest rates are at extremely low levels which is making fixed income investing incredibly difficult.  In addition, many bonds are being called which has drastically increased the cash position in many accounts.  It is our opinion that there is currently a lot of risk in the bond market due to all the government stimulus.  Therefore, we are taking a conservative approach to fixed income investing by keeping a much larger cash balance in the accounts over the next few months.
Please do not hesitate to call us if you have any questions or want to discuss in more detail.


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