May 07

Market Commentary: May 6, 2020

Market Commentary

May 6, 2020

Has the new bull market begun or is this just a bear market bounce? That question is being debated endlessly right now. The reason for such voracious financial news media coverage is because of the dichotomy between the economy and equity prices.

The S&P 500 has soared nearly 35% since the lows on March 23rd after falling 35% and is now within 13% of its all-time high set 10 weeks ago. The market posted its biggest monthly gain since January 1987 on the back of utterly dismal economic data. First quarter GDP contracted by 4.8% with current estimates pointing toward a 30% decline for the second quarter. Over 30 million people have filed for unemployment, which represents 18% of the working population. March pending home sales and housing starts both fell over 20%. Consumer spending declined a record 7.5%, while consumer confidence also posted its record monthly drop, and the Leading Economic Indicators Index dropped a record 6.7% in March. The saying, “the stock market is not the economy” could not have rung more true than in April.

In many cases, the best returns in equity markets are generated when sentiment is overly pessimistic. Reason being, the monetary and fiscal policy is expansionary and the data at the root of the issue goes from bad to a little less bad. Fortunately, we were able to check all of these boxes this past month. Equity allocations fell to the lowest level since March 2009, which was the same month the stock market indices bottomed during the Financial Crisis. The Federal Reserve came in hot doing everything they could to support the federal, state, and corporate fixed income markets; flooding the market with so much liquidity that some are predicting the Fed’s balance sheet will be as much as $12 trillion, nearly 50% of U.S. GDP by year-end. On the fiscal side, Congress has passed over $2.5 trillion of stimulus for those most affected by the coronavirus – small businesses, hospitals and the unemployed. It would appear, the coronavirus outbreak has trended from bad to less bad in several hotspots. There has been encouraging news of a potential treatment. And, more than half the states have lifted some of their restrictions setting the stage for an eventual reopening of their economies.

As much relief as we have felt in our portfolios over the past five weeks, there is still equal, if not more, uncertainty ahead. We do not have a playbook for what we have gone through and are continuing to endure as a nation: a complete shutdown of the economy and the ensuing recession is unprecedented.  Never in U.S. history have so many people lost their jobs over such a short time period. Some of the recently unemployed will go back to work when the economy opens back up. However, many people will unfortunately not have a job to go back to. Countless businesses will be structurally changed if not gone for good. On the bright side, new industries will emerge and businesses that we cannot even fathom right now will be created. It is the “circle of life” as Mufasa once told a young Simba in The Lion King, and can you tell I have been stuck at home way too long?

On a more serious note, millions of lives have been changed. As much as we want the economy to open so we can get back to “normal”, the truth is there is still a lot of uncertainty as to what will be “normal” moving forward. We are all flying blind at this point – medical professionals, consumers, corporations, and government officials. To this I say, stop worrying about what letter the S&P 500 is going to make with its chart; stop contemplating if the S&P 500 has begun a new bull market or is in the throes of a bear market rally. We will not know the answer for quite some time. What we do know is the economic data over the next few months will get worse before it gets better, which will keep equity volatility heightened for the foreseeable future. As we have said many times before, volatility breeds opportunity. It makes no difference to us what type of market we are in – bull market or bear market. There will be opportunities in any market to buy undervalued companies and sell overvalued companies. It is imperative to stick with your process and discipline and not take an “all-in” or “all-out” approach based on the letter or animal that best describes the market.

Castle Tandem Fund Update

The activity within the Fund was much more subdued this past month as compared to March. The opportunities we witnessed and took advantage of to put cash to work in March were not as abundant in April. But rather different opportunities popped up and we were able to trim back overvalued positions or liquidate companies that no longer met our fundamental criteria.

Over the past few weeks, we took advantage of rising equity prices to reduce our position in Abbott Labs (ABT), Ecolab (ECL) and Costco (COST). All three companies got the signal from our quantitative model to sell for valuation reasons.

In addition to the valuation sales, we liquidated Carrier Global (CARR) and OTIS Worldwide (OTIS). As mentioned last month, CARR and OTIS were both spinoffs from the United Technologies and Raytheon merger. These companies were the more cyclical businesses of legacy United Technologies and as stand-alone businesses they did not meet our fundamental criteria of consistent revenue, earnings, and cash flow growth through any economic cycle.

Billy Little, CFA
Lead Portfolio Manager
Castle Tandem Fund

The opinions expressed are those of the Fund’s Sub-Adviser and are not a recommendation for the purchase or sale of any security. 

As of March 31, 2020, the Castle Tandem Fund held the following positions mentioned in this report:  Abbott Labs (4.76% of Fund total net assets);  Ecolab, Inc. (2.00% of Fund total net assets);  Costco Wholesale Corp. (2.01% of Fund total net assets);  United Technologies (2.99% of Fund total net assets).  Carrier Global and OTIS Worldwide were acquired via a spinoff resulting from the Raytheon and United Technologies merger.  The spinoff occurred after March 31, 2020.  As of the date of this report the Fund does not own Carrier Global or OTIS Worldwide.

The Standard & Poors 500 Index (S&P 500) is an index of 500 stocks.

The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund, and it may be obtained by calling 1-877- 743- 7820, or visiting Read it carefully before investing. Distributed by Rafferty Capital Markets, LLC Garden City, NY 11530. 

The risks associated with the Fund are detailed in the Fund’s Prospectus. Investments in the Fund are subject to common stock risk, sector risk, and investment management risk. The Fund’s focus on large-capitalization companies subjects the Fund to the risks that larger companies may not be able to attain the high growth rates of smaller companies. Because the Fund may invest in companies of any size, its share price could be more volatile than a fund that invests only in large-capitalization companies. Fund holdings and asset allocations are subject to change and are not recommendations to buy or sell any security.