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2nd QUARTER 2020 & 2020 ADV PART 3

July 10, 2020

Inside Financial Connections Newsletter

    • FORGETTING
    • VIRTUAL REALITY
    • INDEX NOT SO PASSIVE
    • THE STOCK MARKET AND ECONOMY DISCONNECT

The SEC requires a new disclosure statement referred to as ADV 3. We have uploaded it to your personal portal.

FORGETTING

The impact on various aspects of our lives will be under scrutiny because of the pandemic. Environmental studies are already surfacing viewing the impact of shelter-in-place behavior.

One study already conducted deals with memory. When Jill read the article in the June 11th Wall Street Journal, “You’re Not the Only One Who Forgot Things Under Lockdown,” it triggered a memory of a segment on the TV program, 60 Minutes.

It aired December 19, 2010 (no she didn’t recall the actual date – she looked it up. Her memory isn’t that good J), about people participating in a study who had total recall of what they were doing any day in their life. There is a name for this type of recall – HSAM (Highly Superior Autobiographical Memory). You can see the two segments on YouTube.

The study began at the University of California, Irvine, by Dr. James McGaugh. There were six subjects. The phenomenon was unknown prior to 2006. The subjects agreed to be studied. Subsequently others have been identified with HSAM. An MRI done at the time of the 60 Minutes segment showed each subject had some enlargements in the brain – one in the memory center and another in the area of obsessive/compulsive behavior. Another characteristic the people shared was their need to be very organized.

The Wall Street Journal article discussed the impact of isolation on memory, especially those classified with HSAM. Jill noticed new names in the article so others have been identified with this phenomenon. Apparently, hundreds of people now identify as HSAM.

Dr. Michael Yassa, now in charge of this program at UC Irvine, is Director of the Center for the Neurobiology of Learning and Memory. The study will try to determine the impact of social isolation on memory, mood, and emotions.  The testing will cover a range of people with and without HSAM.

So far, a number of people with HSAM are having trouble retrieving memories while quarantined. The following is an example from the article of someone’s recollection with HSAM.

On June 30, 2007, Markie Pasternak, now 26, reminisces: “She rode her bike to Ice House Coffee & Creamery in De Pere, WI, and ordered a mango smoothie, revealed to her cousin a crush on a boy from church. It was a Saturday. She was wearing a blue T-Shirt from her figure skating team and Adidas AG shorts.”

However, if you give her a date while sheltering-in-place and ask her for a memory, Markie recalls the day of the week but not much else.

Researchers believe that repetitive schedules make it difficult for all of us to recall the recent past – even those with HSAM.

So if you feel your memory wasn’t as sharp as usual while sheltering-in-place, don’t feel badly. If people with HSAM don’t remember, no reason we should.

VIRTUAL REALITY

What do you do when the engineer you need to help solve a problem is in another country and can’t travel to your plant?

Such was the dilemma facing Intel Corporation. A chip plant in Arizona ran into difficulties but the engineer they needed to solve the problems lived in Germany. There are flight restrictions so he couldn’t fly here.

The ramifications for not solving these problems were serious. Intel would be unable to meet the production needs to supply chips for personal computers. The shelter-in-place created a surge of orders for chips to be used in hardware.

To the rescue – Virtual Reality Goggles. These goggles were developed for training videos. Now, they were modified so the German engineer could view the equipment and talk the workers in Arizona through repairs and solve the problem.

It seems that we will see this solution adapted for other industries for times when travel isn’t possible or desirable. While this technology is already available, the uses are broadened, enhanced, and accelerated as a result of the pandemic.

Volkswagen AG’s Porsche unit used augmented reality (AR) glasses to help technicians make car repairs by guiding them virtually.

Thermo Fisher Scientific, a manufacturer of scientific instruments, increased use of AR to guide customers remotely to make repairs.

Microsoft sells HoloLens goggles that are used as AR. Dutch chipmaker ASML Holding uses them to help maintain equipment.

Most of the emphasis for AR has been consumers. With the shift in how business is conducted during the pandemic, AR goggle and equipment startups such as Magic Leap are redirecting their emphasis from the consumer to health care, defense, and other businesses.

INDEX NOT SO PASSIVE

When we wrote that the S&P 500 companies were decided by a committee, many were surprised. The impression is the index holds the largest 500 companies. Not so.

Four dozen companies were removed and replaced over the last three years. One could say that the committee is looking for what is hot and what is not and adjusting accordingly. Although there are requirements, there is an element of subjectivity.

The original S&P 500 started on March 4, 1957. It was divided between 425 (85%) industrial companies, 15 (3%) railroads, and 60 (12%) utility stocks. American Telephone and Telegraph (AT&T) was the largest company in the index.

In 2007, its 50th anniversary, only 86 companies remained of the original 500. In 1964, the average tenure of a stock in the index was 33 years; in 2016 it was 24 years; and the forecast is that by 2027, the tenure will be down to 12 years.

Some of the turnover is due to mergers and acquisitions, purchase of companies by private equity firms and startups quickly reaching over a billion dollars in valuations. A minimum market capitalization (number of shares times the share price) must be at least $8.2 billion to enter the index.

As of 5/29/2020 the sector weights are:

Information Technology 26%

Health Care 15%

Consumer Discretionary 11%

Communication Services 11%

Financials 11%

Industrials 8%

Consumer Staples 7%

Energy 3%

Materials 3%

Real Estate 3%

Utilities            2%

You can see by the sector weightings how information technology can impact the index returns. The success of the large tech stocks masks what is happening underneath. Most stocks are actually down over 20% or more at the time of this writing.

Alternatively, the Russell 1000 includes the largest 1000 companies by market cap. The Russell 2000 the smaller companies by market cap. We don’t have information yet as of 6/30/2020.

THE STOCK MARKET AND ECONOMY DISCONNECT

We listen to many conference calls about the economy and the stock market. Many try to explain why the stock market is so high considering the state of the economy. The best theory we heard was, “the stock market has written off corporate profits for 2020 and is looking at 2021.” It seems to fit the trend that the market shirks off the bad news in the headlines and assumes all will be well by 2021.

We don’t think anyone has that crystal ball and we would anticipate continued turbulence on the down and upside for the remainder of the year at a minimum.

Let’s review some of the issues and reality.

  • An investor can measure the financial health of a company traded on a stock exchange. How do you measure the potential devastation of small businesses (that do not sell stock) all over the country that may never re-open again?
  • What will be the impact when the unemployment benefits that include the extra $600 phases out? Some of the positive job numbers are due to the Paycheck Protection Program that requires 75% of the money go to payroll. When that runs out, will the employment continue or will a company close its doors?
  • What is the impact on many states reversing their openings and closing up again?
  • When will Congress agree and pass a new stimulus package? Who will benefit? Will they do it on a timely basis?

So many questions and so few answers. This leads to uncertainty and markets don’t like uncertainty. It is difficult for us to see that 2021, which we can call the Year of the Vaccine (as 2020 is the Year of the Pandemic) will be a smooth ride.

There are multiple potential vaccines – in fact, we can’t find a consensus on how many. According to the Council on Foreign Relations, there are over 100 vaccines in pre-clinical development; 70 of which are being tracked by the World Health Organization (WHO). Four vaccines are in human trials in the United States. Thirteen other trials spread over 10 other countries are in process. According to the Milken Institute there are 179 studies with 17 in clinical trials. So, let’s just say that worldwide, many scientists are working on a vaccine.

When several are approved, we then need to move to production and distribution. How effective will the vaccine be? Dr. Fauci told CNN he would settle for a vaccine that was 70-75% effective. For perspective, the measles vaccine is 93% effective.

A CNN poll found only two-thirds of Americans say they would actually take the vaccine, if it were available.

The reality is 2021 should be better but COVID-19 is not mysteriously going away. We would assume/hope:

  • Treatments will improve
  • Vaccines will be available and cost effective to everyone
  • We will find a way to adjust our lifestyle

As we’ve said before, your portfolios are built to bend when times are difficult. With so much uncertainty, it is sometimes difficult to remember this money needs to grow for the decade(s) to come. Short-term declines are to be expected. Please feel free to contact us if you would like to discuss your portfolio.

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