Independent Thinking^®

Patient Capital in a Turbulent Market

The recent dramatic swings in the equity market are unprecedented in terms of speed and volatility. With economies and supply chains going all but dark in the wave that began in the Hubei province of China in January and is now hitting the United States, the impact to GDP and earnings will undoubtedly be quite severe, and is all but certain to be recessionary.
 
Among the hardest hit are energy/commodity companies, which are contending with a precipitous drop in the price of oil as Saudi Arabia and Russia lock horns just as global demand for oil falls off a cliff with the slowdown of the economy. Financial services companies and others with balance sheet concerns have also taken a beating. The Evercore Wealth Management core equity portfolio has almost no exposure to oil and commodities and very limited exposure to balance sheet financials.
 
Consumer stocks are also under considerable pressure, after years of outsized gains. As waves of quarantines bring spending to a halt, very high-quality retailers such as Home Depot have been punished severely, perhaps excessively. While under considerable pressure now, we expect the consumer to return to pre-crisis behavior. We will continue to assess this assumption, as it informs many of our holdings.
 
Information technology is a key component of the U.S. equity market. The biggest five companies by market capitalization – Microsoft, Alphabet, Amazon, Apple and Facebook – represent nearly 20% of the S&P 500 index and have been significant outperformers over the past few years. They have so far fared relatively well in this pandemic, thanks to differentiated business models and balance sheets that enable them to dominate their respective markets. Four of these five companies (excluding Facebook) remain core components of many of our portfolios.
 
We are not trying to pinpoint the bottom of this market. Even as indicators flash maximum fear and bearishness, we would seek some view to a plateau of the crisis and/or a settling of the extreme volatility before becoming more aggressive buyers of equities. But we are targeting high-quality investments that will be solid additions to the portfolio for years to come as they fall to prices that we believe reflect good entry points and reasonable valuations.
 
In markets such as these, there are advantages to having a long-term mandate. As painful as the day-to-day volatility is – and it is truly painful – patient capital is at a considerable advantage as it can take advantage of others’ need for liquidity at any price.
 
Tim Evnin is a Partner and Portfolio Manager at Evercore Wealth Management. He can be contacted at [email protected]. Michael Kirkbride is a Managing Director and Portfolio Manager at the firm. He can be contacted at [email protected].