As you may recall, in early 2017 we started the initiative to combat the Opioid Epidemic in our area and were seeking a Federal High Intensity Drug Trafficking Area (HIDTA) Designation for Westmoreland County. When we started this initiative, the overdose rate of deaths in our county was growing at 46% per year. The complete costs associated with these deaths is immeasurable in terms of the families affected and the lost contributions these individuals may have had in our communities.

Although our original efforts were thwarted due to political reasons, I am pleased to say that Westmoreland County has finally been designated a HIDTA by the White House’s Office of National Drug Control Policy. Westmoreland joins three other Southwestern PA counties (Allegheny, Beaver, and Washington) in receiving dedicated federal resources to coordinate federal, state, and local government to fight drug trafficking and abuse.

The HIDTA designation will allow Westmoreland County to have access to critical federal  funding to ramp up prevention efforts, decrease the availability of illicit drugs, to investigate and prosecute the leaders of drug trafficking organization and allow enhanced training opportunities for law enforcement. Overall, the funding will allow for a more cooperative effort between the local, state, and federal partners to combat the opioid epidemic and drug trafficking. ..

Now that domestic COVID infection rates are falling, the country is beginning to reopen, and market volatility has subsided, it’s time to look ahead at what will most likely fill the media headlines in the second half of 2020: The Presidential election.

The stock market is surprisingly President-agnostic over the long term. Whether it is a Democrat or Republican, the President does not have too much direct effect on the stock market and companies learn to adapt quickly to the current regime. But this does not mean that the President does not have any influence over market factors. Presumptive Democratic nominee Joe Biden is much more centric than former liberal contenders Bernie Sanders and Elizabeth Warren, but he still shares some of the same policy directives such as the push for a return to the more progressive tax policies of the Obama administration. Biden has proposed partially reversing the Tax Cuts and Jobs Act (TCJA) passed by the Trump administration in 2017. This tax package in our opinion was a huge boost for American corporations not only because of the increased annual cash flow to the bottom line, but also the competitive dynamic compared to foreign nation’s tax rates. If the Biden Administration were to repeal this tax code it would be a headwind to American businesses. In a note put out over the weekend, Goldman Sachs illustrated how aspects of the TCJA being repealed would potentially affect large-cap companies bottom lines. Goldman’s Baseline forecast for 2021 earnings is slightly higher than consensus EPS estimates but their tax code revisions lowers them to in line with other forecasts.

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How Quickly Will Job Losses Recover?

This year’s huge job losses have almost been entirely attributed to the COVID-19 pandemic. This has played a huge role in why forecasters believe the vast majority of the losses will be temporary and the job market will see a quick snap back along with consumer spending buoyed by Ecommerce and fiscal support. The key question is how many of these jobs will never come back. It is also likely that many of these jobs may be restructured from shrinking industries into those which have seen their business growth accelerate due to the virus. These sort of shifts could create a drag on how quickly the nation returns to pre-COVID levels of employment.

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Recent market action has many investors scratching their head. The seemingly increasing disconnect between the “real economy” and stock market has many wondering how strong of a foundation we are currently on.  

Click the link below to view a copy of our most recent analysis illustrating the current positioning of the market, some of the key metrics moving markets right now, and what uncertainties we believe lie ahead. We have also linked the most recent Schwab Insight explaining how some of the “real economy” developments are being factored in by investors.

June-2020-Market-Positioning.pdf..

Covington Investment Advisors is pleased to announce we have hired Ms. MaKenzie Maust to work as an intern effective June 1, 2020.  MaKenzie will be training with our Office Manager to learn the business processes of the Company and with our Compliance Officer on compliance projects.  In addition, she will assist our Client Services Manager as needed on client-related projects.

MaKenzie is a 2020 graduate of Indiana University of Pennsylvania where she earned a Bachelor of Science degree majoring in accounting.  She was a Student Accounting Association member at IUP and has experience working part time in the banking industry throughout the last two years.

We feel MaKenzie will be a great asset to our company...

When a pivotal economic event takes place like we are experiencing with the coronavirus pandemic there are certain trends that begin to either arise or quickly accelerate. We think the latter is currently happening with Ecommerce. It is no secret that for many years online shopping has been taking market share from brick and mortar retail. But never before have we seen a scenario where many brick and mortar retails were forced to close shop and deemed “non-essential”, while the large online market places became the essential way for consumers to get the goods they needed. Some could argue that Amazon & Walmart, the two largest Ecommerce retailers, became a staple of national security for their distribution capabilities as citizens are quarantined in their homes.

Much of this gained business is due to many small retailers simply being forced to close for several months, but we think that Ecommerce retailers will keep a good portion of the gained customers even after government shutdowns are lifted. In late April during Microsoft’s Q3 earnings call, CEO Satya Nadella remarked that “We have seen two years’ worth of digital transformation in two months” as Microsoft provides part of the digital infrastructure that Ecommerce retailers use. The graphics below show the dramatic penetration that online sales have reached along with the industry distribution due to this new world of the government forcing citizens to stay in their homes...

_{Federal Reserve Action and Market Volatility} 

In late March the Federal Reserve established the SMCCF (Secondary Market Corporate Credit Facility) to support credit to employers and provide liquidity for financial markets.

These new credit facilities gave the Federal Reserve the ability to purchase a larger array of financial products than traditional quantitative easing techniques previously allowed. This included the ability to purchase large amounts of investment grade corporate bonds through SPVs (Special Purpose Vehicles).

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One central part of our investment philosophy that we constantly preach is owning companies that have strong balance sheets. What this means is that they have limited liabilities including debt on their balance sheets as well as low working capital requirements. We also look for those companies that have large amounts of cash on their balance sheets. When these strong balance sheets are paired with good capital allocating management teams future returns tend to be strong in both up and down markets. Goldman Sachs recently created “strong balance sheet” and “week balance sheet” baskets of stocks with the former outperforming the latter.

Strong Balance Sheets Outperform Weak Balance Sheets

Source: Goldman Sachs..

What’s Driving Equity Markets

Fiscal response has been impressive and is a primary reason why markets have seen such a sharp rebound from their mid-March lows. In a note that came out last Sunday Goldman Sachs’ economic team wrote that “disposable personal income is likely to register slightly positive growth for the year” attributed to the stimulus payment program rolled out by the government has been so robust. This prediction is predicated on the passage of ‘Phase 4’ of the government's response so not a done deal yet. We think this forecast for disposable income to actually grow in 2020 is on the optimistic side but the fact that the government has seemingly been able to buoy consumer spending is one of the reasons for the sharp bounce back in markets in the last month...

2020 Earnings Update 

Strict government-imposed restrictions including shelter-at-home policies did not come into place until mid-March across most of the country. This means that the impact to corporate earnings will not be reflected fully in first quarter numbers but more completely in second and third quarter results.

First quarter earnings have so far been fairly solid with most companies reporting results in line with initial expectations. As expected, most companies have been cautious with giving too much insight into what upcoming quarters numbers will look like. Roughly half of S&P 500 companies provided 2020 EPS guidance through the end of February. If early reporters are any indication than many of these companies will continue to not give 2020 guidance or withdraw previous projections. ..

Reopening of the Economy 

The next step as we move through this virus pandemic is the reopening of the economy and a return to normalcy. Although the “reopening” of the economy is talked about as a singular moment where economic activity is resumed, we see it as more of a process that will take place over the next 2-3 quarters. The economy being “open” is one thing, but the return to normalcy is the more difficult time window to predict. It may take years for several aspects of the economy to return to pre-virus conditions. Financial markets, particularly the fixed income market, have likely been changed for a significant period of time on behalf of the unprecedented central bank stimulus taking place across the globe.

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Where We Are in The Life Cycle of COVID-19

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Case Growth

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Volatility in Oil Markets 

One pocket of the capital markets that has seen elevated levels of volatility is the commodities sector, particularly crude oil products. On the supply side, recent negotiation fallouts have led to a price war being waged between Saudi Arabia and Russia. At a time where output cuts were trying to be reached by OPEC+, two of the largest oil producers on the planet have maxed out their production capacity flooding the market.

The demand side of the shock comes from the halt in economic activity brought on by the virus outbreak and government shutdown. Without people flying, driving, or transporting goods, demand for crude oil and refined products have dropped off the map. ..

I have attached our most recent update to the Coronavirus response and economic outlook. Find the update here>>04082020-Q2-2020-COVID-19-Impact-Update.pdf

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I thought you might find this update helpful to understand the government’s actions to stabilize the economy. Lawmakers finally came together on a bipartisan stimulus package that was signed into law on Friday, March 27^th. The $2 trillion dollar stimulus package known as the CARES Act will act as a lifeline for businesses and employees while the government shutdown persists. The graphic below breaks down the different buckets of the package and how funds are being distributed. 

On top of support for large and small businesses, the bill also provides support for hospitals and drug makers that are working to fight and contain the virus. Details are still being provided on the logistics and timing of payments and programs, but officials have been adamant about rolling these out as soon as possible...

Now is the time to look forward and stick to a plan of action. Virus pandemics have a lifecycle that they go through and just like every life cycle they are not exact but can be useful as a timing tool. This framework is important for us as we navigate this volatility and make tactical investment decisions. Our timing will never be exact but what is important is that we are not basing our investment decisions on panic rather than sticking to realities and our core investment philosophy.

The current coronavirus cycle is broken down into 5 stages. Right now, we are crossing over from stage 2 to 3. After the initial spotty cases across the country now we are seeing person to person transmission and the number of total cases to expand dramatically. Our transmission rates have been on par with other countries, but our mortality rate is significantly lower, and we think that will continue to be the case on account of our more robust health care system and better hygiene standards...

Peak in Global Infection Rate

Worldwide infection numbers continue to grow as most of the world remains in shutdown.  The service sector has been especially badly affected, with consumer facing industries bearing the brunt of the social distancing measurements. Although domestic health centers are strained, they have not been overrun such as those in Italy or Wuhan, China...

Day to day the media is reminding you to wash your hands and avoid large crowds as new coronavirus cases pop up across the world. What they should also be discussing is what else you should be concerned about; your cybersecurity.  Global disasters such as the coronavirus creates a golden opportunity for fraudsters because the whole world is informed and constantly trying to learn more about said disaster. This causes a greater potential for impulse clicking on suspicious emails or attachments. The fraudsters know this.  Starting in February 2020, a new coronavirus phishing scam has popped up in the United States. So, not only do you have to worry about the coronavirus outbreak hitting your area but now you must be on the lookout for the latest e-mail scam! These scam artists are trying to prey on the fear of the outbreak, hoping that you’ll impulse click on their seemingly legitimate e-mail and it’s working.  

So how are these cybercriminals getting you to click on their e-mails and links? Scammers are sending e-mails pretending to be from the Centers for Disease Control and Prevention (CDC) or the World Health Organization (WHO) offering to provide an update on confirmed coronavirus cases in your area or luring you in with a link to see “safety measures” to combat the spread of the virus. Why do consumers believe these e-mails are real? One reason may be that the sender’s e-mail address at first glance could look very legitimate. The scammers create addresses that look very similar to the real organizations, making it very hard to catch. Another possible reason is that they also will copy and paste the organization’s logo in the e-mail to create a sense of legitimacy. Let’s look at a few examples of fake e-mails below.  ..