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Looking back, the past quarter was again a record-setter as markets rallied and the S&P 500 posted the strongest quarterly gain since 1998. This also marked the first time for a back-to-back decline and rally of such magnitude since the 1930s. Investors optimism rose as COVID-19 trends moderated from their worst levels, raising the prospects for a snapback in the economic landscape. Massive amounts of fiscal and monetary stimulus began to be disbursed, helping drive a similar snapback to the markets. Despite dire unemployment numbers, greater than 11 percent at present, consumer spending rebounded sharply as people spent their government stimulus checks. Individuals reemerged as reopening began across various states. However, as businesses started this process across the country, key states like Texas and Florida saw infection trends worsen. This raised the possibility of a second wave and remains front of mind for investors heading into the upcoming earnings season. Estimates for earnings growth have begun to moderate from their declines and improve on the margin, after falling sharply last quarter. The trajectory for future corporate profits will serve as a guide for markets going forward.
Looking forward, macroeconomic data will continue to be choppy, as shorter-term data begins to show some marginal improvements from depressed readings amidst continued lower levels of economic activity. Forecasts remain quite negative for economic growth with GDP is still expected to be down substantially for the 2Q20 period; however, expectations for these disruptions to be transitory remain. Further resumption of normal activities by businesses and consumers will be necessary for such a recovery to take place, and the worsening trends in key states may delay such efforts. The path of a recovery remains anything but clear. That said, companies with high-quality franchises and strong balance sheets are likely to remain well-positioned to weather the storm and should continue to be in demand by investors. The upcoming earnings season will serve as an important data point in understanding the impact each company has observed so far from the virus-related disruption. Management teams may have more clarity and willingness to provide financial guidance, which will help provide some framework for investors to determine potential winners and losers in the coming quarters as improvement in employment and business activity unfolds.
Timothy Plan Small Cap Value Fund Q2 2020 Commentary
During the second quarter, all but one sector was positive in the Russell 2000 Index in contrast to last quarter. Consumer Discretionary and Health Care rallied the most while Utilities declined modestly and Financials rose the least.
The portfolio’s relative performance benefitted from strong stock selection in Information Technology and Energy. Century Communities rallied given their entry-level price point houses and attractive geographies for their new home communities. Repay Holdings posted strong results, seeing modest impacts from COVID-19, given the non-discretionary nature of their payment verticals like automobile monthly payments. Lattice Semiconductor moved higher as strength in their communication end-markets helped buffer some disruptions from the pandemic in their auto and industrial markets. BJ’s Wholesale Club saw strength persist for memberships and staples even as the economy began to reopen during the quarter. Similarly, Papa John’s rose as positive sales trends remained well above typical levels even with the reopening of alternative choices given the ease of delivery and continued concerns across the country.
The portfolio’s relative performance was impacted by overweights and less favorable selection in Financials and Utilities. Banks faced challenging conditions, given likely credit losses from the shelter-in-place impacts on small-medium businesses and depressed interest rates. This pushed shares of Great Western Bancorp and Berkshire Hills Bancorp lower during the quarter. Avista moved lower as the pandemic has pushed out their plan for margin expansion given the disruptions to their customers and capital spending plans. NorthWestern also fell as bad weather and tracking adjustments hit their utility results amidst disruptions from the pandemic for their industrial and residential customers and longer-term plans. Children’s Place faced stiff challenges to their business as their brick and mortar stores remained closed, pressuring sales, even as their e-commerce offering grew as a partial offset.
Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting [email protected]. Benchmark Data Source: © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.