The coronavirus has played havoc in our lives resulting in mindset shifts around how we go about our daily activities such as shopping, education, work, entertainment and so much more. More time will be spent at home doing these as part of the “New Normal.”

The resurgence in cases has reinforced that the return to anything resembling normal is far away even if we have therapeutics by the fall and vaccines by year end. We expect that states to mandate wearing masks, social distancing and contact tracing to curb the growth in the number of cases. This won’t stop, although it can limit, a second wave, expected in the fall coinciding with the regular flu outbreak.

We still expect the economy to continue to improve off the bottom as businesses open, but the gains may be uneven through 2022. One of the keys to the rate of gain in our economy is whether schools open in the fall permitting parents to go back to work. Right now, it’s up in the air.

The financial markets continue to be buttressed by the unprecedented amount of liquidity being provided by the Fed along with mammoth stimulus programs provided by the government. All this liquidity is not needed by the real economy, so it continues to find itself moving into risk assets of all kinds. It certainly does not hurt that the Fed is standing there backstopping the bond market which has permitted companies even in the worst shape to raise capital hoping to make it to the other side. But herein lies a risk, too, if demand does not return quick enough to stop these companies from bleeding millions of dollars per day like the airlines. We fully expect bankruptcies to increase meaningfully over the next year which is the primary reason why we continue to avoid investing in the banks.

While we remain favorably inclined to the stock market in general, stock selection is the key to absolute and relative performance. We have remained laser-focused on owning the beneficiaries of the new normal. These companies have tremendous wind to their backs as they are benefitting from an acceleration of an already rising demand for technology as each home has become a mini data center. These companies have superior managements with winning strategies; rising earnings, huge cash flow and pristine balance sheets. Compare them to over half the S & P where earnings are declining, cash flow is negative and balance sheets are rapidly deteriorating. Now, can you understand why these companies are selling and deserve a large premium valuation in today’s market? Even at today’s valuation, their earnings yield is well above well above the 10- and 30-year treasury yield. This is a key Buffett valuation measure.

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Second quarter earnings reports begin next week and we will be paying close attention to how companies continue to react to the pandemic and their balance sheets. We think that investors might be shocked by the large amount of debt added by many companies to stay afloat. The aggregate debt issuance is unprecedented. We also expect to hear that many companies will be cutting employment levels and other costs to right-size their businesses. This is a two-edged sword as it will lead to higher margins down the road as business improves but it also means that our unemployment rate will not improve as much as expected as the economy recovers and wages will stay under pressure too which could minimize the improvement in consumer sales down the road.

The news on therapeutics and vaccines continues to be positive. Gilead’s (NASDAQ:GILD) reported last week that its drug Remdesivir reduces the mortality rate by 62% and improves recovery. In addition, the German biotech company working with Pfizer (NYSE:PFE) announced that it is confident it will be ready to seek regulatory approval for its vaccine by the end of the year with several hundred million doses ready to go. The government funded several more companies last week to accelerate their research, testing and production of therapeutics and vaccines. Testing and contact tracing also continued to increase meaningfully week to week.

While cases rose to record levels last week, the death rate continues to fall as the average age is dropping; some therapeutics are already being successfully used; and doctors are using better practices learned over the last few months. Companies are being pro-active in testing their employees before returning to work and while on the job. All of this is a reason for optimism that even if there is a large outbreak in the fall, our medical system will be well prepared to handle it.

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It is clear after hearing from Treasury Secretary Mnuchin comments last week that the government will support another large package to help individuals and companies in need and provide incentives for individuals to go back to work. There will be an extension of enhanced unemployment benefits for furloughed workers and a more targeted version of the Paycheck Protection Program of forgivable loans for small businesses. Officials are also discussing another round of direct payments to individuals. No doubt the government will have a plan ready to go before the Cares Act expires the end of this month.

We were somewhat disappointed listening to Biden this past Thursday present his $700 billion economic revival plan. Under his plan, the Federal government would spend $400 billion purchasing U.S-based goods and services over 4 years and spend $300 billion on research and development for new technologies and energy initiatives. He would pay for these programs and much more by increasing the individual and corporate tax rates.

We are all for investing in America but am leery of hiking corporate taxes especially in today’s environment. And we could accept raising taxes on the very wealthy and increasing the number of years needed to own stocks to garner preferential capital gains as long as the plan is revenue neutral cutting lower- and middle-class taxes. We still believe that the race will tighten significantly between now and election day if the economy improves and news on the coronavirus gets better. If not, Biden will win. The key then is whether the Democrats take control of the Senate, too. Clearly, we will be factoring in the elections more and more into our investment thesis as we get closer to November.

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Investment Conclusions

The markets continue to be driven by excessive liquidity provided by the Fed along with huge amounts of stimulus provided by the government. Don’t forget that the Fed will remain all in until the end of 2022. And so will the government. That is huge providing a back stop to the market and owning risk assets. The economy bottomed in May and has begun a multiyear cycle which will be led by the consumer.

Overall S&P earnings will take to the end of 2022 to hit new highs unless Biden wins and hikes the corporate tax rate which would reduce reported earnings by around 12%. As the economy improves both here and abroad, we would expect inflation to increase too which along with increasing demand for funds as the economy improves is the reason why we would not own bonds with over a 3-year duration.

Technology remains the core of our portfolios as their earnings will increase during the pandemic and accelerate as we move through to the other side and beyond. We find them still undervalued using both earnings yield and discounted cash flow analysis. Our technology holdings are very diversified from software, hardware, semis, 5G, internet, cloud and data centers. Each one will sustain growth well in excess of 15-20%/year over the next few years.

We also own several special situations which are benefitting from the move to the new normal. Finally, we would own industrial commodities, gold and moderate growth high dividend payers yielding on average over 3.15%. Continue to avoid all companies whose business is being hurt by the pandemic forcing them to raise billions of debt to hopefully make it to the other side. Many will not.

Our weekly webinar will be held on Monday July 13th at 8:30 am EST. Remember to review all the facts; pause, reflect and consider mindset shifts; look at your asset mix with risk controls; turn off your cable news; do independent research and… Invest Accordingly!

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.