Summer 2020

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you

where you want to go.” – Benjamin Graham

20, 20, 2020 When rounding the returns for the S&P 500 Index to zero decimal places, the Index was down 20% in the first quarter and then up 20% in the second quarter, all of this in the year 2020. There seems to be something about 20’s. Maybe we are in for another decade of roaring 20’s. The speed of the decline in the first quarter was unprecedented and the ensuing recovery in the second quarter was as impressive as the gut-wrenching decline in Q1. The blue bars in the near chart detail the second quarter returns for various asset classes. The Nasdaq Index had the strongest return in the quarter up over 30% as technology- and biotechnology-oriented companies were sought by investors. The second-best performing index was the Russell 2000 small company stock index up 25.5% in the quarter. Despite the strong return experienced by small caps, they remain the worst performing index this year. Additionally, small cap stocks have underperformed large company stocks over the last five and ten-year periods. We have been positioned away from the small cap asset class since November 2013 during which large cap stocks have outperformed small cap stocks by more than two and one-half times on a cumulative basis. Now that a broader range of stocks and asset classes are beginning to participate in the market rally, this could support further market advance into year end. In A Recession The U.S. economy is officially in recession after just one quarter of negative GDP growth. In early June the National Bureau of Economic Research (NBER), the organization that determines the official start and end of recessions, declared the U.S. economy entered a recession in February 2020. Generally, a recession is defined as two consecutive quarters of negative GDP growth; however, the unusual nature contributing to this economic contraction warranted an earlier recession determination. NBER noted in their report, “The fact that the monthly peak of February occurred in the middle of Q1 2020 while the quarterly peak

occurred in Q4 2019 reflects the unusual nature of this recession. The economy contracted so sharply in March (the final month of the quarter) that in Q1 2020, GDP, GDI, and employment were significantly below their levels of Q4 2019.” First quarter GDP was down 5% and the second quarter estimate is for GDP to be down anywhere from 25-35%. A sharp rebound in GDP is anticipated for the third and fourth quarters, up mid-teens and high single digits, respectively. The sharp rebound expected for economic growth in the second half of the year is due in part to a lack of excesses built up in the economy prior to the contraction. As states and their economies begin to reopen, businesses need to ramp up production and rebuild depleted inventories, restaurants need to restock nearly all their ingredient and food items, etc. “V-Shaped” Recovery? With the third quarter underway it seems the worst of the economic damage caused by the virus-induced stay at home mandates just might be behind us. States are reopening their economies resulting in a significant pickup in economic activity, albeit from a low level. The nonfarm payroll report released on July 2nd reported an increase of 4.8 million jobs in June versus the consensus estimate of 3.0 million. This is on top of the May payroll increase of 2.7 million jobs. This increase in payrolls brought the unemployment rate down to 11.1% from 13.3%. More improvement needs to occur in the jobs market with total payroll employment of 138 million,

which is below the February peak of 152 million, but the numbers are moving in the right direction. The green line on the above chart shows the current payroll level is just over 90% of where it stood prior to the recession. Importantly, the payroll bounce is occurring in a “V-shaped” pattern versus prior payroll recoveries in earlier recessions, as workers that temporarily sat on the sidelines during the state shutdowns are added back to payrolls. Some high frequency data is also showing signs of a “V-shaped” recovery both in the US and around the globe. The chart at left shows the year over year change in seated diners at restaurants for Germany,

U.S., Australia, Canada, and Ireland. Figures were pointing to near 100% declines in May and have rebounded significantly in recent months as reopening has begun. This type of data can be fickle but does give insight into the mood and health of the always important consumer. Interestingly, better rates of seated diners in these countries has also coincided with better stock market performance. Fiscal & Monetary Support- “Don’t fight the Fed” In the U.S., the Federal Reserve and Government have committed to provide over $9 Trillion in stimulus to counteract the negative impact of the mandated economic shutdown. This unprecedented amount represents 44% of GDP, and Congress is discussing a fourth round of stimulus. One mantra that gets repeated is ‘don’t fight the Fed’ and now this saying seems more appropriate than possibly any time before. The chart at right shows the S&P 500 Index (maroon line) along with the more significant components of the Fed’s balance sheet (green line). Since the market bottomed in March, the S&P 500 Index rise has been in sync with the expansion of the Fed’s balance sheet. With Congress contemplating additional stimulus, this may improve investor sentiment leading to higher stock prices in the second half of the year. While the Fed may not be purchasing stocks directly, it is now the third largest holder of the iShares iBoxx Investment Grade Corporate Bond ETF (LQD). This effort by the Fed to purchase fixed income securities leads to lower bond yields as the increased bond demand raises bond prices (bond prices and yields move in the opposite direction). Lower bond yields can push investors into riskier assets like stocks, which causes stocks prices to rise. Obviously, this is not how a normal market should function, but investors are forced to search for returns outside of bonds since the Fed has stated they intend to keep rates low or near zero through 2022. The Virus Many, if not all, of the current economic and business issues are directly attributable to actions around dealing with the Covid-19 virus. As a result, it is necessary to evaluate some trends in the recent data and potential implications for the economy and the market. Importantly, testing has increased significantly in part due to the reopening of elective procedures in hospitals and surgical centers.

Patients obtain a Covid-19 test before a medical procedure is performed. As the chart at the bottom of previous page shows, the number of those testing positive in the U.S. has increased significantly as testing has increased. On the positive side, many of those tested are asymptomatic. Despite the increased cases, the good news is the death rate continues to decline. One death is too many, but the continued decline in the death rate may indicate control is being obtained around dealing with the virus. Some of this is attributable to the medical profession learning how to better treat those afflicted with the virus. Also, more of the positive tests are showing up in the younger population who seem to be far less negatively impacted. Covid-19 is a serious illness particularly for the older population and those with underlying medical conditions. A Glass Half Full Much of the recent economic data is indicating a potential “V-shaped” recovery after a historical lockdown of the world economy. As various parts of the economy open for business, there will undoubtedly be adjustments necessary to the pace of activity as flare ups occur. The spread among asymptomatic, younger people is notable and the important decisions around returning to school will be a pivotal part of reopening in the coming months. The worldwide race for treatments and vaccines is unparalleled. The fiscal and monetary response to the virus-led economic shutdown is substantial and provides interim support for businesses and consumers, allowing time for businesses to reopen and bring back furloughed employees. It is sometimes difficult to see the complete picture when bad news headlines attract readers' attention. Yes, there are uncertainties with the virus and the upcoming election, and the market will not move higher in a straight line, but on balance, recent data would seem to indicate the glass is half full versus half empty. Thank you for your continued confidence and support in HORAN Capital Advisors and we are always available to answer your questions and discuss our outlook further. Please be sure to visit us for company news, reports and our blog at www.horancapitaladvisors.com/blog. Respectfully, HORAN Capital Advisors HORAN Capital Advisors, LLC is an SEC Registered Investment Advisor.

The information herein has been obtained from sources believed to be reliable, but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. And its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.