Is this a bear market rally? A good case can be made that it is and an equally good case can be made that it’s not a bear market rally. What do we think? We do not have strong opinions either way. Trying to figure this one out is like trying to predict if we are going into a recession. It’s very difficult to do and we’ll only know for sure with the benefit of hindsight. Therefore, we are not trying to guess whether it is a bear market rally. Instead, we continue to own a collection of fine businesses that can thrive in an economic recovery but can also hold their own should we be headed for an economic downturn.

Let’s put the bear market rally debate aside for a moment and discuss the strong market performance of the last 2 months. Since reaching a bottom on June 16th, several equity market indices around the world have rebounded anywhere from 10-20%. Despite this powerful market rally over the last 2 months, year-to-date equity returns remain in negative territory with many global equity markets down double digits for the year-to-date period. The reasons are well known. It’s been a perfect storm with record inflation that has caused central banks to raise rates faster than expected, a conflict between Ukraine and Russia, and new outbreaks of Covid-19 that have led to lockdowns in China.

While we are never happy to see our returns in negative territory, we believe investors should keep in mind a famous quote from a legendary investor. “In the short term the stock market behaves like a voting machine, but in the long term it acts as a weighing machine”. The phrase was coined by a British economist named Benjamin Graham. He is considered the father of value investing and was a key mentor for Warren Buffett. What Graham was trying to say with this famous quote is that in the short run, the market votes on which firms are popular and sends stock prices up and down accordingly. But in the long run, the market will assess the underlying fundamentals of a company to give its true weight, or value. On this note, we believe that the underlying fundamentals for our holdings remain highly attractive.

Thus far in 2022 it’s been the energy stocks that have been popular while quality stocks have been very unpopular. We own quality companies and it’s one of the reasons why the share prices for many of our companies have been weak. However, we believe it’s important to separate share prices from fundamentals. During a period of time when the global economy was slowing and facing severe disruptions, during a time of war and soaring inflation, with Europe on the brink of a recession and the United States posting two consecutive quarters of negative GDP growth…the majority of our companies delivered stellar results. Here are the results that some of our larger holdings in our global portfolio delivered during their most recent reporting periods:

• LVMH generated revenue growth of 28% or organic sales growth of 19% in Q2 2022
• Diageo delivered 28% sales growth in the first half of calendar year 2022
• First Republic had revenue growth of 22.6% in Q2 2022
• Visa had sales growth of 19% in the April-June quarter of 2022 (their fiscal Q3 of 2022)
• Costco had sales growth of 15% in the April-June period of 2022
• Microsoft has revenue growth of 12% in the April-June quarter of 2022 (their fiscal Q4 of 2022)
• Google had sales growth of 13% in Q2 2022
• UnitedHealth Group delivered 13% revenue growth in Q2 2022
• Thermo Fisher had organic growth of 3% in Q2 2022
• S&P Global was a notable laggard with an organic sales decline of 5% during Q2 2022

Most of the above cited figures would be considered very strong results in a booming economy but to deliver these types of results in a slowing economy that is dealing with significant dislocations is truly remarkable. We continue to have high levels of conviction in the companies we own and believe that they are well positioned to compound in value in the years ahead despite what may transpire in the economy in the near term.

Have a good weekend,

Phil