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Sydnee Gatewood
Sydnee Gatewood
Articles (3539) 

Ken Heebner's CGM Mutual Fund 2nd-Quarter Commentary

Discussion of markets and holdings

August 20, 2020 | About:

To Our Shareholders:

CGM Mutual Fund increased 20.7% during the second quarter of 2020 compared to a return of 20.5% for the Standard and Poor's 500 Index (S&P 500 Index) and 2.9% for the ICE BofAML U.S. Corporate, Government and Mortgage Index*. For the first six months of the year, CGM Mutual Fund decreased -12.9%, the S&P 500 Index decreased -3.1% and the ICE BofAML U.S. Corporate, Government and Mortgage Index returned 6.3%.

In the wake of a stormy late February and March, the market experienced a surprisingly strong rebound in the second quarter of 2020. The rally was not without its bumps as stocks continued to move in response to the economic impact of the novel coronavirus. A remarkably strong start to April briefly stalled when the Commerce Department reported March retail sales declined 8.7%. Additionally, consumer spending for March plummeted 7.5% and personal consumption also plunged 7.5%. All three drops could be directly attributed to temporary retail store closures, employee layoffs and furloughs. Throughout April the Labor Department reported unprecedented numbers of weekly unemployment applications and, by the end of the month, a record 12.4% of the U.S. workforce was drawing unemployment benefits. The market was also strained by an emerging oil price war between Saudi Arabia and Russia coupled with tumbling demand for oil in a virus locked-down world. U.S. oil futures briefly dropped below zero for the first time in history. However, stocks bounced back thanks to the Federal Reserve's aggressive stimulus plan and a $484 billion US government aid package that included funding for the Paycheck Protection Program, aid for hospitals and increased virus testing. On April 29, the Commerce Department estimated that U.S. GDP fell almost 5% in the first quarter, ending the longest economic expansion on record. The news depressed stock prices slightly, but the market still enjoyed its best monthly performance since January 1987, returning 12.7% in April 2020.

The market held on into May drawing strength from hopeful developments in battling the novel coronavirus and emerging signs of economic recovery. Record supply cuts by OPEC and its allies as well as rising demand in those parts of the world emerging from lockdown helped revive the price of oil. Quarantine restrictions began to ease, allowing some businesses to resume operations. In early May, the Labor Department reported a record unemployment rate of 14.7% in April, indicating that an entire decade's worth of job creation had been eliminated in just one month. However, weekly jobless claims declined steadily through May and ultimately fell to a seasonally adjusted 2.1 million by the end of the month, suggesting the worst might be over. On May 27, the S&P 500 Index closed above 3,000 for the first time in three months as reports of opening restaurants and bookings at hotels and airlines provided early hints of an increase in consumer spending. On May 29, the Commerce Department reported personal income surged 10.5% in April, largely driven by payments from federal rescue programs. The S&P 500 Index returned more than 4% in May which combined with April's numbers, culminated in the strongest two-month performance since 2009.

U.S. stocks continued their resurgence in early June as federal stimulus money filtered into the financial markets and lifted asset prices. Tweaks and fixes to the federal Paycheck Protection Program extended loan payment provisions and further eased the requirements governing forgivable small business loans. The Labor Department provided some welcome news when it reported that the economy added 2.5 million jobs in May, restoring some of the losses endured during the first two months of the pandemic. The last time jobs were added to the economy on this scale in a single month was 1948. But stocks still remained sensitive to the impact of the pandemic and on June 11, the S&P 500 Index fell 5.9% as virus cases increased in several states and the total number of cases in the U.S. exceeded 2 million. Again, encouraging economic indicators helped the market rebound through the end of the month. The Commerce Department reported that retail spending jumped 17.7% in May for its largest increase since 1992. New home sales also soared a surprising 16.6% for the month of May. Meanwhile, prices for oil, copper and raw materials also began to rise, providing early evidence of recovering global growth and demand. Following the difficult and precipitous decline of the first quarter, the market ultimately staged a remarkable turnaround in the second three months of the year with the S&P 500 Index posting its best quarterly performance since 1998.

The 10-year U.S. Treasury bond yielded 0.7% at the start of the quarter and reached a high of 0.9% on June 5 in response to the Labor Department's release of the encouraging May jobs report. By the end of the quarter the yield was back at 0.7% as a growing number of virus cases and their potential impact on the reopening of the economy pushed investments to the relative safety of government debt. The S&P 500 Index was priced at 22.2 times the trailing twelve-month earnings on June 30. While the overall market remains expensive, we are encouraged by opportunities in what we believe to be relatively modestly priced stocks in certain sectors as the economy begins to recover.

On June 30, 2020, CGM Mutual Fund was 26.7% invested in short-term U.S. Treasury Notes. The three largest industry positions in the equity portion of the portfolio were in housing and building materials, home products and drugs. The Fund's three largest equity holdings were Meritage Homes Corporation (NYSE:MTH) (housing and building materials), Horizon Therapeutics Public Limited Company (NASDAQ:HZNP) (drugs) and KB Home (NYSE:KBH) (housing and building materials).

David C. Fietze


July 2, 2020

The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates ("ICE Data") and/or its Third Party Suppliers and has been licensed for use by Capital Growth Management Limited Partnership. ICE Data and its Third Party Suppliers accept no liability in connection with its use. See prospectus for a full copy of the Disclaimer.

The performance data contained in the report represent past performance, which is no guarantee of future results. The table above does not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares and assumes the reinvestment of all Fund distributions.

The investment return and the principal value of an investment in the Fund will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted.

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