November 23, 2021
Dear Fellow Shareholders,
The US stock market’s performance during the Coronavirus pandemic can be broken down into two distinct phases. The first phase, lasting 6 months from March to October 2020, is characterized by the initial correction, the restrictions to “flatten the curve”, and the economic uncertainty that followed. The second phase, which includes much of the past fiscal year, commenced once trials for a Covid vaccine indicated a safe and effective inoculation was forthcoming. As a result, over the past fiscal year, the S&P 500 Index rose 42.8% as consumers yearned for a return to normalcy.
The pandemic caused one of the sharpest and shortest recessions in US history. Lasting only two months during the second quarter of 2020, the flash recession ultimately fostered broad stimulus to sustain the economy amid uncertainty. Once again, the Federal Reserve revved up quantitative easing through asset purchases. Congress passed several fiscal programs to support businesses, forestall unemployment, and provide direct payment to consumers. In all, the varied actions worked. The recession was brief and the backbone of the US economy, its consumers, endured.
By the end of third quarter of 2020, better Covid treatments, such as monoclonal antibodies, and the likelihood of an effective vaccine laid the foundation for an economic return to normalcy. The stock market responded accordingly and a broad-based rally lifted all sectors of the market, with the more cyclical, higher-beta, and undervalued investments benefiting disproportionately as investors reembraced risk assets. Within the Oak Associates Fund family, this performance dynamic was also apparent, with the more high-risk small-cap River Oak Discovery Fund and the Black Oak Emerging Technology Fund posting the highest returns.
Now a year into phase two of the pandemic, the byproducts of loose monetary and fiscal policies are now apparent. Extensive forgivable lending through the Paycheck Protection Program for businesses and direct payments to individuals flooded the system with helicopter money. The combination of flush consumers and disrupted supply chains has resulted in widespread inflationary pressures. It is a textbook example of too much money chasing too few goods. In October 2021, the year-over-year change in the popular measure of inflation, the Consumer Price Index, jumped 6.2%, the largest spike in 30 years. Prices for groceries, gasoline, rent, etc. are all up. Whether the resulting inflation is temporary or persistent is still undetermined, but most likely depends on the end products input costs. While more commodity-driven inflation could adjust quickly once production and raw materials inventories recover, the impacts of wage inflation may persist.
Exacerbating the underlying inflation pressures is a tight labor market. Although the unemployment rate has fallen sharply from its pandemic peak to 4.6% during the third quarter of 2021, this statistic downplays the reduction in the overall workforce from individuals that left the labor market for one reason or another. Whether tempted by early retirement, to gig work opportunities, or into starting a home-based business, the labor pool contracted during the pandemic. The result is a historically wide disparity between the number of available workers and job openings, highlighting the competitive and challenging labor market.
Businesses that furloughed workers early on in the flash recession have had a hard time attracting them back and many employees transitioned to higher paying jobs elsewhere or work-from-home opportunities. With the free movement of workers affected by the pandemic, replacing employees at the lower end of the wage spectrum is particularly difficult, as evident by the shortage of hourly staff at restaurants and retail establishments. In the meantime, businesses will adapt with technology, automation, productivity, and absorb higher wage expenses. Expect to see more self-checkout lanes at stores and restaurants as well as a proliferation of check-in kiosks.
On a positive labor note, a spike in new business formation occurred during the pandemic due to the massive furloughing of workers and flexibility that the remote work environment allowed. This bodes well for innovation, entrepreneurship and future job growth, but these will take time to develop. Meanwhile, some of the adaptations business made during the pandemic which enhanced productivity will remain, such as flexible remote work, virtual meetings, less time-consuming travel, and reduced office space. The shift to working from home forced a real-time experiment onto corporate America, which will now permanently implement what worked and avoid what did not.
The Federal Reserve will be the largest wildcard next year as it contemplates actions to address inflation, cool the economy, or to rescind the massive injection of monetary liquidity. A reduction in the Fed’s bond buying could hamper asset prices as the proverbial floor is removed. Previous attempts to end quantitative easing have been somewhat futile and eventually revoked. When the Fed stopped expanding its balance sheet between 2015 and 2017, the market initially reacted negatively and treaded water, but the S&P 500 still managed to rise 38% during the 3 years. So, while it is unnerving to have the support removed, stocks can still advance as policy is unwound.
For equities into 2022, the level of interest rates and growth trends should remain supportive. Stocks tend to enjoy a low interest rate, slow growth environment. Even if interest rates rise from suppressed levels next year in an effort to tackle inflation, which they may not, the absolute level of rates is still very low historically. Current supply chain disruptions and labor shortages are natural breaks on the economy that might keep the Fed sidelined. It is also likely these constraints could improve, rather than get worse, as a new post-pandemic equilibrium is reached. This too would benefit both stocks and consumers. Finally, history has shown that it takes several quarters before tightening cycles slow growth and hamper profits. Certainly, rate hikes bear watching, but they are more likely a 2023 risk for equities.
In light of the recovery in fiscal year 2021 and change in risk profile as we move into 2022, we continue to favor companies with the ability to grow earnings and market share regardless of the economy’s growth rate. At this stage of the market cycle, high-quality (and highly profitable) companies are always preferable to low quality and distressed assets, even though the latter can offer phenomenal returns periodically. But while the cyclical recovery lifted all boats early in Phase Two, now that the rising tide has crested, we believe financial strength, a respect for shareholder capital, earnings growth and valuation will determine long-term investing outcomes. Companies that can grow through innovation and productivity, independent of the rate of GDP, remain our preferred investments.
On behalf of everyone at the Oak Associates Fund Family, a wholehearted thank you for being a shareholder.
Robert Stimpson, CFA
Co-Chief Investment Officer & Portfolio Manager
Oak Associates Funds
To determine if this Fund is an appropriate investment for you, carefully consider the Fund's investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund's Prospectus which may be obtained by calling 1-888- 462-5386 or visiting our website at www.oakfunds.com. Please read it carefully before investing.
Mutual fund investing involves risk, including possible loss of principal.
Past performance is no guarantee of future results. Investments are subject to market fluctuations, and a fund’s share price can fall because of weakness in the broad market, a particular industry, or a specific holding. The investment return and principal value of an investment will fluctuate so that an Investor’s shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted.