With the staggering amount of information being generated by the minute, we are all aware of the very serious public health scenario which is putting an enormous amount of pressure on our health care system the likes of which very few, if any, could have seen.
What’s the BLUF (Bottom Line Up Front)?
· The worst of the public health impact may still be six (6) weeks or more out
· The impact to the real economy (businesses, unemployment, wages, etc.) won’t be known for months
· In our opinion, the worst of stock market performance (i.e. the bottom) still ahead of us, perhaps months
· The resources of the USA and the world are cooperatively harnessed at historic levels
We customize each of our client’s investment portfolios based on their specific objectives. As a result, some or all of the following observations may or may not apply to you. Nevertheless, I think it’s important for you to know what we are seeing, thinking, and doing across FIG accounts:
1) What are we seeing i.e. what is known (as of Mon 3/23/20 2pm PST)?
a. The Coronavirus is a global pandemic
b. Over 274,000 covid-19 cases worldwide and growing exponentially
c. Over 30,000 covid-19 cases in the USA and growing exponentially cdc.gov/coronavirus
d. Social distancing protocol and travel restrictions bringing economic activity to all but a halt
e. Global financial markets sell-off
i. The S&P 500 is down by more than 30%
ii. Hardest hit industries thus far: energy, travel, retail, service
iii. Extreme volatility
iv. Energy war – Russia, Saudi Arabia, USA
f. Massive monetary and fiscal stimulus – fed rate cuts, treasury purchases, tax relief and deferral, etc.
2) What are we thinking i.e. what are we reading, hearing, contemplating, and anticipating? The short list:
a. The Market will be news driven with elevated volatility & risk of significant potential downside perhaps into Q3 and beyond
b. Increasing numbers of infected (est 50% of U.S) and related deaths (est 2%)
c. Hospitals overfull and in-need of emergency facilities to house infected
d. Medical personnel and first responders perhaps sequestered in vacant hotels
e. Wide scale collection i.e. drive-thrus in your local CVS or Walgreen’s parking lot more than eight weeks out
f. Wide scale testing of collected samples still weeks away
g. 2Q GDP expected to contract: -15% (JPM), -24% (Goldman Sachs), -30.1% (Morgan Stanley)
h. 2Q earning will be terrible and even though this is expected the headlines may move markets lower
i. Potential news items that could lead markets lower:
i. Cancellations or delays of major events planned for summer or fall – Tokyo Olympics (just announced), Presidential election, etc.
ii. Increasing news of small and medium size business bankruptcies
iii. Larger bankruptcies – cruise ships, airlines, restaurant chains with large debt obligations on balance sheets, smaller energy related companies – the most likely
iv. Unemployment surging toward 30% (Fed reserve, James Bullard)
j. News items that have the potential for market bounce
i. Nuclear liquidity – trillion $ injection via low interest loans to businesses, cash to individuals.
ii. Additional tax date delays, emergency tax credits to all individuals
iii. Plateau and falling number of cases (2- 3 months out or more)
iv. Prospects for Coronavirus vaccine (unlikely to be near term and even if announced no way to get large scale distribution and production in short term) or mitigating treatment
3) FIG Actions: (please note: the actions listed below are a summary of activity across all FIG client accounts, not a specific FIG client or household)
What have we done?
a. The week of Feb 24th, we reduced or eliminated all equity exposure in our most conservative managed accounts
b. Followed soon thereafter by reduction or elimination of exposure to high yield bonds which were trading almost in lock step with the S&P 500
c. Some of the proceeds from these sales were allocated to high quality fixed income -- investment grade corporate and government related securities
d. The majority of the proceeds from the equities and HY bonds remain in cash as “dry powder”
e. Last week, we began operational steps to convert to or establish PPS custom accounts for clients. When the time comes to get back into equities and/or take advantage of the new opportunities we see coming, having the account already set up will allow you and us to act quickly.
Obviously, we are pleased to have made these decisions when we did.
What are we doing?
a. As the dust settles, we’ll be in touch with an action plan to take advantage of opportunities specific to your needs and objectives. In the meantime, here’s a summary of our thoughts:
i. Batten down the hatches, protect capital
ii. Take care of personal health, the health of loved ones, and our neighbors and community
iii. Monitor the situation, uncover previously unforeseen risks and emerging opportunities
iv. Refine the strategy and be ready
v. Implement and allocate “dry powder” when the time is right
As always, we will get through this crisis. There will be a recovery, today is unlikely to be the day, but there is a recovery coming. In fact, it wouldn’t surprise us at all if there is a short lived ‘relief rally’ in the stock market beginning this week.
However, we are not expecting a ‘V’ shaped recovery; a ‘W’ shaped recovery with fits and starts seems more in the cards. Therefore, unless you are a very nimble trader, and/or a very long-term investor, and/or completely immune to downside volatility, we highly encourage you to avoid any temptation to call a bottom in public equity markets.
We are in a bear market! In bear markets, investors will sell what they have to, then sell what they can. This is what creates opportunities in good quality companies and assets as they get caught up in the excessive selling.
For now, we are content to sit on the sidelines of the public markets.
A quick word on the alternative assets: all of you have an allocation to alternative investments that helps us diversify your portfolio. We expect our alternative assets to be more resilient and less volatile than publicly traded assets but these positions are not immune from general economic conditions.In the coming weeks and months, we will communicate specifics as they unfold.
Speaking of volatility, the tension at my house has been elevated with the forced upon us home schooling. It seems my 14 and 12-year-old sons thought they were on extended spring break and online video gaming could fill their days. As my wife, Christine, and I explained what we think is a better alternative use of their time, this article on Sir Isaac Newton came in handy:
Again, if you’d like to have a conversation, please let us know. Until then, take care of yourself and family.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
Edited from original content to comply with public disclosure.