Special Market Commentary
March 16, 2020
Over the last few weeks, we’ve been in the midst of a constantly shifting and changing investment environment. The situation is evolving in real-time, but you can be confident that we have been working very hard on your behalf to navigate the movements with the best possible outcome for your portfolio. We want to continue to proactively communicate with you and, in that vein, share some of our latest thinking:
- First, in the last two weeks we have entered a new phase of this health crisis as the ramifications have, quite literally, hit home with most of the American population. What was once a virus mostly contained to foreign countries is now permeating every aspect of American life with event cancellations, school closings, and “work from home” policies representing the new normal. It has become “real” for our country causing renewed angst and, in some cases, outright panic. Although social distancing measures are extreme, they are necessary to slow the spread of the disease and ensure the US health care system is not overwhelmed.
- While we expected these measures, the swift cancellations of major sporting events (starting with the NBA) prompted virtually every industry to re-evaluate their own response causing a cascading effect. The impact to the health of our citizens will benefit from these extreme measures but the impact to the economy is real and is likely to impact corporate earnings significantly in the first quarter and subsequent quarters thereafter. The odds of recession have risen. Further, as the numbers of those infected increase, the news feed will become ever more crowded. Overburdened hospitals, understaffed clinics, shortages of medicine, ventilators, and testing kits will all provide fuel to an already amped-up news media. The Federal Reserve and Congress have begun to act with 2008-like measures in magnitude that hopefully will stem the inevitable decline in GDP and employment.
- We have used this as an opportunity to prudently add to positions in your portfolio when and where appropriate. While we can’t call the bottom, and more opportunity will likely exist, the bargains we are seeing, driven mostly by irrational selling, are as good as we’ve seen in a decade. We are confident that we’ll be pleased with these purchases when we look back in three, five, ten years and beyond.
- We have also been monitoring the dislocations in the credit markets. Because people are still involved in the functioning of the capital markets, social distancing policies mean New York City trading desks are understaffed. While the underlying credit of our fixed income holdings remain strong, we don’t want to get caught needing to trade when a counterparty is unavailable. Thus, for accounts with more stable fixed income investments, we have shifted a portion to cash to ensure our clients have liquidity if and when needed.
- For those clients at or near retirement who have also chosen to go through the firm’s comprehensive financial planning process, you can be confident that we have stress tested your portfolio against just this type of crisis. While this one has been more rapid than normal, such pullbacks are part of investing and you can be confident that your portfolio is designed to weather a very long-term, protracted crisis.
We understand that some clients are anxious. 10% daily movements are not normal. In fact, they are extraordinary. They are also irrational. We are trained to seek opportunities in times like this and, historically, our moves in times of stress have proven to pay off for clients. We believe this time will be no different.
Finally, we believe some perspective is warranted. The COVID-19 epidemic is a tremendous challenge for our country. Businesses and families may struggle, some industries may experience generational shifts, and new norms will emerge in our social interactions with each other. Most tragically, people may perish that would’ve otherwise lived healthy lives. Like 9-11, the tech bubble, and the great recession of 2008/09, this crisis will forever be etched in our collective memories. But we firmly believe this will not shake the fabric of our country and economic system. After all, we are fortunate to live in the country with the best and most innovative corporations, best research universities, best rule of law, best constitution, strongest and most advanced military, and a citizenry that has a history of coming out of challenging periods stronger than before. If, like us, you believe these qualities will endure, then you (like us) can see better days on the horizon. While not minimizing this very serious health threat, this perspective reminds us that this too shall pass and investing with that notion in mind will prove fruitful.
As always, we welcome your calls, questions, or concerns. Until then, you can find us hard at work on your behalf. Thank you.
G. Brock Gearhart, CFA
President & CEO