Dear Clients & Friends,
We have enjoyed the chance to connect with you the last few weeks. During periods of stress, we hope to serve as a sounding board or stress relief valve. Please call or email us if you have questions. We enjoy hearing from you and discussing the plan we have carefully put into place. Letting fears or concerns fester does not help us avoid overly quick or emotional decisions.
If you are excited about buying opportunities, you are not alone. Many clients have been adding cash to their portfolios to take advantage of the market’s discount. Let us know if you would like to add to your accounts and we can help you do so.
Tax Season Update
It is becoming more clear that the April 15th deadline to pay tax liabilities will be delayed by 90 days. Nonetheless, we are working to get tax returns completed on our normal pace. Stay tuned for more information. We don’t know if the IRA or HSA contribution deadline will get extended so we will operate on a normal schedule for those planning items.
If you have not submitted documents already, please do so ASAP. In this time of disruption, we’re happy to facilitate documents via UPS and can send you pre-paid envelopes to return to us.
Managing Your Portfolio
Our first thought when creating portfolios is, what could go wrong? What risks are we trying to mitigate? While the markets have been moving very quickly as of late, the behavior of our investments are rather predictable. Safe investments like bonds have
performed well and are up during the last few weeks. Distribution minded clients have ample bonds in their portfolios to ride out many years of a bad stock market.
Stocks have experienced their fastest 25% correction in history. Many investors have been paying extra attention to the media headlines during this extraordinary time.
What started as a health issue has turned into a global quarantine and economic pause.
Please see below for what’s top of mind this week. We couldn’t resist a Warren Buffett quote (or two) to match.
To put it simply, there is a lot of uncertainty in the next few weeks and months. However, there is a lot a certainty on what the world will look like in a year or two. If you can stomach some ups and downs during the period of uncertainty, you will likely be rewarded.
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” -Warren Buffett
- 2020 Correction. Stocks have declined more than 25% from their highs, at a pace not seen in US history. This includes the Great Depression, World War II, the “Tech Bubble bursting” and many more scary times. We have a view on why this occurred. Some investors feel the snapback rally could be equally sharp. It is best to stay fully invested. The rebound could happen within a matter of days.
Past performance is no guarantee of future results.
- Historical Corrections. We have experienced eighteen 20% corrections since 1960. It usually takes 11 months to move from peak to trough. This downturn was approximately 10 times faster. It’s tempting to think the recovery will be equally as fast. A few crucial days of market recovery spent on the sidelines will significantly harm long-term returns.
Source: Franklin Templeton. Index Dow Jones Industrial Average. Past performance is no guarantee of future results.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” – Warren Buffett
- Volatility. Stock market volatility is now at levels only seen a few times since the 1930’s Great Depression. The last time stocks were this volatile was the 2008/2009 Global Financial Crisis. Buyers of stocks during that time were heavily rewarded just one year down the road. The “VIX” (below) measures volatility of US stocks.
“Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.” -Warren Buffett
- Clustering. Great days in the markets are usually clustered next to bad days. This makes timing the market impossible. If history is a guide, we are due for some good days. Of course, past performance is no guarantee of future results.
The most crucial action is staying the course. Missing even a few good days just after a large downturn can decimate long-term returns.
- Epidemics. There are some recent historical precedents for these current times, as we have seen both epidemics and pandemics in modern history. The chart below shows seven outbreaks occurring over the past twenty years. SARS in 2003 and MERS in 2013 were both variants of Coronavirus. The virus we met in 2009 as H1N1 (Swine Flu), was first seen as the Spanish Flu of 1918. That 2009 H1N1 pandemic infected 60 million people worldwide and closed 559 schools in Michigan alone. For many, the facts of these events have faded in memory.
While markets have declined more since the March 9th date of the chart above, they have generally brushed off other health events the last few decades. While scientists still have a lot to learn about this virus, we have seen viruses like it in the past. The social response to this epidemic has been much different and resulted in the much larger impact to the markets. The shape of our recovery from this crisis is yet to be seen but history gives us some guide.
Past performance is no guarantee of future results.
“It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.” -Warren Buffett
- Investor Behavior. As the saying goes, “the more things change, the more they stay the same.” Every market decline is caused by something different, but the response is almost always the same. It is okay to feel nervous, yet acting on nerves is always the wrong response. Sadly, the average investor usually let’s their emotions get the best of them. We are proud to say our clients are not average investors. Investors who stay the course, and even make smart buys, reap the benefits over time. Throughout history, the average investor has underperformed the market dramatically. This result is almost exclusively because they sell low and buy high. We chose to do the inverse.
- Recession. Markets lead the underlying economy. The Coronavirus slowdown is just starting to show up in economic data. Over the next few months, we are going to see a big impact to jobless claims, GDP, consumer confidence, etc. Technically a recession occurs when an economy shrinks for two straight quarters. We haven’t been in a recession since 2009. There are lots of metrics that investors use to gauge the real time status of the economy. First quarter GDP in the US only started to feel the impacts of the quarantine measures and will likely be positive. With the unprecedented self-quarantine causing a sharp decline in economic activity, it is almost a certainty that the 2nd quarter global GDP will decline sharply. It will probably extend for two or three quarters. The extreme measures we are all taking may help slow the spread of the virus and accelerate the eventual recovery. Some are calling this a repression instead of a recession, since it is self-inflicted. In our view, the stock market has priced in a mild global recession.
- Stimulus. As mentioned, the self-inflicted economic slowdown across the globe is truly unprecedented. Never have all major economies put on the brakes so aggressively and so quickly. On the flipside, the stimulus being implemented by global governments is almost equally as massive. Hundreds of billions of dollars of fiscal stimulus has already been announced worldwide. The US is contemplating a $1 Trillion stimulus package. For some context, that is around $3,000 per person in the US. The stimulus will not likely take the form of a government check to each man, woman, and child but the per person amount is an interesting data point. Congress is trying to get money into people’s hands as quickly as possible- especially workers who have lost their jobs or live paycheck to paycheck. The US Federal reserve has promised trillions of dollars of liquidity to the financial markets. Much of that has already been provided. Government stimulus can’t cause the virus to go away, populations to build immunity, or drug companies to invent treatments. However, the government response is massive and will help blunt the impact of this sharp, temporary shutdown of economic activity.
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” -Warren Buffett
- Unknown Unknowns. Donald Rumsfeld delivered a speech in 2002 where he famously described known knowns, known unknowns, and unknown unknowns. The markets are responding to uncertainty around the range of potential outcomes from the Covid-19 pandemic. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases, said that the steps the U.S. is taking to slow the spread of the novel coronavirus will likely mean the worst-case estimates for the number of deaths don’t materialize. A few days ago, the Centers for Disease Control and Prevention (CDC) reportedly predicted 160 million to 214 million infections, 2.4 million to 21 million hospitalizations and 200,000 to 1.7 million deaths in the country. Those are large ranges, with widely varying economic impacts. As of March 19th, 150 people have died from the coronavirus in the US.
- Moving Forward. The strongest bull markets are not built on a foundation of good news, but on diminishing bad news. We may be near or approaching our peak
“bad news” cycle in coming weeks. Markets are pricing in varying ranges of bad outcomes ahead of that peak. As “social distancing” measures would begin to show results, markets could begin to weigh smaller ranges of outcomes. Right now, markets can’t disprove the worst-case scenarios and likewise, they can’t disprove the rosiest scenarios. The time for purchasing is now and through that “peak fear” timeframe.
We’re making calculated, steady additions to equities across the accounts we manage. This can take the form of fund buys and sells, adjusting ongoing contributions to buy only equities, rebalancing accounts to their target allocations and your fund managers deploying cash to purchase selective companies.
Please do not hesitate to reach out to us and discuss your plan. Thank you for the continued opportunity to serve you and your family.