April 6, 2020

The Outlook

Be prepared for some mind boggling economic numbers, as we expect the rise in the unemployment rate and the GDP decline in the second quarter to be unprecedented.  How that translates to the stock market remains to be seen.  In terms of timelines, there is the timeline related to defeating the virus, then there’s the timeline for economic activity to ramp back up, and the time horizon that the stock market is operating on.  The market is forward looking and we think the more confidence we have in the measures being taken to address the virus’s spread, the more likely it is that the stock market will look through the second quarter into the back-end of the year and possibly 2021.  

There is a lot of discussion about the type of recovery we will have and whether it will be “V” shaped, “U” shaped, or “L” shaped.  We think the answer to that question depends on the industry.  Some recoveries will be shaped a “V”, others more like a “U”, there will be some “L”’s, and unfortunately a few “\”’s.  In that environment, thinking about and understanding what you own will be more important than ever.  

We think at the end of this, economically speaking, the strong will have gotten stronger. Assuming we avoid the very worst economic outcomes, and we believe theUS Government will do whatever it takes to avoid them, the back end of 2020could be alright and 2021 could shape up to be surprisingly strong.  

Our Portfolios

The period between mid-February and March 23rd was brutal.  There were several days where futures traded “limit down”, a point where exchanges halt trading until a trader is willing to bid it higher or the stock market opens.  There were also several circuit breakers that got tripped, which stopped trading for a time and the market experienced unprecedented volatility, both up and down.  There was chaos in fixed income as the market went into full liquidation mode.  There were rumors of bank holidays and a closure of the stock exchanges, which we think made the selling worse.  Despite the pain, we are glad they kept the markets open because we think the politicians needed to see their approval ratings in real-time in order to get them to act quickly.  

We’d like to say our portfolios were immune to the selling, but they weren’t.  We can say we felt well positioned for a business cycle slow down or normal recession.  However, this is not a normal slow down or recession, it is an acute and unprecedented shock to the system.  We had some cash, some treasuries, those things helped a little but only so much. Gold was a good hedge in the beginning, but then it too went into liquidation.  We were not surprised by any particular outcome, given what happened. We would say that we believe we’ve participated the way we had hoped in the modest rebound thus far and feel well positioned going forward.  

The Fed’s actions have given us confidence that the system should hold up, and all throughout we felt the US Government would ultimately respond in a way that was proportionate to the problem we are facing.  At a certain point we knew the most important job was to keep our clients as informed as they would like to be, in their seats and prepared to ride out the storm, and to try to position ourselves fora potential recovery.  Up to this point, we believe we’ve done all three.  

We thought the market could begin pricing a recovery when three conditions were present:  a robust stimulus plan to address the economic hole, a willingness to do “whatever it takes” if that is not enough, and evidence that the public health measures being taken are starting to control the spread of the virus.  We felt that evidence could be as simple as decelerating new case growth in major metropolitan areas, like New York City.  

It is said that the market climbs a wall of worry.  Absent meaningful setbacks in the response to the virus, it is possible we may enter that phase sooner rather than later.  We have declared war on the virus.  In the 1800’s London financier NathanRothschild said, “buy on the sound of cannons, sell on the sound of trumpets”.  We think a bazooka is close enough to a cannon, and it’s about to be fired multiple times.  We also think it is possible that it fires one more shot than is necessary, just for good measure.  There’s a common saying among investors,“Don’t fight the Fed”, we would add “or the Feds”, especially when they have declared economic war.  In the end, we believe the war will be won.  Sometime before that happens, we would expect the markets to start to recover.   None of this means that volatility will disappear, that the bottom is in, or that we should be declaring victory just yet.  

In Conclusion

During this difficult time, we want you to know that we are working hard on our clients’ behalf.  We cannot remember a time where we have worked harder day-to-day than over the last 6weeks.  We are hopeful and optimistic that the decisions we made during this period will bear fruit over the years.  

We part by reminding readers that no one knows the bottom until well after it is established.  You cannot time it, once you get out there will always be a litany of reasons for not getting back in, so we think you need to be invested when it happens in order to experience the recovery.  The media is never going to say, “all clear, safe time to invest”, and in fact, they are more likely to tell you all the reasons not to invest.  

To our clients, we appreciate the trust and confidence you have in us.  If you have any questions or concerns, please do not hesitate to contact us. To our friends, if there is anything we can do to help you, please reach out to us.  We would welcome hearing from you.


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