April 2020 - Sheltering Your Portfolio in Place

David L. Johanson |

SUMMARY

  • Earnings season
  • Stocks favored for the future
  • The upside to Coronavirus

 

The month of March is known for “March Madness” as college basketball fans go crazy vying for their team’s chances at a National Championship.  Basketball got canceled, but boy did we get a new definition of “March Madness”.  The Dow Jones Industrial Average (DJIA) had its worst quarter since 1987, down 23%.  The biggest losers: Boeing, Chevron, and Exxon at the forefront of the index drop.

In February, markets were at a record high, as healthy data on the U.S. economy signaled continued growth.  Then, as this Coronavirus (COVID -19) made its way from China to continental Europe and the United States, markets went into a tailspin, suffering one of the fastest declines on record.

We are dealing with three simultaneous worries: health related, economic, and societal.  It is difficult to fix all three at the same time.  Weighing the loss of life versus getting Americans working again, is a difficult choice.  In the long-run, this will pass.  For the short-run, we will all have to be patient.

Investors have had a “react first” and “think later” nature as the media unnerves everyone about the COVID-19 outbreak.  As we try to make heads or tails of the situation from a financial point of view, the reality is we are now officially in bear market territory.  A bear market is defined as any time the stock market dips lower than 20% from its highs.

Although, the markets have seemed to be bottoming out, we are not out of the woods yet.  Earnings season is coming.  Earnings announcements are not going to measure up the same as past quarters, but forecasts for Q2 and Q3 are going to be brutal and worrisome.  Some of that uncertainty is already priced into the market.  Markets detest uncertainty, and this trader-driven system, is making it a little gut-wrenching for some glued to their TV’s.

Our base case (expectation) has moved generally to a short-term global recession.  This is based on new readings that we are getting from COVID-19 studies and from the economy at large, and also from how we are seeing sentiment change.  The deepness of the recession will hinge on our ability for America to get back to work.

Should We Buy or Sell Stocks Now?

On one side you have people telling you it is only going to get worse from here.  And on the other side you have people saying this is an incredible buying opportunity.  So, we have to ask… what should our next move be?  Should we sell everything and run for the hills, potentially missing out on a massive rebound in stocks, or should we hold on for dear life and pray there won’t be another huge downturn?

We are concluding that the relative valuations between equities and fixed income really start to favor equities (stocks) as we look into the future.  The lower interest rates and low inflation are super supportive of equities.  From today, looking forward a year or two, one would rather own a Blue Chip, cash heavy, dividend paying stock, than a bond or cash.

Reasons to Be Positive About the Coronavirus Fight

Coverage around the virus has been almost exclusively negative, as experts extrapolate worst case scenarios to spur action.  It should come as little surprise, that fear of a recession has moved to the forefront of many minds.  At times like this, we think it might be helpful to look beyond the headline news and note some positive developments.  Here are the reasons why we are starting to see hope.

  1. We now have the biggest economic rescue measure in U.S. history, a more that $2 trillion package of spending and tax breaks.
  2. The Federal Reserve Bank has lowered interest rates further, to ease borrowing. Quantitative easing is back.  Our banking system is strong.  Fed Chairman, Jerome Powell, has stated, “The Fed still has room for more policy action to fight any economic downturn.”
  3. The Dow had its biggest 3-day surge since 1931.  Over these three days in March, the Dow was up more than 20%.  Buyers are ready to pounce when they see daylight.
  4. More testing equipment is coming.
  5. The coronavirus is not mutating quickly, suggesting a vaccine could offer lasting protection.
  6. Stanford biophysicist and Nobel laureate, Michael Levitt, predicts a quicker coronavirus recovery stating, “We’re going to be fine.”
  7. Harvard University Department of Health posted why they are hopeful we can beat coronavirus.
  8. China announced that it would lift the massive quarantine and lockdown on the city of Wuhan on April 8th.  Normalization is taking place.
  9. President Trump wants to open the U.S. economy as soon as possible and feels more harm than good could result with elongated lockdowns across the nation. 
  10. The Private U.S. Healthcare industry is the best in the world.  We often overlook and under appreciate how fast the healthcare industry has responded.  Moderna has already begun testing a vaccine.  Doctors have begun experimental uses of the anti-viral drug Remdesivir from Gilead Sciences to treat patients with positive results.  Johnson & Johnson is now in the headlines.  The speed in which these discoveries have been made is breathtaking.

As the virus response ramps up, sentiment will turn higher as well.  Every day we learn more. Every day we make progress.  The next two weeks may be bad, but panic will subside to hope, as we see incremental improvements later in April.  Fingers crossed.

What Else Can We Do?

  • Fear is a natural reaction.  We are all humans and are hardwired to react when things threaten us.  Take care of your health.  Social distancing yourself is necessary and will help you stay healthy.  Turn off the TV.  Go on a walk.  Listen to music.  Give your mind a break.
  • Do not forget the earlier work we have done to responsibly choose your asset allocation, diversify, and build a plan.  Your long-term plan looks 10 to 15 to 20 years out.  It already takes some of the black swan events into consideration in setting up your strategic asset allocation.
  • We all need to take a look at our spending.  When economic hurdles arise, we may need to curtail spending for a season.  Paying off debt, building up our savings, and prudent living will go a long way.
  • Understand that these buying opportunities do not come up that often.  Buying on the dips and investing more money during stock market slides has generally created wealth in the past.

The World economy should recover.  In two years, when we look back, we should be very thankful we added money to our portfolio.

Stay safe and well.  If you have any questions or concerns, never hesitate to reach out to us.  In the meantime, take good care!