An Update

I want to update you on what I’m seeing now.  You know I’ve written in the past about my father, who was a lawyer from a small town in Indiana.  He gave me one invaluable piece of advice which was to be forthright with folks and give them the news straight out, good and bad.  I’m going to do that today just as I've had to do through other market crashes and wars as well as good times in my 30+ years of investing.  Up front I will tell you that nothing in all these years compares to this pandemic.  The September 11 attacks are the closest event that comes to mind.  Like that sad day, we’re experiencing a huge exogenous economic shock.  This is unprecedented in modern memory. There’s a playbook for what happens when unlooked for events wash over the transom, so we’re pretty familiar with what happens after an earthquake or hurricane.  The chapter on global pandemics for that playbook is being written as we speak.  We’ve experienced unprecedented volatility in world markets as investors try to come to grips with the economic consequences of a world on lockdown from the coronavirus.  Nearly all global asset classes have experienced steep declines in excess of 20% in March due to the uncertainty surrounding the virus and governments response to it.   There really hasn’t been any place to hide besides cash.  

Being straight with you is to say I have no crystal ball telling me what’s in store in the near future other than I believe the news cycle will continue to be grim. I can make guesses, but to say that I know for sure how this pans out would be unfair to you.  Nobody knows for sure and the best educated guesses are no better than yours or mine.  Instead I’ll rely on my experience when markets have gone through terrible events.  In that vein, I want to prepare you for  the possibility that stocks could fall further.  The  possibility also exists where markets rally in the coming weeks only to see us sell off again, perhaps even falling further depending on the news cycle.  Of course nobody knows if either of these scenarios will happen.  Stocks might blast off much as they did after 2018’s decline and quickly erase much of this month’s losses.  I think this best-case scenario is the least likely given where we are right now in the life of the virus, but anything is possible.   Therefore, while we all hope this is over soon I want you to be prepared that there may be more pain to follow.  Much will depend on the news and the Government’s response to this event.

“Men make plans, God laughs” is an old Yiddish proverb reminding us that the life is unpredictable despite our best intentions.  Very few of us would have imagined that a global pandemic was coming as we turned the page into 2020.  The US economy was in pretty good shape before all of this occurred.  If there is a hook on which to hang our hats it is as recent as six weeks ago there were few structural issues threatening overall economic growth.  Locking the majority of the country down for whatever period of time means a massive economic disruption and throws all those forecasts out the door. Some of that economic activity won’t be recovered.  Nobody’s going on vacation or to the movies, out to eat or to a ball game right now.  Some revenue is merely  being postponed.  For example, they’re talking about moving the Kentucky Derby and the Masters Golf tournament to September, assuming it’s medically feasible by then.  But the cash that we’d spend on all those things will still be with us, ready to be used on the other side of this as long as economic confidence doesn’t take too much of a hit.  In that regard the Federal Government is signaling its going to do what’s needed to make sure programs are available to tide certain parts of the economy over until we get through this.  The Federal Reserve is also flooding the markets with liquidity. Basically, what you are beginning to see is the Government opening up their playbook for responding to a disaster by flooding the impacted zone with cash.  Uncle Sam is about to open the checkbook big time.

With the news cycle so grim it's important to remember that millions of people still have jobs and much of the economy isn’t going away, but is being put on hold.  Somebody who needs a new cellphone, a new set of tires for their car or just a pair of jeans will still need these things when this is over, plus maybe a few things more.  All that cash folks are pocketing now from everything they’ll give up in the coming weeks will probably get spent with gusto in a few months.  Assuming, the disease doesn’t morph into something more deadly it is reasonable to expect pent up economic demand to start coursing through the system later this year and carry over into 2021.  If you buy my thinking on this then it is reasonable to assume that stocks have declined to much more attractive valuations if investors are willing to look out 12-18 months.  Investors with that type of time horizon and the willingness to assume more risk should think seriously about taking advantage of the opportunities because corporate America is for sale.  Now there’s a reason that stocks are so cheap given all the uncertainty out there.   But I say there’s value being created right now in the markets even as I’m telling you there’s some probability that stocks could fall further in the coming weeks.  I say markets are cheap knowing that the world is looking into a deep dark pit right now and nobody knows when we’ll starting digging our way out.  But we will dig our way out!  It is only a matter of time and sound policy before we start that process.  In that vein, I’m not very good at asking clients to send my firm additional dollars to invest but I will say that if you buy my line of reasoning then I’d suggest perhaps sending us some additional money to put to work on your behalf over time.  Better times will come just as winter turns to spring.  The seeds in the heroic work of our medical communities and the Federal government’s checkbook are being planted even if we can’t see any green shoots yet.

Everything said so far comes with the following warnings.  Don’t expect that I or anybody else will know when the final bottom is put in on this decline.  We'll only know that later on when looking in the rear view mirror. As I have cautioned above, it is possible that markets will trend lower in the coming days or weeks.  In 2008 you could have bought stocks in October right after that crash, been rewarded with gains through the end of the year, only to have to sit through the final throws of that bear market through March 2009.  In retrospect it didn’t matter because any major index you bought back then has paid you handsomely regardless of whether it was October of 2008 or March of 2009.  I think there’s a very high probability you’ll feel that way in the coming years even if we miss out on the absolute lows.  

Also you should absolutely not be investing new dollars you will need in the markets on a short-term basis.  Don’t bet next year’s tuition money on the markets right now.  The better strategy I believe is to pick at assets with dollars you are willing to allocate to longer-term investments as they become or remain cheap.    Also you should be prepared for the possibility that any new dollars allocated to the markets may decline first before they start to advance, assuming there's a recovery.  There is no guarantee of profit but the margin of error down here is much more favorable for long-term investors.  One last caveat is to remember something I said to you the other day.  The news cycle is likely to get worse before it gets better, but stock prices will turn before the news cycle.  Stocks will likely start to recover once investors begin to sniff out a recovery.  This is why I say don’t try to time this market by selling and trying to pick the bottom.  To do that means you have to be confident you’re going to know when to get back in.  I have seen that type of skill elude individual investors time and time again,  especially if we have a massive ramp higher in prices when investors begin to believe that the future is clearing up. 

Now I want to talk about our portfolio strategies which are centered around ETFs.  While there are enormous advantages to ETFs, especially during volatile times, they are not immune from market declines as ETFs will lose value by something that mirrors the decline in their underlying index. They are also not a panacea for volatility. Recent events have shown they can be whipsawed around like any common stock. However, besides their cost and tax advantages ETFs  form a diversified portfolio of assets, backed by the value of the securities in an underlying index while removing single stock risk from the portfolio.  Warren Buffett has always said bet on America.  I would rather bet on America and the World by buying diversified baskets of assets right now than worrying about individual companies.    As grim as the news is right now the cavalry in the form of the Government’s checkbook and the ingenuity of the free enterprise system will eventually right the ship of state.  I think it will profit most of us to be around when that turn comes, even if that turn is further out right now and from perhaps lower price levels.

Finally, it's fair to say that our Government was slow to respond to the threat this disease posed to the country. But the Federal Goliath is now very much awake!  It is beginning to do what it always does in situations like this, throw ridiculous amounts of cash at the problem.   That  will eventually make a difference.  It is when these programs are seen to start stabilizing things and when investors think we’ve reached peak infection that I believe markets will turn.  I cannot honestly tell you from where that will be and we need to be prepared that it could be from lower stock price levels than what we see today.    I don’t know if markets have to go down further but if history is any guide, the turn will be violent and I think we’re going to want to be along for the ride when prices start moving the other way.

I plan to update you regularly until we’re through this event.  Please call with any questions or concerns.  Most important to me is that you please stay healthy and safe.