The End Of The Beginning (Lick ’Em Tomorrow, Though)
By Christopher R. English, President of Lumen Capital Management, LLC
I’ve promised to keep you updated as we move through this crisis, so here is what you need to know about our current coronavirus situation and how it’s impacting our economy. Since I last wrote to you on March 22, 2020, we’ve seen grim tidings out of places like Italy, Spain, New York City, and Louisiana. However, our mitigation strategies appear to be working and, as we indicated in our last report, the Federal checkbook is wide open. Also, the Federal Reserve has pumped trillions of dollars into the economy.
While our global ordeal with the coronavirus is far from over, it’s starting to look like we’ve survived the initial onslaught and maybe even turned a corner. It’s going to be a long time before we return to something that looks like normal, but, to borrow a phrase from Winston Churchill, we’ve perhaps made it to “the end of the beginning.” (1) That means it’s time to start thinking about what comes next. Before we do that, though, let’s start by discussing the present situation.
Current Happenings
First, I think the next two months are going to be critical in terms of how much damage is being done to the economy. Besides the human cost of the virus, the current economic news is grim. Estimates of 2nd quarter annualized GDP losses of 30% are showing up from the economic crowd (2) and nearly 17 million people have filed for unemployment. (3) My guess is you’ll see an additional 3-5 million filings next week, and perhaps the same amount the week after.
So far, Americans have seemed willing to tolerate the economic pain and the shelter-in-place rules. However, weather in much of the country is turning warmer, and it remains to be seen what happens as that occurs. My guess is the political pressure to begin opening certain parts of the economy and areas of the country less affected by the disease will intensify in April, particularly if we start to see a significant decline in both new cases and deaths from the coronavirus. If things open up a bit and if we don’t see a pick-up in new coronavirus cases, then it’s likely investors can start to price in the disease’s impact and we can also get a better read on future economic growth. If so, there is a higher probability we’ve seen the worst of it for equities. Conversely, if social distancing guidelines continue for a longer period, there is the possibility of deeper and more lasting economic pain.
Some Perspective On Spending
We are rightly focusing on the sick and those suffering enormous economic hardship right now. As a society, it says much of us that so many are stepping up and trying to do their share. But what isn’t being talked about much is all the people who still have a job and are still receiving a paycheck. We’re also not focusing on the millions that are still getting Social Security checks or other economic payments like a pension. This is hundreds of billions of dollars sitting on the sideline that at some point will get put back into the economy on things besides groceries and medical supplies. Once people regain some confidence in their own financial situation and stop worrying about close contact with other people, there is a higher probability that the demand side of the economy will pick up substantially and perhaps quicker than many expect. Now, I don’t have any expectation that things will return to where they were overnight, but I do think it’s reasonable to think that sometime this summer we will start to see economic growth. If it looks like we’re getting a handle on the disease, growth could accelerate as confidence returns.
And Now, A Market Note
Markets have found some footing these past few weeks, although volatility has been historic in many cases. Price swings of 4-5% have become common as investors grapple with good and bad news. Stocks bottomed toward the end of March and have now moved significantly higher, although still quite a bit below their February highs. Absolutely nobody knows if we’ve seen the final bottom in price. Many in the investment community think we need to retest those March lows before we see the final low in the markets. I have no idea if that’s correct, but I still believe value is being created for longer-term investors; I also think it’s going to take time for this process to play out. I’ll warn you now that there is also a high probability that stocks won’t go up in a straight line. We’ve seen a substantial move higher from the March stock price lows, so it is reasonable to expect some profit-taking along the way. I think we still expect more wild market swings and we’re not done hearing bad news regarding the virus.
I think investors should review their long-term asset allocations and risk profiles given current events. Something I wrote earlier bears repeating: You should not be investing money 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 money allocated to equities may decline first before they start to advance, assuming there’s a recovery. There is no guarantee of profit, but the margin of error even after our recent advance is more favorable for long-term investors. I also believe the news cycle could remain grim, but stock prices will focus on the future and not the current headlines. Stocks will likely start their next long-term bullish phase 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.
Our Response To Market Movements
We have been scanning our investment universe to see where we should add assets and what areas may not be as attractive going forward. One of the other things we are attempting to do in taxable accounts is mine those accounts for losses. Basically, anything in equities by all investors purchased in the last two years is likely showing up in portfolios as a loss right now. There are strategies we use in times like these to realize those losses to offset any gains already taken this year, but to also be used as carryforwards in later years. Since I’m guessing that taxes will be going up after 2020, we will be looking to have as many of those carryforwards as possible. I am happy to discuss this with you at any time.
Clients ask why I am optimistic. It’s easier to answer that with an anecdote that seems relevant to these times: a conversation that allegedly occurred between Union Generals William T. Sherman and Ulysses S. Grant during our Civil War. It happened during the Battle of Shiloh, which was fought 158 years ago on April 6-7, 1862. Up to that point in the war, Shiloh was the bloodiest battle the nation had ever seen. The details don’t matter much, so in brief, Confederate forces surprised Grant’s Union Troops in Western Tennessee on the first day of combat. His army barely held on into the night when Union reinforcements came onto the field. Both sides, exhausted by the day’s fighting, bedded down fitfully, knowing another day of hard fighting lay ahead. To add to their misery, a thunderstorm drenched the battlefield. It’s said that Sherman found Grant sometime after midnight standing under a tree out of the rain smoking a cigar. Sherman supposedly said to him, “Well, Grant, we’ve had the devil’s own day, haven’t we?” Grant is said to have replied while puffing on his cigar, “Yes. Lick ’em tomorrow, though.”
Grant’s experience at Shiloh is just one of the events in our history where we’ve reacted to a sucker punch. Time after time we’ve been surprised and forced to get up off the ground after we’ve been knocked down. Americans have always responded in situations like this—you can see it in what folks are doing now—and it’s happened again, although this time the enemy is a virus. I’m betting on us once again. I don’t know when we’ll get the best of this virus, but I know we WILL get the best of it. We’re going to lick this disease; maybe not tomorrow, but someday soon, and it’s that tomorrow that we’ll turn to in our next report. We can perhaps now faintly start to imagine what that tomorrow is going to look like.
Ulysses S. Grant obviously went on to bigger things after Shiloh. Three more bloody years of generalship followed for both him and Sherman. Grant learned his hard-won lesson from those days and was never surprised like that on a battlefield again. I’m betting we won’t be surprised again in this manner by this virus or another disease. We've taken it's measure, maybe even its best shot and we're going to beat it.
As always, I am here for you. If you have any questions or concerns, please don’t hesitate to reach out at 312.953.8825 or email us at lumencapital@hotmail.com. Stay healthy and safe.
About Chris
Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.
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posted by CR English at 12:21 PM
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