1Q2020 Newsletter – Where Do We Go From Here?

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“…And the crowd roared with excitement” –no sports fans or investors – 1st Quarter of 2020.

As we happily close the (record) books on the first quarter of 2020, let’s take some time – something most of us now have an abundance of – in the midst of the relative market calm to evaluate our financial and emotional health, look at our portfolios (or don’t) and determine the steps we should and should not take as we jump into the second quarter.

With a nod to my father who was surprised to learn last week that I actually write these memos and don’t purchase them, my apologies for what is an unusually lengthy newsletter.  Appropriately so in my opinion, as the first quarter of 2020 has been described as many things, but certainly not brief!  So put the kids in front of the TV (there’s no parent-shaming in a Covid world), go into your (home) office or bedroom, close the door and read up on how things might just be okay after all.

The Economy (Not the Markets)

Last week the US death toll surpassed nearly every other country, jobless claims mounted, unemployment soared and companies began pulling their guidance for the quarter and some for the year, yet the markets had their best week in 46 years!  It’s hard to find a clearer example that the economy is not the markets.  The market as a whole is a better forecaster than any of its parts (or the so-called brains behind it).

Thursday, April 16th, we learned of an additional 5.2 million Americans who lost their job the previous week, bringing the total to 22 million since the pandemic began, and wiping out all of the jobs created since the Great Recession. To what degree the economy (and citizens) will suffer as a result of this pandemic remains to be seen.  Millions of additional workers will find themselves furloughed or unemployed, and the unemployment rate will skyrocket to numbers few alive have ever seen (and even fewer can remember).  Notably, this number will now include millions of “gig” and part-time workers who previously were not included in the unemployment rate, nor eligible for benefits as they are under the Cares Act.  The fog of what a 20 or 25% unemployment rate, though hopefully short-lived, is making economic predictions difficult if not impossible, and as the inimitable and brilliant Randall Forsyth of Barron’s cited this week, “Economists are using decimal points in their predictions to prove they have a sense of humor!”

Adding to the anxiety, the loosening of social restrictions may introduce a “second wave” of illness and death, and it’s not clear yet to what effect those who have already been infected may have immunity.   What is clear is that each answer seems only to raise more questions; questions around technology that can be used to track movement, the legal considerations of such technologies and of course, balancing human lives with self/government-imposed economic collapse.

But does the severe economic uncertainty mean it’s a poor time to invest, or does it create the opportunity investors have been waiting for?

Opportunists versus Investors

In recent weeks, I’ve had conversations with clients, friends, family and neighbors, all of whom are asking what they should be doing with their portfolios in these turbulent times.  As usual, my response begins simply with “what’s your investment time frame?”

As with most investing decisions, your actions in this market should be driven by your investment time frame, not your emotions.  Opportunists, my suitable-for-work name for market-timers and day-traders, will view the recent bounce in stocks (what many in the industry refer to as a dead-cat bounce) as an opportunity to tactically – read: short-term – profit from a rally that’s unlikely to be held.   They may try to short the market, profiting if the market sells off from here, or simply time the market by moving to cash in hopes of buying at lower levels.  As most people know, timing the market is hard as you need to be right 70% of the time.  Importantly, success in timing the market is also determined by your time frame.  For example, clients that moved to cash mid-March have missed out on a significant rebound and be on the wrong side today, but may look smart in the near future if the markets retest (or blow past) their lows.  It’s all in the timing…if you’re a market-timer!

My Take, Bottoming Out and Future Returns

In my opinion, we haven’t reached bottom and those who missed buying at March lows may have another opportunity to do so.  Then again, my ability to predict near-term market moves is less than 70% accurate, so I’m not advising you to wait!  The fact that most people agree with me also gives me reason to doubt my own beliefs.  Investors, those with a long-term investment horizon (7+ years) should view this as a good opportunity to invest.  Note that I didn’t say perfect, but don’t let nailing the exact market bottom (read: perfection) with identifying good value and taking action relative to historical precedence (read: good).  As billionaire founder of Oaktree Capital Howard Marks eloquently writes in his April 7th Memo, “[w]e never know when we’re at the bottom.  A bottom can only be recognized in retrospect: it was the day before hte market started to go up.  By definition, we can’t know today whether it’s been reached, since that’s a function of what will happen tomorrow.”

Rational investors look at what their expected returns should be over their expected time frame.  In meeting with prospects and clients over the past 18-24 months, notably prior to the pandemic,  I advised (in concurrence with history and many economists) that equities had an expected annualized return of low to mid-single digits given the double-digit annualized returns experienced since the Great Recession.  Investors purchasing stocks/funds today after a market correction should expect a higher return over a long-term investment horizon than those who purchased in January after 10 years of compounding double-digit growth.  Likewise if the market continues to fall, that increases the investors’ expected returns.  It should also be noted that bonds (fixed income) look increasingly less attractive, both on an absolute basis and relative to equities, though I’ll save that for another day.

Historically, Bear markets don’t begin with recessions; they end with them (or in the middle).   To Marks’ point, it’s impossible to know (in advance) the best time to invest, but we know it’s usually when there’s the least amount of light, the least certainty and greatest discomfort.  This is certainly a time of great discomfort.

What Should You Do?

Well it’s possible that the best course of action is for you to turn off your TV and do nothing.  Unless there’s been a fundamental change to your financial position – and a 20% loss of your portfolio doesn’t qualify – you shouldn’t sell.  When you invested (remember to invest means to put away for the long-term) you knew that markets fluctuate, sometimes more rapidly than others.

Now is a good time to find your target long-term target of stocks to bonds and determine if the selloff has left you underweight in stocks – a likely scenario.  What would it take to get your portfolio back to your long-term target?  How much would you have to purchase?  If you have continued concerns about the near-term market sell-offs and aren’t fully invested (or are fully invested but underweight stocks relative to your long-term goals) consider choosing a time frame i.e., 3 or 6 months and committing to invest an equal portion each month.  While I’ve seen some studies arguing against this method from a purely returns-oriented standpoint, it’s hard to argue with it’s high sleep-better-at-night factor.

We’re living in strange and uncomfortable times unlike anything anyone alive has experienced.  But in the midst of the chaos, remember that markets have endured significant events for hundreds of years and have a way of adapting and moving higher over long periods of time.  It won’t happen overnight and we may continue to experience market shocks, but if you believe that we can adjust as we have in the past, it might be a good time to consider dipping your toes in the water.  It’s a bit chilly now but should warm up with time.

Thank you for your continued support. I hope this newsletter finds you all healthy, safe and grateful for what matters most to you and your families.  If you know of someone who may enjoy my commentary, I’d greatly appreciate you forwarding this to them and they can sign up below.

Jake