It is in times like these that some of the best opportunities come and some of the biggest mistakes are made.Submitted by Integras Partners on April 29th, 2020
We hope this finds each reader healthy, staying safe, and enjoying some extended time with loved ones.
The global epidemic has brought tremendous stresses, loss of life, and fear.
At the same time, it illustrates the bravery of our healthcare workers, the resolve of our citizens to come together, and our gratitude for those working in healthcare and food supply.
It looks like we’re past the scary beginning of this episode, thanks entirely to everyone staying home.
As we delve into the impacts of history’s greatest economic shock, let’s count our blessings. The Federal Reserve and the Treasury Department, having learned valuable lessons from The Great Recession, moved swiftly with an unprecedented $4 Trillion in stimulus and aid packages designed to keep consumers, businesses, and the financial system afloat while this storm passes.
While U.S. markets have already recovered half the losses, they went from record highs to bear market in just 22 days. Major industries almost entirely shut down. 26 million unemployed have filed claims so far. March was the most volatile month ever with nine different quadruple-digit moves of 5%. The S&P 500 lost over 30% of its value while the yield on the 10-year US Treasury broke below 1% for the first time in history. Sometimes superlatives just aren’t enough.
The Fed has repeatedly stated that it will continue to do whatever is needed to maintain credit liquidity and support our return to economic stability. Investors are looking beyond the crisis at what companies will be worth when things return towards normal.
Things will return to normal.
The next few weeks should give us some indications of how quickly businesses will re-open and how we can start approaching life “as usual”. With increased unemployment benefits (for those under certain income thresholds) and forgivable loans for small businesses to sustain payrolls, many lower-income households have a rare opportunity to strengthen their household finances.
It is in times like these that some of the best opportunities come and some of the biggest mistakes are made.
In March we capitalized on dislocation in the energy sector to create a structured note based on the volatility of the three largest US integrated energy companies in our Income Strategy. More recently we created another one with two of the most impacted companies in the hospitality and restaurant industries in our Growth Strategies. Each will pay a handsome quarterly income (under the circumstantial terms of each note) that should provide equity-like returns without the equity volatility. We also increased exposure to the consumer discretionary and technology sectors in our Growth Strategies. We also added high yield credit (which we exited nearly three years ago) to our Income Strategy. These moves capitalize on the incredible volatility and reposition portfolios towards what we believe will be primary beneficiaries of the ultimate rebound in the economy.
In these circumstances, it is easy to lose sight of long-term goals for fear of what is happening today. Human nature operates using two brains. We engage the logical, thought-provoking, analytical brain to make critical decisions. It is where we determine how to best position assets to achieve our longer-term goals and desires. The primal brain protects us from danger – the “fight or flight” mechanism. In times of stress, this brain usually takes precedence, winning over the logical brain. As fear begins to mount, this brain is telling us ‘anything is better than this’ and tempts us to panic and run. Succumbing to this emotion in times of stress is perhaps the worst mistake a long-term investor can make.
Fortunately, we don’t need to sell stocks today to support our clients’ lifestyles.
As our clients know, we utilize separate strategies for assets we need sooner, and for those, we can allow to grow for farther down the road. Each strategy provides timelines for us to take appropriate risks and seek potential returns. It also allows clients to sleep at night, knowing that this record volatility and uncertainty will not affect current income withdrawals whatsoever. They can keep living life just the way we planned all along - with the obvious exception of our current restrictions.
The S&P 500 having retraced roughly 50% of losses is very common after major selloffs.
The next stage of the market recovery hinges on two major items: when companies feel they can safely bring employees back to work and when a vaccine has been developed to allow social activities. Until we have a better idea of when companies can resume normal operations (and there won’t be another wave next winter) expect markets to remain in a sideways pattern with elevated volatility.
Corporate earnings for the next quarter or two should be terrible for most industries and the market is currently trading at relatively lofty valuations given those expected earnings. So, there isn’t an expectation for market to approach the February highs again for some time. Patience and judiciously exploring opportunities remain key to navigating treacherous markets until the economic backdrop improves. There remain considerable concern and dislocation for leisure industries given their financial complexity and interrelated parties. We will continue to seek opportunities in these areas once we see underlying conditions improve.
We will get through this as we have with every other recession.
This is not a breakdown in the financial system that will take years to solve like the structural recession of 2007-2009. This is an event-driven recession that accelerated the end of an economic expansion. Recovery from event-driven recessions usually occurs within a year. We believe this one has more cyclical characteristics and recovery will take perhaps two years or so.
Stock markets are forward-looking.
Investors are already looking past this year, towards a more normal economy, which has prompted a 5,000-point bounce in the Dow Jones Industrial Average. Markets typically start the next rally while consumers are still feeling the pain of recession. Integras Partners clients can take comfort that current income is not impaired by the markets and long-term growth accounts are just that – insulated for the timeframe it will take to reach new market highs. If it takes four years, then we’ll see annualized 9% compounded growth, which supports the strategy of staying invested.
Reach out to us if you would like to re-visit your personal situation.
Also, brag about us to your friends. We offer complimentary portfolio reviews that provide analysis and recommendations. Anyone can request an appointment through our website.
Be well, stay safe, and listen to the scientists!