Dear Clients and Friends -
Each day for the past several weeks I have poured over emails sent to me by institutional money managers, economists, psychologists and other “seers’ into the financial world. I have participated in dozens of webcam webinars with investment academics and traders, and at a personal level, have been entertained on “Online Cocktail Parties” with friends and even old high school classmates. From each of these interactions I have gleaned insight and have worked to develop a picture on what our world may look like going forward. From my perspective but trying to not put the “TV Talking Head spin” on things, I’d like to share some observations with you.
- Phase One of Covid-19 is playing out relatively predictably and the mass panic and fear stage has passed. As intended, shutting down the world economy via “shelter-at-home” has effectively slowed the infection to the point that hospitals can manage the most serious cases, yet the virus continues to spread at a rate that will require us to wash hands, wear masks and socially-distance for some extended time to come.
- Phase Two begins now with our “gradual release” to public life, albeit one which will look, will feel and will be, changed. We will begin to work, shop, dine, travel and live life with new levels of personal health protection. Emotionally, some of us will feel comfortable venturing out in a more adventurous manner to enjoy the summer, while others who are feeling a need for more caution may choose to stick close to home. The balance of these two different behaviors will be the ultimate determinant of the rebound, or the magnitude thereof, of the economy and financial markets. Unlike those seers to whom I refer, I have no prediction at what economic activity level or in what time frame we will find a balancing point, but I do remain optimistic that we as Americans have a history and desire to be social, active and engaged. My gut tells me that it will be sooner than many might think.
- As Mickey & Minnie's House goes, as a proxy, so goes the life we will be living until a vaccine is viable and readily available. “The Happiest Place on Earth” encompasses several global theme parks, ABC, ESPN and other media companies, and is also the largest movie production company in the world. Clearly these core "touch-required" businesses are in for a very real struggle, yet in taking a more organic look overall, they are in an okay place for the future. This is much like where many of our lives and the overall economy sit right now - challenging but we are doing okay. Imagine the challenges theme parks face in being able to reopen, and at what cost in labor and redesign to accommodate health needs? And ESPN, when the only highlight for months has been watching the NFL draft, and in the foreseeable future with no live sports to broadcast, you have a problem. Yet financially they can stay afloat as they await this virus passing as they have saved reserves and they have several sources of income - people are glued to TV (ABC) and monthly subscription customers are using their streaming service in binge watching shows and watching classic movies. But the core of their business which will allow them to thrive – theme parks, sports, travel and movies are still effectively shut down. Truthfully, only when the day comes that Mickey & Minnie are not wearing masks as they greet us at The Happiest Place", and we are watching on ESPN a football game with stands full of fans, and we are actually going to theaters again to watch new films, will we then be back to “normal”. Using Mickey, Minnie and Friends as a mirror for our lives right now, I think the pent-up demand for all of what is important to us makes a big difference in so many ways, and that portends a determined recovery once the virus is in full check.
- Until then, the way we live our lives and the impacts of that will drive the uncertainties of the economy and financial markets. The good news is that the government and banks have stepped in to support the financial markets, struggling companies, and for the most part, individuals in need. These commitments to provide stability are epic by any standard, and I believe will continue to be so until no longer required. The bad news is that for the next few months even with this support the economic news will be unpalatable - with huge levels of unemployment, large budget deficits, decreased corporate dividends and increased bankruptcies. If you have a child or grandchild thinking now of graduate school…I suggest law. For many years to come there will be lawsuits over everything from failed businesses to struggling municipalities.
- Lest we lose sight, this will pass, as it is a solvable health crisis with a finite life. Dozens of major pharma companies worldwide are working on vaccines, or treatments to ease, if not end, this threat. Compared to the 2008 financial meltdown, companies and banks are far better funded, individuals are less leveraged in debt, and the cavalry in the form of the US Government has come to the rescue much more quickly. As we muddle through this, the pace of the economic recovery in our communities and worldwide is up to each of our individual comfort levels in reengaging in our communities. There is no right or wrong, but simply what works for each of us and our families.
Which brings me to what we are doing now within our practice for you as clients. The markets have rapidly rebounded making back over half of their losses, indicating a high expectation that the return to normality in lifestyle will be “V Shaped” (in the world of mountain charts). I think that is a bit too optimistic in timeframe, yet in scope, does set a promising base in terms of a market bottom. I think it more likely that the economy and ultimately the equity and bond markets will look more “U Shaped” in making a more gradual recovery. Arguably the stock market at its current valuation is pricing in perfection in a quick consumer rebound, a detente with China in our disagreements and a favorable November election outcome. Given the lack of clarity on those, for now, we are suggesting clients continue to maintain a balanced approach. We expect continued high market volatility, and for stocks and bonds to be somewhat range-bound going up and down around current levels. Barring an unexpected and unmanageable turn in the virus, we do not expect a retest of the market lows of mid-March. This “Market Multiple Table” does a good job of showing the S&P 500 parameters of market recoveries based upon the Current, Better and Worse scenarios of this “Phase Two”. As a point of reference, the current level of the S&P 500 is 2848 and the Dow Jones is 23,664 (5/6/20), and we believe the first column (Current) in the Table feels most realistic.
Looking forward, we continue to search for and analyze opportunities to take advantage, and avoid pitfalls, of this changing world we live in. You like I can imagine the forever-changed dynamics that are now evolving globally with the likes of high government spending, work-at-home transitions and the pervasive expansion of the “Home Delivery/Pick-up" culture. We are embracing this future and assure you that we are studying ways within these opportunities to optimize your investments with improved risk/reward dynamics, cost efficiencies and a more user-friendly technology interface.
Should you care to chat about the perspectives shared here, or about your investments, please feel free to give me a call. James is still working from home while helping out with his family and I am splitting the day between office and home.
I hope you and yours are in good health, are finding ways to “fill your cup” with people and experiences valuable to you, and that you, like me, will soon feel comfortable in venturing out and reconnecting. Be well, Bob