Where Are We Now?
We are living through an unprecedented period of disruption. Over time, mankind has experienced plagues, famines, and wars. Today, our enemy is a virus that has brought the nations of the world to their collective knees. Economies have ground to a halt. Job losses will likely grow into the tens of millions. Without government assistance, many consumers and businesses will be unable to survive this disaster. American mettle is being put to a test.
The Federal Reserve has provided guidance to banks, encouraging leniency for customers experiencing financial challenges related to COVID-19. The Fed is also implementing extraordinary measures to support the flow of credit in the economy. In addition, The House and Senate are working towards an initial stimulus bill to further dampen the effects of the economic shutdown. In time, these actions will provide a positive impact.
What Do We Believe?
PWA believes that the number of reported COVID-19 cases will escalate exponentially over the coming weeks. Businesses will remain shuttered through April and likely well into May. At the same time, the rate of unemployment will be reported to have risen to levels not seen in many decades. Americans will likely grow more fearful and less inclined to spend money as they experience job losses and financial declines. States and municipalities will receive less tax revenue. Tax-free bonds, normally considered a safe haven, will be priced based on the likelihood of default. The stock markets of the world will reflect investors’ collective fears and the expectation of future profits being substantially less than what was expected just 30 days ago.
What Should We Do?
The advice throughout history has always been the same as it relates to the stock market: Ride it out. This advice, however, is predicated on a maxim that governs sound investing:
Short-term money (i.e. money needed within a five-year period) should not be invested in the stock market.
Anchored in historical events, this investment maxim is illustrated in the following table (published by Wealthfront):
The longest recovery period is 2112 days, nearly six years. The average recovery period of 684 days is less than two years. Most investors remember the declines of 2000 and 2008, recovery periods that were approximately four and five years, respectively.
This is why PWA Wealth Management builds custom client portfolios that include fixed income for near-term/immediate needs. At PWA, we have always understood that markets decline for many different reasons and we have planned so that our clients have sufficient fixed income investments to weather these storms.
Younger investors can view the downturn as an exceptional buying opportunity and aggressively add money to their 401(k) and IRA accounts. Older investors do not have that same luxury.
PWA continues to study the vast amount of information available to us. The information allows us to see patterns upon which we are making decisions. We believe that those U.S. companies with the strongest balance sheets and the best-in-breed management will be the companies we want to own on the other side of this event. We believe companies like Walmart, Apple, Home Depot, Amazon, and Microsoft will continue to be the great businesses they were before the pandemic occurred. Those companies (as well as the ETFs and mutual funds holding these companies) have all experienced declines and represent great value for long-term investors. Conversely, food service, hospitality, travel, retail, and energy are likely to be impaired for a much longer period.
Over the coming days we will continue to monitor the situation and reposition our portfolios as needed to align the portfolios with our beliefs. International and emerging market positions will be eliminated in favor of cash. Many large-cap U.S. dividend paying companies will likely be forced to dramatically cut those dividends to preserve cash. Those companies and the funds that are heavily invested in them will be eliminated from our portfolios. We are doing everything we believe necessary to position our portfolios to weather this storm and benefit from the eventual recovery.
Although we are forced to work remotely, our team is performing exceptionally well and completing our duties in a manner consistent with in-office outcomes. I am very proud of the team.
Please know that your trust and confidence is greatly valued and we are working tirelessly to continue to earn your business.