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Financial Updates | July 2020

As things stand today, there are many encouraging signs of a rapid economic rebound around the world, but uncertainties also abound. Federal Reserve Chairman Jerome Powell describes the prospect of U.S. economic recovery as “extraordinarily uncertain.”

This probably best characterizes the broad economic environment facing most investors. To be clear, we are still bullish on risk assets, but also think that a short-term set back in markets is very well possible.

Will The Bulls Continue?

Although the U.S. stock market has so far shrugged off the renewed viral spikes in Florida, Arizona and Texas, the increasing number of COVID-19 infections will remain a key risk to equities. At present, the market seems to be assuming that the viral spikes will likely be contained within these states, while the broad economic reopening in the U.S. will stay on track.

Over the past quarter we saw a combination of large-scale monetary and fiscal easing stabilize financial markets. The optimism of relaxing lockdown measures continued to spur the stock market recovery through April, May and June. The question on most investors’ minds is whether this new bull market will continue.

The next few months could be a precarious time as we see renewed virus outbreaks. Depending on how governments choose to steer through the next wave there is a high chance that stock markets will be volatile over summer and we may see again a short-term correction. However, we remain positive on equities versus bonds on a 12-month period.

Global equities have rallied strongly from their March 23rd lows. However, the fixed income environment in the past quarter paints a different picture. Bond yields have barely recovered from March. The US 10-year Treasury note is currently yielding 0.58%, down from 1.92% at the beginning of January and the 30-year bond yield offers only 1.24%. On the commodity side, we have seen oil and industrial metal prices mirror the bond yield picture whereas gold rallied with equities. The divergence in the markets have left investors perplexed.

Despite the second quarter rally, the world equity market is still down since the start of the year. More importantly is to realize that the market rebound has been driven mostly by large technology stocks. A number of large banks, industrial and energy stocks are still down 35% or more from their February levels.

We navigate the choppy waters by considering the main trends at play. In general, bond and industrial commodity markets tend to reflect the outlook of the real economy whereas stocks reflect the outlook for corporate earnings.

A Second Wave is Gaining Momentum

Countries all around the globe are on the path of relaxing lockdown measures. Governments are gradually permitting larger group gatherings and the opening of restaurants, bars and non-essential shops. This opening of the economy takes place against the backdrop of limited success in virus containment.

Although some countries have accomplished lower case and death rates, others still face increasing infection rates. These countries, however, continue down the path of relaxing measures, fearing the prospect of being left behind in the economic recovery.

Predicting the effect of a second wave on markets is difficult plagued by unknown factors. The public appetite for lockdown measures is clearly fading with a growing number of people choosing to flout or protest remaining lockdown measures in place. It is also unlikely that governments will impose the same lockdown measures as seen in the first wave, choosing instead to prioritize the economy by following the “Swedish model” which markets will favor.

Also, developments in technology have given governments the ability to create tracing systems which are better equipped to contain small breakout clusters. Furthermore, treatment options have improved since the onset of the first wave with medical professionals learning more about the virus.
Concerning equity markets, if a more deadly second wave occurs, we would expect to see some severe short-term weakness in the equity market as many sectors would reel from a second punch.

Geopolitical Risk

Another risk factor is the increasing animosity between China and the rest of the world. The implementation of a new National Security Law in Hong Kong triggered a reaction from countries like the U.S. and the U.K., while clashes at the China-India border created tensions with India, which prompted India to basically block many popular Chinese Apps.

Hong Kong is at risk of losing several legal and trade agreements with western countries. However, we feel Hong Kong as a financial center is not at risk in the short-term, as its capital market is too important to both China and the western world. Hong Kong also has more than enough monetary reserves to maintain the HKD-peg to the US dollar.

The positive news is that the increased tensions have spurred China to provide large economic stimulus packages to its domestic economy and start new infrastructure spending programs. This will be positive for Asian economies and indirectly for the world.

Equity Markets

Although equity markets will face an uncertain period, there are plenty of positive drivers which will likely keep the bull market pushing on higher. As economic data continues to improve equity markets should pull higher.
Although we may see a slowdown in growth during the second peak it is likely governments will not halt economic activity altogether in the same way. Typically recoveries from external market shocks tend to be more rapid than those created by internal problems. The pandemic would qualify as an exogenous (external) shock and, therefore, equity markets should see a more rapid recovery than for example after the 2008 global financial crisis.

The amount of government spending to protect people’s incomes is extraordinary. Although the CARES Act will expire by the end of July, and the 18 million Americans who are unemployed could lose the $600USD/week in extra unemployment benefits.

Both Congress and the White House agree that more fiscal support is needed, but they differ on how the next package will be structured. The Trump administration, worried about unemployment benefits being too generous, favors a “back to work” bonus. The House democrats want to simply extend the extra $600USD/week to January 2021, send another round of $1,200 cheques to each family and increase infrastructure spending.

Will ideological differences between the Republicans and Democrats lead to a blockage of the second stimulus bill? Not likely, as both parties understand that the stakes are too high. Especially now with the flare up of the virus in the southern states. Therefore, we can expect to see additional economic stimulus on top of the huge amount of fiscal spending we have already seen. This explains why the economy remains in reasonable shape despite the pandemic.

The same is happening in Europe, where it is likely that Angela Merkel will manage to get a new EU backed economic stimulus fund of 750 billion Euro approved in the short-term. Which comes on top of an earlier package of 540 billion Euro plus all the individual government spending programs.
The upcoming US elections have the potential to cause a stir in markets. If Biden ousts Trump and the democrats take control of the Senate, corporations will shudder at the prospect of Trump’s corporate tax cuts being rolled back. However, given that the current forecast is now expecting a democratic win, this risk is likely already priced into the market.

Furthermore, a Biden win would likely lead to improved relations with China which would be welcomed by global markets. Anyway, four months is still a long time in Presidential politics, and anything can still happen.

Source: Predictit via BCA Research

Source: Predictit via BCA Research

Bond Markets

Bond yields will remain depressed until inflation picks up, which we do not expect to happen any time soon. The unemployment rates have jumped so rapidly it will take likely 1-2 years to return to the levels before the pandemic and even then, it will still be another year or more before a tight labour market would lead to higher inflation.

Central banks would likely let inflation levels run up before stepping in to increase rates. Furthermore, highly indebted governments will prefer a higher inflation environment so that the real value of debt is eroded.
Bond yields could see some recovery alongside global economic growth. We will likely begin to see long term yields rising more than short-term rates. However, yields will remain low in absolute terms.

The Fed has been actively buying fixed income Exchange Traded Funds (ETFs) in the past two months to provide liquidity to the (high yield) credit market. This means the credit market does not offer particularly attractive opportunities at the moment. Given our outlook for the world we would prefer to add credit risk in emerging market debt or, for clients who can accept low liquidity, opportunities in private credit.

Investment Strategy

During the past quarter we made slight changes to our investment allocations. After the initial rebound we de-risked the portfolio slightly which we intend to hold until we see opportunities in the market which would warrant an increased appetite for risk. Specifically, we are looking forward to the presidential election in November.

There are several themes we are incorporating into our models. First, we feel that higher quality companies with stronger balance sheets and sound financial statements are better suited for a prolonged slow down should that prove to be the case. Second, we view health care innovation and biotechnology as a potential expanding segment as the pandemic crisis should lead to even more investment in healthcare and especially in health technology. And third, we believe big tech, which provided a significant boost to the market rebound, can continue to lead as the reliance on technology becomes evermore critical for business operations in a shutdown COVID environment.

With those ideas in mind, our model allocations were adjusted to reduce or eliminate small cap equity exposure, introduce large cap healthcare and technology positions and slightly underweight developed foreign large value equity. Our fixed income weightings remain unchanged overall for all allocation models and our sentiment for quality mirrors that of equities.

DISCLAIMER: The views expressed in this economic update are those of the author and do not necessarily reflect those of BFT. This update contains “forward-looking statements” that relate to future events, including future economic performance and plans. These forward-looking statements can be identified by the use of such words as “believe,” “think,” “intend,” “may,” “will,” “should,” ”expect,” ”anticipate,” “estimate,” or “could,” or variations of these terms or the use of other comparable terms. There are certain risks and uncertainties that could cause actual results to differ from those predicted in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this update.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Emerging Markets Disclosure: Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

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How to Find the Right Financial Advisor: Hint, It’s Almost Like Finding the Right Spouse

I recently saw some social media thread comments where people voiced complaints about financial advisors. “Bunch of high-priced crooks” generally summed it up. I swiped passed without much thought. 

Later that evening, my wife recounted a conversation she had while serving jury duty, and it made me pause. She went on to say that while on lunch break, she and two others had brown-bagged for the day and had the usual conversation in the breakroom – “What do you do?” “Are you married?” “What does your husband do?” That last one turned out to be the bingo question. My wife said that I was a wealth manager and had my own company. Juror number seven asked, “how do you know if an advisor is a good guy, and how do you decide if they’re trustworthy?” He went on to say that his father-in-law had not one, but two bad experiences with brokers/advisors, and it had cost him a great deal of money. I was sad to hear that what I discounted earlier in my social media stream may be more legitimate than I had thought. Clearly, naive thinking on my part.  

I’ll confess, my wife thinks I’m a pretty good guy. (When she has doubts, I remind her she said yes!) The way she answered genuinely made me proud. She said that she had listened to me talk about my work and my work experiences so much over the years that she felt confident that her response was really the right one and the one that mattered most.  

“He always asks a lot of questions. He doesn’t ever assume he knows you or what problems you need help solving. It’s really important that you like each other and that it’s hard to have a good relationship if you don’t. That’s where the trust part comes in. And, it’s important that you understand everything that’s going, and he won’t move on until you do. I wanted to say, ‘he’s like his dad, who was the most generous person ever, and he genuinely likes helping people,’ but I couldn’t explain that part.”

Great answers!  

I understand the position I’m in and the importance my role plays in people’s lives. It’s serious business, and I treat it as such. I’ve learned many things in 22 years of wealth advice, but the top two things on my list that make people crazy are their kids and their money! Rightly so. Family is everything and family takes funding. Hence, the importance of hiring the right person. But, how do you know if an advisor is ethical and has your best interest at heart? If you can’t meet with my wife for a little due diligence, these tips may help.

  • BrokerCheck, is a repository of records for registered individuals that contains history of their troubles or lack thereof.
  • Google the potential advisor – you’d be surprised.
  • Continue to ask questions throughout the relationship 
  • Never do anything you don’t understand. Ever.

Ask questions. Lots.

  • What licenses do you hold?
  • What custodians do you work with?
  • How do you charge clients?
  • What are your fees?
  • What is your investment philosophy?
  • Do you manage assets in-house, or is it outsourced?
  • What are your disclosed conflicts of interest?
  • What is the liquidity of recommended investments?
  • Can you provide cash flow modeling?
  • Do you provide written plans if requested?
  • How will we communicate?
  • How often will we meet face to face?
  • Are you an ensemble team or a solo practitioner?
  • How many clients do you have?

I’m not meant to be everyone’s advisor, and not everyone is meant to be my client. That is a fact. There are good reasons for that, and they’re not nefarious ones. Any good advisor should tell you the same. Being ethical and putting the client’s needs first are the minimum requirements you should expect and accept.  

There were lots of good, qualified candidates out there, but I did my due diligence and married the right girl. Do your due diligence, and you’ll have a better experience too.

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YOUR 401(K) OPTIONS AFTER JOB LOSS OR EMPLOYMENT CHANGES

Sadly, the headline article in the Wall Street Journal reads “Decade of Job Gains Erased in April.” The article went on to say the April unemployment numbers hit a record 14.7% and payroll numbers dropped by 20.5 million workers. No one knows for sure, but unemployment estimates during the Great Depression are around 25%. I’ve not seen any commentary that would suggest we would match the tragedy of the 1930s, but there’s no certainty. We can all hope that the numbers are at a peak, and as the country begins to reopen, more Americans will return to work. It’s a difficult time for everyone and undoubtedly compounded for those that are furloughed or have lost their jobs. 

With so many issues to address during this most unusual time, tending to your 401(k) may not be a priority. When I initially meet with clients more often than not, I discover they have a trail of 401(k) assets strewn across multiple employer plans. I don’t mean to imply that it’s inherently bad if this is the case. I do find some clients have been very diligent in keeping up with multiple accounts. But I also find that many times they’ve been neglected and are not positioned to best represent the risk budget of the client or the current economic environment. Whether you’re an employment victim of COVID-19 or maybe you’ve had a robust career and have changed employers multiple times, you should take the time to evaluate your options.

401(k) Options After Job Loss or Changes

When employment terminates, employees are no longer eligible to contribute to the retirement plan. While you aren’t required to close your account, you do have options.  

  1. Cash it out
  2. Leave it in the old plan
  3. Transfer it into the new plan (if you’re in a new plan and they allow transfers into the plan) 
  4. Roll it into an IRA Rollover account. 

I do have strong words of caution for the first option. Cashing out your plan may result in substantial taxes due.  Keep in mind your contributions have been made pre-tax, and distributions will be taxed as ordinary income. You may also be subject to early withdrawal penalties.  

Determining what to do may not be as simple as you think. Or it may be as simple as, “I want all of my assets under one roof.” There are many variables to consider; the biggest being everyone is a unique individual, and there isn’t a general answer that fits everyone. I encourage you to champion your cause (assets) and take control. That may mean meeting with someone like me to see how this best fits your overall financial plan. Maybe you don’t feel comfortable deciding on your own; perhaps you don’t have the time to dedicate appropriately; or reasonably so, you don’t want to do it yourself—all good reasons to schedule a visit.

That said, let’s look at the pros and cons of the remaining three options.

Leave 401(k) Assets in Your Former Employer’s Plan

Advantages

  • Investment plan choices may include low-cost, institutional-class products
  • Investments remain tax-deferred until withdrawal
  • May be able to take loans against your account
  • May not have to take any action or complete additional paperwork
  • May be able to take penalty-free withdrawals if you left your old employer between age 55 and 59
  • Retirement plan balances may be protected from creditors and legal judgments under federal law
  • May be able to roll over to a future employer’s plan later
  • Access to investor education, guidance and planning provided to plan participants
  • Total costs may be lower than other alternatives
  • A plan fiduciary selected investment choices on your plan menu 

Disadvantages

  • Investment choices would be limited to those in the plan
  • Former employer may pass certain plan administration or recordkeeping fees through to you
  • Even though you still participate in the plan, you would not be able to contribute any new funds
  • Managing investments among multiple accounts can be a lot of work

Roll over 401(k) Assets into a New Employer’s Plan

Advantages

  • Total costs may be lower than other alternatives
  • Investments remain tax-deferred until withdrawal
  • May be able to take penalty-free withdrawals if you leave your new employer between age 55 and 59
  • Retirement plan balances may be protected from creditors and legal judgments under federal law
  • Plan investment choices may include low-cost, institutional-class products
  • May have access to investor education, guidance, and planning that your new employer provides to plan participants
  • A plan fiduciary selected investment choices on your plan menu
  • If you roll over to a new employer’s plan, you may not have to take required minimum distributions (RMDs) if you decide to keep working

Disadvantages

  • Investment choices would be limited to those in the plan
  • New employer may pass certain plan administration or record keeping fees through to you
  • May be required to complete paperwork to have your assets moved over
  • If you hold appreciated employer stock in your former employer’s plan account, there may be tax consequences. You should consult with a tax advisor

Roll over Your Old 401(k) Into an IRA Rollover

Advantages

  • Assets are managed by a financial professional
  • Investments remain tax-deferred until withdrawal
  • Access to a wide range of investments, such as mutual funds, ETFs, stocks, bonds, and options 
  • Access to a wide range of tools, resources, and services
  • May have the flexibility to convert to a Roth IRA
  • May still have the option to move assets to a future employer’s plan later
  • May be able to take penalty-free withdrawals before age 59½ in special circumstances (such as higher education expenses, health insurance premiums or first-time home purchase)

Disadvantages

  • Not able to take a loan against your account
  • Any outstanding plan loan balances need to be repaid before rolling over or you may incur income taxes and potentially a 10% tax penalty
  • Investment activity may incur trading-related expenses, including commissions
  • May not have access to the same investments in an IRA that you had in your plan
  • The level of protection from creditors for assets in an IRA is lower than in a plan
  • If you hold appreciated employer stock in your former employer’s plan account, there may be tax consequences. You should consult with a tax advisor

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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Financial Updates | May 2020

What a difference a month makes. Global equity markets (MSCI All Country World Index) have rallied by 27% from their March lows. Last month we recommended investors stay invested in equities and not to sell at the bottom.

April’s dramatic turnaround has not altered our positive view of equities on a 12- to 24-month basis, especially relative to government bonds. However, the odds of near-term profit-taking is significant, which could lead to a renewed market correction.

Risk assets have rallied thanks to a healthy dose of economic stimulus and mounting evidence that the number of new COVID-19 cases has peaked. Unfortunately, the odds of a second wave of infections remain high. In the absence of a vaccine or effective treatment, only mass testing can keep the virus at bay.

Such testing will become available, but probably not for a few more months. Meanwhile, the global economy remains depressed. As earnings estimates are revised lower, stocks could give up some of their recent gains.

The Economy Is In Freefall

The global economy is on track to suffer its worst contraction since the 1930s. However, the combination of aggressive monetary and fiscal stimulus will prevent a rising wave of defaults from swelling to a crippling tsunami that permanently curtails household income. Given that banks and households have stronger balance sheets than in 2008, when governments ease lockdowns, the economy will recover quicker than it did following the Global Financial Crisis (GFC).

The economic lockdowns and the collapse in consumer confidence continue to take their toll on the U.S. and global economies. The eventual end of the stay-at-home orders and the progressive re-opening of the economy will halt this trend. The rapid monetary and fiscal easing worldwide will allow growth to recover smartly in the second half of the year, but only after authorities loosen extreme social distancing measures.  

First-quarter U.S. growth is already as weak as it was at the depth of the recession that followed the GFC. The second quarter will be even worse.

U.S. industrial production is falling at a 21% quarterly annualized rate and the weakness in the Purchaser Manager’s Index (PMI) manufacturing survey warns that the worst is yet to come. In March, retail sales contracted by 8.7% compared with February, which was the poorest reading on record, and year-on-year comparisons will only deteriorate further. Annual Gross Domestic Product (GDP) growth could fall below -11% next quarter with both the industrial and consumer sectors in shock, according to the New York Fed Weekly Economic Index.

The International Monetary Fund (IMF) expects the recession to eclipse the recession that followed the GFC. Under the IMF’s base case, the resulting output loss will total $9 trillion in the coming 3 years.

The IMF’s forecast indicates that growth will suffer substantial downside relative to its baseline scenario if the second wave is strong and forces renewed lockdowns. In this scenario, the current package of stimulus must be increased even further to avoid a depression-like outcome.

If a second wave of infections forces renewed lockdowns in the fall, then 2020 growth could be even lower, and this would be very negative for equity markets.

The Good News

The good news is the economy will recover quicker than it did following the GFC.  The deep recession engulfing the world should not evolve into a prolonged depression because banks and household balance sheets are in a better shape than in 2008.

While the recovery will be chaotic, the economy will not remain as depressed for as long as it stayed after 2008, which will allow nominal GDP to recover faster than after the GFC.

Consumers are also in better shape than in 2008. Last December, U.S. household debt stood at 99.7% of disposable income compared with a peak of 136% in 2008. More importantly, financial obligations represented only 15.1% of disposable income, a near-record low.

As long as governments help households weather the current period of temporary unemployment, consumer bankruptcies should remain manageable. The collapse in the consumption of durable goods (for example cars) has created pent-up demand, but not a permanent downshift in the demand curve.

Investment Implications

Despite short-term risks, we continue to favor equities on a 12- to 24-month investment horizon, especially in an environment where a second wave of lockdown can be avoided.

Stock valuations have deteriorated, but they remain broadly attractive. While multiples are not particularly cheap, the equity risk premium remains very high. In other words, stocks are attractive because bond yields are low. 

Low inflation for the next 18 months will allow monetary conditions to stay extremely accommodative. Growth will recover in the second half of 2020, so the window to own risk assets remains fully open if we can avoid a second wave of complete lockdowns. Ample market liquidity also continues to underpin equity prices.

The Structural Outlook For Inflation… And Bond Yields

Looking further out, the outlook for inflation will depend on whether the structural forces that have suppressed the rise in consumer prices over the past few decades intensify or weaken.

On the one hand, it is possible that the pandemic will cast a shadow over consumer and business sentiment for years to come. If households and firms restrain spending, this would exacerbate deflationary pressures. Likewise, if governments tighten fiscal policy in order to pay off the debts incurred during the pandemic, this could weigh on growth.

On the other hand, high government debt levels may increase the political pressure on central banks to keep rates low, even once the labour market recovers. This could eventually lead to economic overheating in two-to-three years.

A partial roll back in globalization could also cause consumer prices to rise. Global trade was already stagnant even before the trade war flared up. The pandemic may further inflame nationalist sentiment.

On balance, we suspect that inflation will rise more than expected over the long haul. This is not a particularly high bar to clear. Investors currently expect US inflation to average only 1.2% over the next decade based on Treasury Inflated Protected Securities (TIPS) break even yields. Market-based inflation expectations are even more subdued in most other western economies.

If inflation does surprise to the upside, long-term bond yields are likely to increase by more than expected. Therefore, government bonds offer an increasingly poor cyclical risk-reward ratio. However, investment grade credit, emerging market debt and private credit might offer interesting opportunities in the next few years.

Bottom Line

We think the coming months will remain volatile and a negative development in the pandemic trajectory could set off another equity market correction.

However, for long-term investors there are opportunities to add to their risk assets in both equities and fixed income.

DISCLAIMER: The views expressed in this economic update are those of the author and do not necessarily reflect those of BFT.  This update contains “forward-looking statements” that relate to future events, including future economic performance and plans. These forward-looking statements can be identified by the use of such words as “believe,” “think,” “intend,” “may,” “will,” “should,” ”expect,” ”anticipate,” “estimate,” or “could,” or variations of these terms or the use of other comparable terms. There are certain risks and uncertainties that could cause actual results to differ from those predicted in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this update.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value. The Nasdaq Composite Index is an unmanaged group of securities representative of the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.

The MSCI World is a market cap weighted stock market index of 1,644 stocks from companies throughout the world. The components can be found here. It is maintained by MSCI, formerly Morgan Stanley Capital International, and is used as a common benchmark for ‘world’ or ‘global’ stock funds intended to represent a broad cross-section of global markets.

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Covid-19 Common Questions About the Market & Investments vLog

On April 2nd we held a webinar to address some of the questions posed by BFT Financial customers, as well as give an overview of the current market landscape. Below is a condensed version of the discussion with Stephen Tally, BFT CEO and Chief Compliance Officer. Please note, the information given reflects what was known at the time. If you would like to get the latest news and updates, please subscribe to our newsletter here.

Please feel free to also listen and watch the video version (run time of 36 minutes). 

Skip to a specific question and answer section
WHAT’S THE CURRENT LANDSCAPE?
IS BFT OKAY?
WHAT’S THE IMPACT ON MY PORTFOLIO?
SHOULD I SELL AND MOVE TO CASH?
SHOULD WE BE DOING ANYTHING RIGHT NOW?
SHOULD WE BE BUYING STOCKS WHILE THEY’RE DOWN?
IS THIS GOING TO BE THE SAME AS 2008 OR IS THIS DIFFERENT?
HOW LONG IS THIS GOING TO LAST?
THE FEDERAL RESERVE IS TAKING ACTION. WHAT DOES THAT MEAN?

WHAT’S THE CURRENT LANDSCAPE?

The Virus

We know now that the virus is highly transmissible.  Fortunately, we know that the mortality rate is lower than SARS, MERS and H1N1 and that the most affected are the elderly and the compromised. We’ve seen COVID 19 move from China to all parts of the world in a matter or weeks. This past week the US became the highest reported country and it’s escalated to crisis levels in New York from a care availability standpoint.  New Orleans sadly may follow. But there is good news. China has seen cases drop over the last several weeks and that, for now, appears to be the result of quarantining. The numbers in Singapore, Hong Kong and South Korea support that. So, while we’re behind in the lifecycle of the situation, we have good news and evidence to draw from.

The Stock Market 

This has been the most rapid market decline ever. It took 6 trading sessions to drop 10%  and only 16 more to drop to 30%. We’ve recovered from the lows but have a lot of ground to regain.  The thing to keep in mind is, if you go back to January 31 and take a market assessment, you’d say the economy is strong and prices are a bit elevated but within a range that’s not alarming.  What has changed is clarity. The virus appeared and that caused a transitory shock to the stock market. It seems that the market reacts better to bad news than the unknown, which makes sense. You can model bad news and price in risk and future earnings. It’s difficult to model the unknown.

Earnings and Employment

What we do know now is that earnings will drop dramatically for Q2 and Q3 before they gather upward momentum and unemployment will increase as dramatically. 

Gauging how far earnings will fall is tough. One economic model that I’ve seen estimate as much as a 15% decline in the S&P500’s earnings before beginning to normalize at the end of the year. That will have a negative effect on GDP. Keep in mind, not all earnings recessions are accompanied by an economic recession. That’s the good news. And, once the clouds break the market should start to price in a virus free run rate for earnings. That puts us back on an upward trajectory again.

Employment in the short term will be rough. Business closures are translating into lost jobs.  Unemployment may hit 6% or worse by mid-year. No question this is a concern that’s been priced into the market. I have two positive comments here. First, we’ll be coming off a very low unemployment rate. In February it was 3.5%. As reference, the lowest in the last 70 years was 2.9% in January of 1953. Second, as the virus subsides or we develop a treatment, demand will pick up and business will need to rehire.  

IS BFT OKAY?

Yes, we’ve well capitalized and most importantly we’re all safe.

Our structure builds in a safety net for you. We work with three big, great custodians, Schwab, Fidelity and TD Ameritrade. Our client’s assets are held at the custodian meaning we don’t have your cash or holdings on our register. That’s an added layer of security. If something terrible were to happen to us our custodians would be right there to help you.  

WHAT’S THE IMPACT ON MY PORTFOLIO?

If your portfolio doesn’t look like the stock market it shouldn’t behave like the stock market.  Meaning, if you have an allocation of equities and bonds your risk exposure is reduced. That said, there hasn’t been any place to hide.

SHOULD I SELL AND MOVE TO CASH?

If you participate in the downside don’t de-risk at the bottom. Be in a position to participate in the recovery. There are endless charts that illustrate the impact of poor investment decisions, namely selling low and repurchasing higher and the impact of missing the three best market days of the year. What you’re really saying is “I know that the market is going lower and I also know where that bottom will be.” The first part of the trade is the easy one to make, sell. The second, buy, is terribly hard.

SHOULD WE BE DOING ANYTHING RIGHT NOW?

From a portfolio perspective, the answer is most likely no and be patient.  We’ve already put in the research and effort to build a solid investment portfolio and we model for good markets and bad markets.

What you can and should be doing is:

  • Reduce your trading.  When volatility is up it’s easy to get whipsawed in a trade. If you must trade, make sure there is enough liquidity in your trade.
  • Review your debt load and interest rates on your debt.  It may be a great time to refinance your home.
  • Review your cash flow-If you’re in retirement can you lower any withdrawals?  Try to not sell securities to generate cash. 

SHOULD WE BE BUYING STOCKS WHILE THEY’RE DOWN?

I like the thought process but be careful. If you do have cash to invest this will most likely be a good opportunity. But I’d advise to do your homework and not be in a rush. We may be at a bottom or we may be near a bottom. My preference in a situation like this is it’s better to be a little late than a little early.

Ask yourself: 

  •  “Would I have bought this 12 months ago?”   
  • “Am I only buying this because it’s depressed?”  

That’s speculation and it may or may not work out.  Stocks can be priced low for a reason and there needs to be a catalyst for them to reflate.  

There are plenty of good deals out there and making bets on a single stock or sector probably aren’t necessary for future gains.  

Also, be aware that things will most likely change once this has passed. So, there are a lot of questions to ask. How will business be transacted once we’ve become accustomed to virtual interactions?  What solutions did we adopt and are they likely to stay in place? Business will resume once we get the all clear but it may not look completely the same.

IS THIS GOING TO BE THE SAME AS 2008 OR IS THIS DIFFERENT?

I don’t think so. We don’t have the baggage like we did in 2008. Bad debt, housing market in shambles, banks with loads of bad assets on the books, failed investment banks; all that is absent.  

We also have better tools and regulations in place. I’m sure you’ve all heard “limit down and limit up.” In 2008 it was curbs and market halts. Limits are used to ensure proper trading and liquidity in trading. We’ve seen record volume and the processing has been very good.  

Banks are much more capitalized.

You and I have less debt and more in savings than ever before.

And to my earlier point, the market didn’t have a fundamental problem two months ago.  I can’t say we’ll pick up right where we left off but once we get past quarantining a great deal of demand will pick up and employment should follow suit.

HOW LONG IS THIS GOING TO LAST?

I wish I had an answer, but I don’t. If we follow the quarantine that will be helpful.  But this one is up to the scientists. Fortunately for us, the world’s best is working in concert.

I KEEP HEARING THE FEDERAL RESERVE IS TAKING ACTION. WHAT DOES THAT MEAN?

This is an “at all cost” initiative for every country.  

Monetary Policy

The Fed has been all in from day one. They were ridiculed at first for attempting to fight a virus with a rate cut while in reality they were signaling their commitment.  

  • Cut the overnight rate to zero
  • Bond buy backs of treasuries $700 billion, mortgage backed $200 billion and first time ever some corporate bonds
  • This puts more money in circulation and adds much needed liquidity
  • Back stopping prime money market funds

Read the most recent updates on the Federal Reserve responses to COVID-19. 

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