PFA Updates

Mar 20, 2020

Happy Spring everyone!  It's amazing how life has changed in such a short time. Just 30 days ago the stock market peaked at an all-time record high and the economy appeared to be on pace for another good year. Enter Covid-19. It feels like we have been in this "fight" for months, not just 30 days in the US. Panic and fear are ruling the day because there is so much uncertainty. Stock markets do not like uncertainty - so volatility is the result. We understand the concern in our clients' voices; we are doing our best to be a calming voice and to answer all of your questions, even the tough ones. Please do not take any of my comments as downplaying our current situation...it is real.  I am trying to offer another perspective.

In my opinion, we are experiencing a mix of emotions similar to what we saw following 9/11 and the Great Recession of 2008-2009. Regarding 9/11, the fear was "when is it safe to go out again?" It took a little time, but after a while, we went to the grocery store, we went to work, we went for a walk in the park and life got back to normal. This time might take a little longer because we are under government directed closures. The decisions, I am sure, were made in the spirit of good for all. This does not take away the heartbreak for all the restaurants, bars, and small businesses that have closed - and all the employees who are now unemployed and worried about paying rent and providing the simplest necessities of life. It's sad, but we have to hope that this will all pass sooner than later so we can get back to a normal life. What did the stock market do following 9/11 and the ensuing 13% drop in market values in less than a week (don't forget the markets were closed by government direction for 5 trading days)? It fully recovered and moved on to new highs less than 3 months later (stockcharts.com). The speed of this economic recovery will be controlled by how soon our government agencies allow us to get back to a more normal lifestyle. As the saying goes, "In the US, when the going gets tough, Americans go shopping," (David Kelly, JPMorgan) which is very good for economic recovery.

Let's talk about the Great Recession of 2008-2009. This is still fresh in everyone's memory and the question looming at that time was "will the stock market go to zero and all my money be lost?" What did happen is the stock market dropped 57% over an 18-month period and there was absolute fear that even banks were going to close. Economically, it was a very different time than we are in now. Michelle Seitz of Russell Investments wrote on 3/19/20, "The root cause is different and important: the crisis of 2008-2009 was a financial crisis stemming from significant structural impairments (banking/subprime mortgages) ...this is a global health crisis.  It's causing financial market upheaval given the uncertainty of its impact on the global economy. Thankfully, our financial system is far healthier today than in 2008." Jim Dudick of Allianz Global Investors stated in a conference call yesterday, "Government and central bank responses have been massive; significantly larger than in 2008 and 2009. They are working to keep creditors whole and liquidity available, and relaxing rules so banks can loan quickly to small businesses impacted by the slowdown." In the Great Recession, it took a few years for the stock market and economy to fully recover, but both did, and went on to record highs again as it has 100% of the time in history (JPMorgan Guide to Markets 13).  This is why we are not recommending that clients sell any of their stock positions currently.  Nancy Lazar, head of Economic Research at Thornburg wrote on 3/9/20, "I believe we will have a V-shaped recovery in the second half of the year." As counterintuitive as it sounds, we should be adding money to stocks.

The other discussion I have had with clients is about the stocks we own within the mutual funds and ETF's in most of our models. In the top 25 holdings we name companies like Amazon, Microsoft, Facebook, Johnson & Johnson, Visa, Nestle, Apple, Pfizer, Intel, Coca Cola, Bank of America, etc (Morningstar 3/19/20). These are well known "blue chip" companies...ones that have weathered an economic slowdown before. We point out to clients in our reviews that typically, we focus 70% or more of their stock positions in large, blue chip companies. We do not own the small, local businesses that have closed because of government shutdown. Yes, our models own stocks and we do have risk in the markets, but we like what we own currently and we are not recommending any changes. We also increased money market holdings and bond holdings back in January so we have investments we can liquidate, if clients need money, that have positive earnings in the last twelve months (Morningstar 2/29/20). We hope clients find some confidence in our strategies, and in the wisdom of holding for the long term.

I close with a quote from Bob Brinker of the Marketimer, "Based on our view, this is a temporary event, unlikely to last beyond one or two quarters in the US. When the inflection point on the spread of Covid-19 occurs in the US, and investors can see to the other side of the pandemic's impact on the economy, we expect the stock market to improve very substantially."  Also, attached is an interesting chart from Thornburg Investors, which shows how important it is to stay invested so you do not miss the early "best" up days in the market recovery. If we get a V-shaped recovery like Nancy Lazar predicts, you don't want to miss any of the days. It does not feel too good right now, but this too shall pass. Keep the faith my friends. Feel free to contact us if you have any questions about the markets or your investments. We are here for you. Be safe and healthy.

Stay Invested - Chart