2020 Q2 Investment Update
The COVID-19 outbreak has led to unprecedented volatility and tremendous declines in wealth, but we have faith that once the pandemic is defeated, the wild swings in the financial markets will subside and prosperity will return. But, what cannot be so easily recovered is the loss of a job, the loss of a business, or, worst of all, the loss of a loved one. While it is our duty to provide timely market insights, please know that now, more than ever, the health and safety of you and your families is at the forefront of our minds.
During the first quarter of this year, we saw the fastest market decline of over 30% in history (22 trading days), ultimately losing -20% overall for the quarter. This was the worst quarter for the S&P 500 since the 4th quarter of 2008, where the market lost -22.56%. The daily volatility was enough to keep investors up at night, where the benchmark index averaged a daily move, in either direction, of more than 4.8%.1 That’s insane! On March 16th, there was a daily loss of -11.98% and then a week later on March 24th, the market was positive +9.38%. We literally saw the market move as much in one day than we typically see in one year. Nothing about the market in the first quarter was normal.
The emergence of the coronavirus as a global pandemic was a “Black Swan” event no one saw coming. Its discovery clouded near-term economic outlook and created unparalleled market turbulence. Investors panicked because of the uncertainty of what lied ahead and as the infection rates went up across the globe, so did the fear in investors’ eyes. The market had investors (obviously) fleeing from equities or risk assets, but they were also leaving their fixed income investments in droves. This caused credit problems to show up shockingly early, threatening to amplify the economic downturn. The US Treasury market, the most liquid in the world, experienced trouble in the second week of March. The Fed responded with two emergency rate cuts, leaving the target range for the federal funds rate at 0-0.25%.2 The Fed restarted large-scale asset purchases (quantitative easing) and then made that unlimited. The Fed has introduced an alphabet soup of credit, liquidity, and funding facilities – and will likely do more to prevent a broad collapse in the credit markets.2 Since this started happening, we have seen some normalcy begin to return to the fixed income markets and our client’s “safe” or more conservative assets are starting to perform the way they are designed to.
Additionally, President Trump signed the CARES Act (The Coronavirus Aid, Relief and Economic Security Act) into law on March 27th. The $2.2 trillion stimulus package is the largest emergency aid package in US history. It was enacted in response to the social, economic, and health crisis created by the COVID-19 pandemic. The CARES Act was 880 pages, so there is no way to try and summarize everything that is included in this bill. But, the core intention of the bill was to provide relief to individuals who have seen an income disruption due to business closures or loss of a job. The stimulus package (phases 1-3) aims to provide over $1 trillion in direct relief, $850 billion in loans, and $150 billion in supplemental support. We expect additional relief, and as of this writing, the Senate and the House just passed an additional $484 billion coronavirus relief bill for small businesses, hospitals and expanded medical testing. President Trump is expected to sign this into law.3
We have always said, “Volatility creates opportunity.” If you have seen any of our weekly webinars, or read the email communication to our clients, we have discussed the rebalancing that we will be completing in our clients’ accounts. Our investment committee has been meeting daily to review each of our clients’ accounts to make a few fund changes to our existing models, which has been happening over the past few weeks.
The goal in reallocating our portfolios is to focus on adding high conviction active strategies. These strategies give the manager flexibility to navigate the market outside of the parameters of a traditional index fund. It is our belief that coming out of this unprecedented time active strategies will be able to outperform a traditional index fund. There are going to be companies that thrive, and companies that fail, and it is important to have managers that have the flexibility to steer away from certain companies.
We also reduced our Emerging Markets and International exposure to favor more U.S. and Global strategies, as we believe the United States is going to be in a position to recover much faster than the rest of the world, post pandemic. The Fed has been able to act swiftly by essentially pumping money into the economy, trying to prevent a longer term recession. We’ve all heard “Don’t fight the Fed,” and do not plan to as we claw our way out of this.
At Vance Wealth, we tend to be on the more optimistic side and see things as “the glass is half full.” Will there be future economic pain? Yes. Will there be additional infections and deaths caused by COVID-19? Unfortunately, yes. But, we know we will get through this and be stronger because of it. We’ve previously discussed the “Roaring 2020’s” and what we think will propel our economy out of this short-term recession (in our opinion) and into the next 10 years of strong economic expansion and innovation. Here is a reminder of the themes4:
While the above mentioned is across the next decade, repercussions from COVID-19 have not all been looked at in a negative light. I know at Vance Wealth, we are all enjoying more time with our families at home. I, for one, am able to experience many “firsts” with my daughter Jocelyn that may previously had been happening at daycare. Let’s use this “extra” time we have to take a step back and focus on what is truly most important to us. Let’s work on our relationships with loved ones, the internal processes of our businesses, or see if you can improve the role within your company. Now is a time to look within, to see if we can make ourselves better, inherently making the world better, one person at a time. Here are some additional “silver linings” from COVID-19 I wanted to highlight:
- Reduction in Crime: “Stay-at-home orders are keeping many potential perpetrators and victims off the streets.” – The Economist
- Wildlife Returning: “Nature’s sudden resurgence are…a ‘silver lining’ to the pandemics manifold horrors.” – The New York Times
- Benefits of Telework: “The coronavirus disruption is demonstrating that digital connectivity, including telework, is a valuable tool.” – LA Times
- Pet Adoptions: “[The outbreak] has led many animal shelters to see a surge of public interest in pet fostering and permanent adoption.” – NPR
If you would like to discuss your long-term financial plan in greater detail, please contact our office to schedule time with one of our financial advisors. If you are not currently a client and would value a second opinion, please contact our office at (888) 775-0950. Now is a better time than ever to look at your current investments and financial plan to make sure they are properly positioned for the future economic recovery.
Jerrod Ferguson & the Vance Wealth Investment Committee
- “CNBC Stock market live Tuesday: Dow drops 410 points, down 23% in 2020, Worst first quarter ever” dated 3/31/2020
- “The Economic Impact” – Scott J. Brown, PhD, Chief Economist Raymond James
- “House passes $484 B coronavirus relief package” – The Hill, Mike Lillis and Juliegrace Brufke
- “Delaware Funds by Macquire SMID Cap Growth” 12/31/2019
Disclosure: Any opinions are those of Jerrod Ferguson and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Keep in mind that individuals cannot invest directly in any index. The S&P is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.