Mar 20, 2020 Commentary – Coronavirus 3.19.20

Our everyday lives have changed dramatically over the last few weeks as we work together to minimize the impact of the COVID-19 pandemic. We know these efforts are necessary, but they also have come at a cost.

Stocks have entered a bear market and a global recession seems almost certain as people stay home and activity slows considerably, hurting many parts of the economy. Big stock market moves, both up and down, have become the norm. The yield on the 10- year US Treasury fell to an all-time low, making borrowing cheaper—but challenging savers. And the VIX, a common measure of market volatility, recently reached an all-time high, surpassing its prior peak which occurred during the financial crisis. In short, this has been a challenging period for many long-term investors, and you’re asking what’s next and what to do.

While we remain committed to our investment approach, we acknowledge that we are in an unprecedented time. We have managed portfolios through other markets, but this is the first bear market driven by a global pandemic. In these periods of market turmoil, we ask ourselves, “Is this a crisis that can be resolved and is there an end?” In this case, we think the answer to both questions is “Yes.”

The virus has disrupted the likelihood of modest economic acceleration in the first half of 2020 that we had expected. However, we also believe that given the level of global liquidity and likely policy response, there is a good chance that economic acceleration is only delayed rather than canceled. On the other side of the virus outbreak could be a significant rebound in activity.

We’ve been encouraged by the actions of global central banks and governments to support their economies and stock markets through this challenging period. In the United States, the Federal Reserve (Fed) lowered its policy rate by a full percentage point, the first move that large since the savings and loan crisis, bringing the rate to a target range of 0–0.25%. The full impact of lower rates may have to wait until loan demand picks up, but other Fed actions may provide more immediate support to help financial markets continue to run smoothly, bolster short-term funding, and increase market liquidity.

At the same time, the US government has already passed several measures to support the economy, and it’s currently working on a significant fiscal stimulus bill of at least $750 billion. Discussions are still taking place, but provisions possibly could include paid sick leave, expanded medical testing, unemployment insurance, direct financial support for consumers, and relief for some of the most heavily impacted industries.

We know it’s difficult to keep looking forward with so much uncertainty and so many unanswered questions right now. But as long-term investors, we must maintain a clear vision of our financial goals and our plan for getting there.

Market volatility like we’re experiencing now may provide pockets of opportunity in suitable portfolios. As a recession increasingly is priced into markets, stock market valuations relative to their earnings power and bond yields have become more attractive. As of 3/19/2020, the S&P 500 dividend yield was 2.42% compared to 10-year Treasury yield of 1.12%[i]. Dividend yields are even higher in non-U.S. stock markets. Current uncertainty means taking a careful, measured approach, but for appropriate investors, there may be small ways to consider taking advantage of these potential opportunities.

We may see an economic rebound later this year and into 2021 as the outbreak is contained, businesses reopen, and fiscal and monetary policy support expands. The US economy and corporate America have steered their way through world wars and cold wars, financial crises, and geopolitical events. Through even the most challenging times, markets have found their way back to normalcy, and investors have been able to look to the future. It will be a process, but we’ll get through this too.

 

Looking Forward and Reviewing the Past

We are now in the 6th worse bear market since 1950 and the fastest decline of this magnitude ever, with S&P 500 losses around 30% from the peak reached in February[ii]. We do not know if down 30% is the lows; in fact, it probably isn’t. Assuming the US economy goes into recession, the average bear market has lasted 18 months with average declines of 37%.

The good news is that stock markets are forward-looking. The price action we’ve seen recently is trying to price in the expected impact of the coronavirus, but additional, unexpected good news can drive markets higher from here. In the same vein, unexpected bad news can drive markets lower. We don’t know which we will get, but we are already near the historical average bear market declines.

In the 14 previous bear markets since 1950, it took an average of 20 months from the bear market lows to recover the losses (the current bear market is still active). Taking this a step further, when the economy avoided a recession, the recovery took only 10 months, versus 30 months for a recession[iii].

While we don’t know exactly when the bottom of the decline will be, we are confident the market returns will recover. The US stock market has fully recovered from every historical market panic. Looking from 1929 through today, all past declines of this magnitude have had positive returns over 1, 3 and 5 years[iv].

We know it is easier emotionally to sell after a market decline than it is to buy, a big reason why so many investors have historically underperformed the market. They buy after stocks go up and sell after stocks go down. Instead, we are rebalancing your portfolio to take advantage of the decline in stock prices. We and others don’t know when the market will bottom, but rebalancing after significant moves restores exposure to assets that have underperformed and positions the portfolio for an eventual recovery. We are confident that there are many attractive opportunities today for investing additional long-term capital in the stock market.

 

Road to Recovery Playbook

We want to err on the side of caution before we would overweight equities. A few things we would like to see:

  • Confidence in the timing of a peak in new COVID-19 cases in the United States: Monitored Daily
  • Visibility into the probability and severity of a US recession. Almost there.
  • Markets have priced in a US recession. Already there.
  • Sentiment and technical analysis indicate a limited number of sellers remaining. Getting closer.
  • Will policymakers’ response be enough to restore confidence?  Almost there.

We learned during the Financial Crisis and the Tech Bubble, the worst thing to do in times of crisis and heightened market volatility is to panic and cash out. History also shows that market advances are more frequent, last longer, and have a greater magnitude than market declines.

Trust your plan, stay the course, and be well. And as always, we encourage you to contact us with any questions.  We are working on a series of webinars to help educate and entertain while everyone is at home.  Look for announcements on times and replay information next week.

 

 

 

[i] Sources: Yahoo! Finance, Multpl.com as of 3/19/2020

[ii] Fidelity Viewpoints, 3/19/2020

[iii] LPL Research, CFRA Factset, 3/17/2020. Bear market defined as when S&P 500 closes 20% or more below a 52-week high. For this analysis, we take liberty with this and included 19%.

[iv] A Wealth of Common Sense, Ben Carlson

 

 

IMPORTANT DISCLOSURES

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This newsletter is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced herein is historical in nature and is not an indication of or a guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Your experience may vary according to your individual circumstances and there can be no assurance that LRIA will be able to achieve similar results for all clients in comparable situations or that any particular strategy or investment will prove profitable.   As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore.

 

Stock investing includes numerous specific risks including the fluctuations of dividend, loss of principal, and potential illiquidity of the investment in a falling market. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. This newsletter should not be regarded as a complete analysis of the subjects discussed. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The risks associated with investment-grade corporate bonds are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market’s belief in the stability of the economy. The fast price swings in commodities and currencies can result in significant volatility in an investor’s holdings. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors. For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.

INDEX DEFINITIONS

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

 

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Important Disclosures

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.