Executive Summary
- The CoronaVirus has halted consumers as large events are being cancelled, people are staying home from social functions and sick days are being used.
- The S&P 500 is off its high.
- Federal Reserve has cut rates and have announced a bond repo for T bills.
- Federal Government is looking to cut payroll taxes until the end of the year among other stimulus.
- Federal Government has banned travel to/from Europe.
- Xi visited the coronavirus epicenter Wuhan and gave it the all clear to go back to work.
- US GDP is likely to suffer from the lack of consumer spending, potentially putting us in to a recession.
- It is too early to tell what the effects of the virus are and what the market should be priced at.
What to do now?
Windward has always stressed the need to plan for bad markets while you are in a good market. This allows us to not have to react in a downturn and instead be proactive, put cash to work and buy during downturns. We recommend resisting the urge to sell which makes temporary losses permanent. Instead, be long term greedy. This does not mean complacently sitting on the sideline, but rather choosing to make all of these decisions in good market environments. Remember, on average, every year for the past 30+ years we have an intra-year decline of at least -13% . Bear markets are typically relatively short and timing the sell and the buy perfectly is nearly impossible.
Consumer spending drives about 70% of the Gross Domestic Product (GDP- our measurement of growth) in the United States. The consumer has supported the lifeline of this bull market for a very long time now. Couple that with accommodative interest rates and nearly full employment, we had a good looking economy going into January. Even through February great economic reports and analytics were being reported.
That is all coming to a halt as people are staying home, having sick days and refraining from large gatherings. Without the consumer out buying things at the mall, traveling, going to Disney World or going to a movie, the US economy is likely going to fall into a recession soon, if not already. Not because the corporate world isn’t working, but because people aren’t buying their goods right now.
THIS WILL END, We will get back to normal, it’s just a matter of how long. This 2020 market environment is likely a cyclical (even ‘black swan’) event that will have an end date, and not entirely a systemic issue (like the financial crisis of 2008) that is like a cancer killing the underpinnings of the economy in traumatic ways. A cyclical event will, instead, slow us down and the unknown is the extent of the slowdown for length of time and growth. Having allocations to hedges and bonds for the very reason of thwarting off the full effect of the stock market volatility is key to maneuvering through market volatility.
Remember, losses on paper are temporary until sold. Downturns result in rebounds which is why being IN the market is so critical. With every decision to sell, requires a precise decision of when to buy back in or you will miss the most beneficial of rebound days. If you look at history of bear markets (markets down more than 20% from their highs) the number of days in that bear market are far fewer than the number of days on average in a bull market (markets with good growth). So while this market is reacting swiftly to the downside, there is likely a bottom to be met. It may be possible that an intra-term bottom around 30% down from the highs could be a likely floor. That doesn’t mean we stay there for 2020, that is just an intra-year downturn that is part of long term investing.
Steps clients should take is to:
- Assess their thoughts/feelings surrounding this market and apply them to their current portfolio. Asset allocations should be massaged per any risk tolerance adjustment – after the market heals. Keep diversified and add hedging strategies where they are recommended. Proactive trading should be on the buy side.
- Understand the goals and strategies of the portfolio. At Windward, investing is about your future, we continually review portfolios. Accounts are positioned for volatile times and the focus is on long-term growth over inflation and taxes. We look for ways to be tax efficient, while looking for buying opportunities.
- Never invest more that you are willing to risk or that you will need in the next two years.
- Proactively put long-term allocated cash to work.
The Virus
Isn’t it just like the flu? We’ll explain why it’s a bit different in the detailed section. This is not a story about how each individual should fear a deathly virus and panic, it’s more about slowing the spread of the virus to reduce the strain on hospitals and longer term effects on our economy due to sick leave and consumers not spending because they are home sick. If we can flatten the curve of the number of cases hitting during a short or longer time frame, it would be beneficial to lengthen that time frame. This allows for our healthcare system to maintain their systems, tend to all of the sick and not exist beyond their own capacity. If we have a plethora of sick people hitting the healthcare system at once, our healthcare providers will not be able to handle it.
This is not taking the deaths from the virus lightly by any means but in comparison with other illnesses, this affects most people of elderly age as well as those with underlying health ailments. Slowing the spread can make it more manageable for healthcare and consumer activity – which is the foundation of 70% of the growth of the economy.
Ways to do this are through massive testing, good hygiene and staying home. South Korea has been incredibly impressive on how they get ahead of this virus by testing everyone. They tested, they responded and they are in better shape than any other country. Italy, has not done so well. It got out of hand and now they are having to take some very dramatic steps by basically shutting down all social functions. China is the main source of the virus and has not been forthcoming of their actual numbers. This is troublesome because it keeps the US out of the look not knowing what the real count of the number of people dying vs the number of people sick. Right now, we think the denominator of that ratio is incredibly low which results in a falsely high death rate. The US death rate is much lower so far. The US needs to test, and we need to test as many people as possible. It’s the only way to get a handle on what the statistics look like, just like South Korea.
At this point it’s less of a point of the tally of people who contract the virus, but it’s more about the fear of getting it. Fear has created a contagion effect where normalcy is out the window. People are not going to large gatherings (probably wise to slow the virus), they aren’t going shopping, attending sporting events and business travel to conferences are all but halted. This behavior will kill the consumer. The key when you do go out is to wash your hands. This virus is said to be transferred very easily and washing hands is key to reducing transmission.
What’s Next?
There is an end to this, we just don’t know when yet. The good news is this is not a result of a systemic issue like in 2008 in the financial crisis where financial surprises kept coming out of the woodwork and causing precipitated downturns. This is more like a black swan event that is having a quick and strong impact on our economy because it is taking the consumer out of the workforce and from spending money on our economy’s goods and services. The fundamentals of many companies will likely remain intact but with an intense growth slowdown for the foreseeable future. That anticipated slowdown is what makes values of stocks go down. It will take some in depth analysis to make sure balance sheets and forecasts are steady and reliable after this starts to blow over. Once we have more information on containment and slowdown of infection, we will likely have a rebound and rebounds can happen very quickly.
Sincerely, Windward Wealth Strategies
*The information provided is based on information provided by you and is only an estimate based on that information. Windward Wealth Strategies does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor. A qualified tax professional or independent legal counsel should review the tax implications of any securities transaction. This material is not intended to replace the advice of a qualified attorney, tax advisor, financial advisor or insurance agent. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional advisor.
