Special Market Update | May 5, 2020

To say the least, COVID-19 has been a severe medical, and now economic, storm that has and will result in much human loss and suffering.  No one knows what the future holds for certain, but we remain hopeful overall and choose to focus on what we can control.  At our core, we are your guides and count it an honor to be just that during times such as these.

Here are some concise and relevant updates from us to help frame where we, as a country, are right now, knowing full well how quickly circumstance have and will continue to alter over time:

• In a recent press conference, Federal Reserve Chairman Jerome Powell called the current economic outlook, “highly uncertain,” and expressed concern that we could experience more economic disruption than even a “W” shaped recovery. We agree with his sentiment and as we’ll detail further below, we’re postured for such a view as this going forward.

• The markets have been looking beyond the dire economic data. Households, small businesses, and corporations are focusing on governmental support strategies to carry us through this downturn while the healthcare industry continues to make headway in alleviating the impact of the virus. We are hopeful this will continue to be the case by way of therapeutics as well as the ultimate, longer-term development of a vaccine.
• Over 30 million Americans filed new unemployment claims. Job growth from the last decade has been erased in just a few weeks. We are concerned that this unemployment figure will take a lot longer to remedy than it did to realize.

• Right now, it is impossible to gauge the long-term economic impact of the ‘pause’ taken across the country, much less the recent shock to the oil industry that has yet to experience any snap back from its recent and rather deep downside on pricing.(See chart below for historical context of pricing.) Significant risks to the downside remain. The state-by-state rollbacks of social distancing will probably not bring back economic activity quickly enough to avoid structural damage or prevent bankruptcies at every level. We believe we’ll learn a lot on this front in the next sixty to ninety days.

• Estimates for GDP show historically significant, double-digit contractions through midyear with a negative outcome for 2020 overall. We will keep a close eye on earnings season as well as default rates in the coming weeks/months.

• Central banks and governments have responded with unprecedented stimulus to stabilize credit markets, maintain liquidity and offset demand reduction. We believe this has been one of the primary drivers behind the recent recovery in the equity markets and, as we’ve shared, keeps us postured cautiously for more potential volatility in the near future.

Our Investment Committee respects the complexity of the current situation.  Admittedly, any specific strategy we implement can easily be proven too defensive or perhaps optimistic in hindsight.  This has always been true in varying degrees. For us, the question is how to minimize the potential damage of a recurrence in market weakness, while participating, at least partially, in an abrupt recovery.  No doubt, it is a delicate balance to strike.

As you may be used to hearing from us now, your financial plan leads the way.  It models volatility, recessions and other “black swan” events as a way of preparing us for seasons like this and others when the market turns upside down.  This is not a time to panic but it is a terrific time to plan.  Please take the time to update your plan with us where we can reengage your longer-term goals and reinforce our understanding of how you view ongoing risk.