Executive Summary
* After witnessing the fastest bear market decline in stock market history from mid-February to late March, markets turned around and had their best month in nearly fifty years in April.
* Two major forces are in a massive tug of war in the US economy and financial markets. On one side, the economy has been placed into a self-imposed, medically induced coma. This has resulted in a massive slowdown in economic activity and an unequalled level of job losses.
* On the other side, an unprecedented level of stimulus and liquidity are being provided by Congress, the Treasury Department and the Federal Reserve Bank. These programs combine to pump more than $6 trillion of stimulus back into the economy.
* We are starting to see some green shoots of economic activity as certain parts of the economy, especially in less medically ravaged states, start the process of a phased in re-opening.
The joint Investment Committee of Horizon and Impel Wealth Management met on the afternoon of May 4th of 2020. To say that there has been a lot going on from a healthcare, viral, economic, and investment standpoint over the last two months would be a gross understatement. The markets reached an all-time high on February 19th, and 21 trading days later, on March 23rd, had dropped nearly 32%. Subsequently, during the month of April, markets have retraced just over half of that downturn. However, this still leaves the S&P 500 down approximately 15% from where it was approximately 10 weeks ago.
We are happy to report that the model portfolios of the joint investment committee have continued to outperform their risk adjusted models over the last one, three, and five years. We had also proactively taken steps with many of our clients in the lead up to all time market highs to sell high and set aside the necessary cash and liquidity to cover systematic withdrawals and required minimum distributions that clients will need for the next two to three years. This gave a buffer during these volatile economic and investment times.
Over the last two months, we have seen major sell offs in the stock market, many areas of the bond market, and subsequently, in the oil market, where prices actually turned negative for the first time in history. There is literally more oil being pumped than there are places to store it, as people are not flying or driving currently. Therefore, the current price of oil has dropped precipitously. While this is beneficial to people who drive automobiles, it is potentially detrimental to the people who work in the oil and gas industry, where we could see additional slowing of production and job loss in the near future.
We know that stock prices are currently caught between two strongly competing forces. On one side of this tug-o-war is multiple trillions of dollars of fiscal and monetary stimulus that has been created, at record bi-partisan speed, by Congress, the Federal Reserve Bank, and the Treasury Department. On the other side of this struggle is a massive collapse in GDP/economic growth, and corporate earnings, as well as soaring job losses. Consumer spending makes up nearly 70% of our economy, and there is concern about how quickly people will be willing to start spending again if their job security and income is uncertain for the foreseeable future. This could lead to drops in discretionary spending on retail sales, travel, eating out, etc. These are things the committee will continue to monitor going forward.
The good news is that we are starting to see some very early green shoots of economic activity rebounding. Anecdotal evidence, as well as real time data reveals an encouraging trend, albeit from a very low baseline. Automobile traffic, TSA check points at airports, smart phone apps that track travel requests, gasoline usage, hotel occupancy and railcar traffic are all up from a month ago. These "high-frequency data points" will give a clearer read on the pulse of the economy as we gradually reopen. We know that in less medically ravaged states, including a large part of the middle of the country, which is less densely populated, the viral outbreak has not been as severe. These states are working hard to start the process of a phased in re-opening. Whether or not the economy can re-open without sparking a surge of new cases, will play a large part in determining how quickly the economy rebounds, and whether this is a U-shaped or L-shaped type recovery.
The adjustments that the joint investment committee had made to the model portfolios leading into period of record volatility, along with proactive rebalancing and tax-loss harvesting, has allowed our clients to weather the storm relatively well. Two of the models of Impel Wealth Management will have two funds each replaced due to perceived opportunities, diversification and risk strategies. However, our overall asset allocation models will remain true to our benchmark weightings. You will see trade confirmations coming through as these changes are implemented.
The committee wants to thank you, our trusted friends and clients, for your faith and confidence as we help guide through this historic time period. Like previous times of dislocation and volatility, Dot.Com, 9/11, Lehman Brothers/AIG, this too shall pass. A free market economy, capitalism, technology and innovation will bring us through to the other side...as it ALWAYS has before. Please feel free to reach out to your advisor if you have questions regarding these notes or your situation. Have a great day!
