Friday, April 17, 2020
The market convulsions of the past two months have been unusual by any standard. Only twice before, in 1929 and 1987, have investors experienced comparable volatility. From mid-February’s record highs to the lows of late March, global equity markets fell 30%-40%. Oil plunged to its lowest price in over three decades. By then, three years of gains—the entire upturn of the Trump presidency—had been wiped out. Reminiscent of the 2008 financial crisis, normally sedate asset classes like municipal bonds, money-market funds, and even Treasuries, had gut-wrenching swings as investors scrambled to raise cash. The rebound since the bottom on March 23 has been almost as swift, with the S&P 500 Index advancing 28% as of this writing.
COVID-19: A 2020 Global Reset
These violent market movements reflect the unique nature of this crisis. Bear markets and recessions usually have origins in our financial system. The source of trouble today is a global pandemic affecting every person on earth and every part of the global economy. In a period of weeks, close to three billion people have come under some form of lockdown. Over twenty-two million Americans have lost their jobs since March 13. The United States, tragically slow in its initial response to the outbreak, has become the epicenter of the pandemic, outstripping all other nations in infections and deaths.
The emergency remedies adopted so far represent a social and financial experiment on a scale never before undertaken. Over $2 trillion in loans and grants to business and unemployed workers have passed into law and more will follow. The Federal Reserve has simultaneously undertaken the greatest injection of cash into the financial system in history.
At this juncture, markets seem somewhat reassured that government responses, both fiscal and monetary, are adequate to maintain the economy in a state of suspended animation until businesses can begin to reopen. Unlike in 2008, our financial system enters this crisis in much stronger condition. In addition, infection rates in hot spots like New York appear to be peaking, while China—the first country affected by COVID-19 and the first to declare victory—is already in the process of resuscitating industrial production. Goldman Sachs this week announced that the bottom of the market is “in” and investors should prepare for recovery.
We view such pronouncements with caution. Uncertainty about the virus, and about the depth and length of the economic slowdown, will linger for months. Much will depend on the seasonality of the virus, how quickly testing is available, whether some degree of immunity is possible and how soon a vaccine is available. To be sure, healing the economy will take time, as will bringing millions of laid-off employees back to work.
With the initial phase of panic selling behind us, a more measured assessment of global economic prospects is now taking place. Further market adjustments should be based on the ongoing trajectory of the pandemic. A vaccine will be found, and by 2021 the world should be well on the way to recovery, but we expect a bumpy road ahead. Needless to say, the long-term consequences of current policy decisions will be with us for years to come.
Luckily for investors, it’s not necessary to be an economist or immunologist to plot a course through this crisis. As we’ve mentioned in previous letters, timing a market as volatile as this is a next-to-impossible task. Making large-scale shifts in asset allocation based on current news is more likely, in our experience, to hurt investment returns than to help. In an environment of uncertainty, the best course of action is to focus on areas where we have an element of control: harvesting tax losses to offset future gains, rebalancing portfolios when equities fall below target levels, and using available cash to buy securities that are compellingly cheap.
For investors with balanced portfolios, market losses in this crisis remain significantly below the worst levels of 2008. While it’s never comfortable to see one’s holdings drop in value, we’re confident the damage caused by COVID-19 will prove temporary. The economic disruption we’re witnessing has been unparalleled in its swiftness and severity, but the way markets have responded fits an age-old pattern of periodic crisis, followed inevitably by recovery.
Adapting to New Circumstances
Like many of you, we’ve made changes to help stop the virus’s spread and improve safety, including working remotely and holding client meetings by phone or video call. Our portfolio management and operating systems are cloud-based and we have encrypted connectivity to our office network, which has allowed us to manage the transition with minimal disruption and with full attention to cybersecurity.
We are also introducing a few changes in how we report to you on quarterly portfolio performance and our outlook, which we have long delivered by mail. The most immediate change that most clients will notice is this letter itself, which we are sending by email. More importantly, we are introducing an online
in order to provide secure access to your reports. The portal will offer a convenient way to share documents and other information, and provide a more environmentally sustainable delivery option than mail. Our hope is that you will enjoy this faster access to information, with significantly greater security (and less paper.) We will follow up separately with more information and are available any time to answer questions.
We hope you and your loved ones are well and that you stay safe through this challenging time. For our older Santa Fe clients who may be concerned about venturing out, our LongView staff make periodic grocery runs for our own families, and we would be happy to pick up supplies and drop them off if you have a need. Just let us know. And for those of you looking to support local organizations, we mentioned the Santa Fe Food Depot and the Santa Fe Community Foundation in a previous email. We would add to these, Many Mothers
, which offers support to under-served Santa Fe mothers and their newborn babies.
All of us at LongView wish you well and thank you as always for your trust.
David, Harlan, Maria, Doug, and Charlene