Three Key Points to Consider

We face historic healthcare and economic challenges that demand our overwhelming collective efforts to conquer this threat and set the foundation for economic recovery. Global equity markets continue their roller coaster gyrations due to the uncertainty related to the duration and depth of the economic slowdown caused by COVID-19 contagion.

In the U.S., we still expect positive real economic growth in the first quarter of 2020. However, the strict mitigation approaches required to stem the spread of the Coronavirus will likely lead to a recession. We expect this recession to be short lived when compared to historical financial recessions. Goldman Sachs estimates the upcoming quarter’s economic growth to contract significantly by -5% or potentially more on an annual rate. Conversely, we expect a rebound with accelerated economic growth later in the third quarter and fourth quarter supported by immense fiscal and monetary stimulus (as long as we successfully “Flatten the Curve”, see below). 

An impending recession may sound like a reason to sell equities.  However, in this case it’s not.  Those who try to time this market will likely cause more harm than good. Stocks typically start rising well before a recovery begins, and we do not recommend selling equities at these levels. The points detailed below help illustrate key issues facing investors as they determine how to be positioned in the current environment.

Three Key Points:

1. The “Known Unknowns”: Expect the equity market’s volatile ride to continue as we deal with the “Known Unknowns” referenced in our prior discussions relating to:
   1. how the virus will spread and mortality rates, and better understanding medical progress for vaccines and/or anti-viral medications, and
   2. programs enacted by policy-makers to mitigate the virus spreading and to support the financial system, economy, unemployed, small businesses, and those most impacted by this slowdown.

2. Every Day Matters to Flatten the Curve: Infectious disease experts state that the sooner individuals, organizations, and governments implement strict mitigation actions, then the faster we will come out the other side and flatten the curve of COVID-19 spreading. The other side leads to sustainable economic growth. While it might seem counterintuitive, markets will likely react positively to prompt, severe mitigation restrictions. This could increase investor confidence that people actually understand the crisis’ magnitude and are doing everything possible to “flatten the curve” to buy more time for a vaccine or anti-viral therapies.

3. “We are in the 2^nd Inning”: Announced this past Sunday, the U.S. Federal Reserve lowered interest rates to zero and announced asset purchases for Treasury and Mortgage Backed Securities. This will help support market liquidity. Last week congress proposed short-term measures to deal with unemployment and healthcare issues related to COVID-19. As Treasury Secretary Mnuchin said, “we are in the 2^nd inning”. Expect many more sweeping measures (beyond anything we’ve previously experienced) to limit the healthcare and economic impact. The so-called, helicopter money.

We continue to maintain the discipline of our investment process, which significantly reduced portfolio corporate credit exposure well before the COVID-19 outbreak. Our belief was that investors were insufficiently rewarded for taking on credit risk as spreads tightened. During shorter periods like 2019, these recommendations underperformed those who speculated that credit risk would remain low.  However, we believe our diversified asset allocation and prudence by reducing credit risk during the recent speculative period positions us better to take advantage of longer-term opportunities now being priced into the markets.

Our team is laser-focused on practicing the necessary protective measures to safeguard the health of our communities by practicing the mitigation techniques outlined be the Center for Disease Control (CDC). We strongly encourage everyone to follow these guidelines.

We’ve invested heavily in a robust IT infrastructure that allows everyone on our team to work from home and seamlessly provide services as if we were in the office. Should we be required to work remotely, we will do so with full capabilities to serve you best. To the extent that our office remains open, we will act responsibly by utilizing alternating schedules to maintain social distancing and adhering to the CDC guidelines summarized below:

(https://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.html)

During this stressful period for everyone, we renew our determination and commitment to supporting our clients, employees, and communities. Together, we will successfully confront this challenge and move forward.