by George Hosfield, CFA
Director, Chief Investment Officer

Staying in touch with clients is critical during such extreme market volatility. Admittedly these are highly stressful and uncertain times for everyone. It is paramount that we stay safe, remain calm and strive to make decisions that are aligned with our long-term goals … not current headlines.

As investors anxiously wait for congressional passage of a much anticipated economic stimulus deal coupled with digesting earnings reports and jobless claims, we believe it is constructive to take an accounting of what, in our opinion, is known and unknown at this juncture:

What We Don’t Know

When will the COVID-19 rate of infection curve stabilize in the U.S. and Europe? While there is an abundance of estimates, no one truly knows. However, what is certain is at this stage in the crisis, all other variables pale in comparison.
What will be the depth and duration of the recession? The answer to this of course is dependent upon when the “curve is flattened” for the rate of infections in the U.S. The dramatic disruption in economic activity is going to send second quarter GDP into materially negative territory that is going to be accompanied by stunning headlines of layoffs that likely will be in excess of five million. Amid this gut-wrenching data, it is important to understand that the severity of the recession and the pace of the ultimate recovery is not so much dependent on how far GDP declines, but rather, how long it persists.
How aggressive and how effective will policy response be? There is no doubt that equity markets in recent days have been playing vigilante by expressing their dissatisfaction with the inability of Congress to pass a fiscal stimulus package. We believe the markets’ message has been received by Congress and expect an announcement of a stimulus package of unprecedented scope that will be a key building block in placing a floor under this economic freefall.
When will equities bottom? Not only do we need exceptionally negative sentiment, which is now the case, but we also need materially undervalued assets. Though asset prices have dramatically fallen in recent weeks, we are awaiting greater clarity on amount and timing of future earnings before we can conclusively make a value call on the market. Furthermore, it is important to note that historically, equity markets bottom before the economic recovery is evident.

What We Know

The U.S. economy was on very strong footing when we entered this recession.
Unlike 2008 when banks were the problem, bank balance sheets today are solid and the institutions are well-positioned to be part of the solution.
We entered this bear market with a recommended “neutral” allocation to equities in client portfolios. In other words, the midpoint between the minimum and maximum permissible allocation to equities as specified in each client’s investment guidelines. The selloff has now taken the equity allocation below neutral and effectively increased the proportional allocation to bonds. This is a highly fluid situation and we continue to monitor daily capital market developments in order to determine when, and by how much to increase the allocation to risk assets.
This is not the time to sell. We understand and appreciate the instinct to sell risk assets at such times in order to preserve principal. Even if the market may fall another 10 or 20 percent, because the turn can be very rapid, capital market history is clear that once prices fall to bear market levels, the question is not whether to sell, but rather, at what point to do you buy? Given an investment horizon of even a couple of years, odds are overwhelming that selling at this time will more likely do permanent portfolio damage as opposed to preserve value. As such, if one can’t resist the impulse to sell … only sell half of what you think you want to.
There remain some challenging days ahead, but we will get through this … and prosper. Be safe, remain calm and count your many blessings.

As always, please don’t hesitate to contact your portfolio manager regarding the capital markets and your investments.

Disclosures