Q1 2020 Market Review
Each quarter, I look forward to writing market updates to share my perspective on the financial markets. Given this last quarter and how much news we have found ourselves inundated with, I thought I’d start with information on what we, Aevitas Wealth Management, are doing "behind the scenes" to help you and your portfolios.
I can’t say this enough – we are here for you, and we want to hear from you. We hope that you and your loved ones remain healthy and are managing well during this time. Our thoughts go out to all of the affected families, especially those who are on the front lines making sure the rest of us are healthy and safe.
Thank you as always for your business and trust. Best regards,
Michael A. Schreiber President
Summary
Aevitas is carefully monitoring all portfolios and asset allocations to ensure proper diversification and to provide sufficient liquidity to meet cash flow needs. Our team is also taking important and proactive steps to take advantage of tax-loss harvesting and to evaluate investment opportunities that may be available as a result of the market downturn.
The first quarter of 2020 was unprecedented in many ways as the COVID-19 pandemic gripped the world, causing a voluntary shutdown of the economy.
Governments and central banks worldwide have responded to this crisis with massive fiscal and monetary stimulus measures to help stabilize the economy, with much more likely to come.
Maintaining perspective and attempting to keep emotions in check can be difficult, but are necessary during these times.
Active Steps Aevitas is Taking During this Time
While we may be guiding our clients to stay the course, it does not mean that nothing is being done now. As your advisor, we are doing everything we can to control what we can moving forward. We are making the appropriate strategic moves to protect your portfolios by regularly re-balancing and ensuring asset allocations remain appropriate based on your stated goals and objectives. We are using the current market pullback as an opportunity to be pro-active on tax-loss harvesting, well in advance of the end of the year, as tax savings now can help with some of the negative returns. We are also evaluating and seeking investment opportunities that may be available for investors on the other side of this recession, i.e., what industries, sectors, and asset classes stand to perform better now and as we recover. Part of our portfolio monitoring includes making sure that there is adequate liquidity and cash available to meet your cash flow needs, so good investments will never have to be liquidated at inappropriate times. For this reason, we have cash on hand for a minimum of two years of stated needs from the portfolio. We are also reviewing specific investments that our clients own to determine if they remain appropriate, given the changes in the business cycle. A great example of our ongoing monitoring is why our clients, in general, had greater amounts of cash and, and in many cases, gold on hand going into this crisis. We will continue to monitor market conditions and actively make changes as necessary. Below is a recap of first-quarter market activity and the corresponding impacts.
From Bull to Bear Market
The start of 2020 has been an unprecedented time as we face a shutdown of the U.S. economy and the resulting turmoil in financial markets. We are living in a period of uncertainty, hoping for signs of stabilization so that our families, communities, and country can get back to living our lives. As we frequently discuss with clients, recessions and bear markets are an inevitable part of the economic cycle, and we usually do not know what the catalyst will be, such as geopolitical conflict, surprise financial events, natural disasters, and in this case, a global pandemic.
Before anyone had even heard about COVID-19, there was reason for caution coming into 2020, given economic indicators suggesting the economy was still doing well but slowing down. Despite this, markets began the quarter on a roll following the strong gains of 2019. In mid-February, this came to an abrupt end, as the pandemic became a reality and paralyzed our economy leading to one of the worst quarter market performance in history, losing 30% in just 30 days. The market, as measured by the S&P 500, ended the quarter down by 20%, while the NASDAQ Composite lost over 14%. Market volatility, as measured by the VIX Index, hovered near all-time highs. There were few safe havens as all sectors of equity markets domestically and globally were impacted. Bond markets were also impacted significantly as fear spread to the trillions of dollars of debt issued around the world. At the same time, oil prices plunged on the collapse of economic output and a price war between Saudi Arabia and Russia.
As your advisor, we entered this first quarter already on the defensive, with greater amounts of cash than normal and, in some cases, gold holdings in client portfolios. While nobody enjoys losses, these moves helped most of our clients outperform on the pullback during the quarter.
Fiscal and Monetary Responses to Markets and the Economy
Headed into the 2nd quarter, we have seen an unprecedented response from our government with the passing of the CARES Act, and by the Federal Reserve cutting interest rates to near-zero while injecting significant liquidity into the banking system (printing money) as well as supporting the flow of credit and backing lenders. The government continues to discuss further stimulus measures and is throwing in the proverbial 'kitchen sink' in an effort to stabilize markets until the economy can resume, and people can get back to work. While opinions vary on the depth and length of the recession and subsequent recovery, all agree that controlling the spread of the virus is paramount to moving forward.
The massive stimulus and positive news on mediation efforts around the country have led to a market rally over the past two weeks, with last week being one of the biggest one-week gains in history. Despite this, we should expect that significant fluctuations will continue as the news rapidly changes, governments release economic data, and companies report earnings. The economic damage will be significant, at least in the short term, with negative GDP and rapidly rising unemployment figures. The headline of the day often causes an increase in emotions; however, much of the news is already factored into short-term market prices as markets are frequently excellent leading indicators. It is important to stay connected to market information, but not to make portfolio changes based on emotions.
Keeping Perspective and Emotions in Check
Clients continually ask, "What should we be doing now?" The most important thing for investors today is to keep perspective and not make portfolio changes based on reactions to the daily news, market fluctuations, or emotions. I realize that is sometimes easier said than done. Still, while the pandemic is unprecedented, we have recovered from many crises over time that were also considered unprecedented at the time, including the Great Financial Crisis, the dot-com bubble, and September 11 attacks, to name a few. The markets not only recovered, but over 96% of the subsequent positive returns occurred in less than 1% of the trading days in history, which is an excellent lesson in not attempting to time markets.
Sir Jon Templeton, a legendary investor, had a famous quote: "The four most expensive words in the English language, are 'This time it's different.'"
At stock market tops and bottoms, investors often use this rationale to justify any emotional decisions. There is no doubt that COVID-19 is something different than what we have experienced in the past. What Templeton was referring to in this often-repeated quote was that while each crisis is indeed different, our economy always prevails, and risk assets have bounced back. The crisis of the time is no reason to abandon time-tested investment principles of patience, discipline, and broad diversification. The result of giving up on a carefully constructed plan can be detrimental to a portfolio and your long-term goals. When we are in the midst of a bear market brought on by a crisis, we can often look at history to remain grounded. The markets are complex and adaptable and will remain in place well after the COVID-19 crisis has passed.