Market Update

The dual battle against the covid-19 virus and resulting financial turmoil continues. As it happens, in my annual State of the Markets presentation this year, I spent some time discussing economic history. This is a subject I’ve been increasingly reading about over the last 18 months.

One of my observations about recessionary periods is they tend to coincide with a major exogenous shock. For example, coinciding with the 90-91 recession was the Iraqi invasion of Kuwait, the doubling of oil prices and ultimately US involvement in the Gulf War. About ten years later, just as the excesses of the late 90s “tech bubble” were beginning to unwind, the events of September 11th hit. And most recently, in 2008, excesses in housing and Wall Street speculation created a financial crisis that resulted in a major downturn.

Today, we face a shock that the modern economy has never experienced. Almost strangely, the economic system we have is incompatible with a temporary shutdown. Businesses have payroll to make, and households have expenses to pay. Anyone who thinks a recession is avoidable at this point is fooling themselves. The only question at this time is will governments around the world come up with appropriate policy responses to effectively manage the situation?

If you look to east Asia, there is hope. Countries like China, South Korea, Taiwan and Singapore have been able to dramatically slow the spread and started to roll out economic programs to support their economies. The western world clearly responded slower and is now scrambling to limit both the healthcare and economic damage.

On the economic and financial side, we’ll know more this week as Congress appears likely to pass a major package designed to support the economy. Any package will be in-addition to the measures taken by the Federal Reserve. Just today, the Federal Reserve essentially said it will do whatever is necessary to support the economy. This basically means the Fed will be pumping money into the economy to keep interest rates extremely low and credit flowing as businesses and consumers scramble for cash.

As for the model portfolios we manage, we’ll be making one change this week in response to market conditions. The change is on the fixed income side of our portfolios. Even before the covid-19 virus became a global problem, I was persuaded that certain segments of the US business sector had accumulated excess debt that would likely be at risk of default in a downturn.

Consequently, we had significantly reduced our exposure in this area. Given the unfolding situation, I think the risk is even more elevated and not fully priced into the market. Therefore, we will continue to reduce our over-all exposure to corporate debt. At this time, we won’t be making any shifts on the equity side. Our portfolio positions have largely responded to a sell-off as I would anticipate. The positions with more risk, as expected, have been impacted more. We could rebalance but the effect of that right now would increase risk in the portfolios. Currently, I don’t see that as a prudent move. 

This situation truly is unprecedented at least in the modern economy. It will likely be remembered as vividly as the 2008 financial crisis or the events of September 11th. I just want to take a moment to thank all our clients. We’ve made an effort to reach out to as many as possible to answer questions and concerns. Everyone I’ve talked to has been great given the extreme circumstances.

If you have any questions or just want to check in, please don’t hesitate to reach out. We fully intend to remain operational even if a state or federal shutdown is announced. Thank you for your ongoing trust and confidence.

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This has been prepared solely for informational purposes. Information herein is not intended to be complete, and such information is qualified in its entirety. This is not an offering or the solicitation of an offer to purchase an interest in any fund, and it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security. Nothing herein should be construed as investment advice, an opinion regarding the appropriateness or suitability of any investment, on an investment recommendation. No representation is made that the objectives or goals of any investment or strategy will be met or that an investment or strategy will be profitable or will not incur losses. Past performance is no guarantee of future results. Reliable methods were used to obtain information for this presentation but the information herein cannot be guaranteed for accuracy or reliability; the information in this presentation may be out of date or inaccurate. The information contained in this summary is and may not be distributed without permission.