06 Apr Quarterly Letter to Clients – March 2020
History is full of suddenly tragic and deeply challenging moments. Clearly and unfortunately, this current global pandemic has forced us all to confront one such moment. And just as our predecessors found, through the fog of hardship, sacrifice and tragedy shines the human spirit: solving seemingly insurmountable problems, overcoming and improving with creativity and ingenuity, and meeting the collective need.
The record low unemployment, economic strength and market performance of one month ago are definitely on hold. Sharp economic contraction is occurring and will likely accelerate sharply further before we see signs of improvement. We think a recessionary period is a given. As we go to print with our commentary, markets have given investors a respite from the rapid declines over the past few weeks and rallied off their lows, at least for now.
In the interest of public health, our leaders have decided to furlough 16 million workers and counting, and force the American consumer to stay home. The economic effects of this will loom large in the short term, requiring patience and repair efforts for recovery.
Fortunately, markets are forward looking, generally not pricing current economic conditions, but rather those that are expected in the future. On that front, optimism remains for a gradual return to economic strength and the growth experience expected before this pandemic. Given the established massive Federal stimulus relief and possible further intervention efforts, it is not out of the question that these efforts might overshoot the mark. The Fed’s tightrope walk finding that ideal balance, avoiding recessions and inflationary pressures, will be tricky with the magnitude of this crisis.
As in all others in history, this current health crisis will be resolved or will run its course. But, for a period, we will all need to continue “social distancing,” elbowing not shaking, wearing masks, and staying in or near our homes to work and play in an effort to avoid contracting or spreading this potentially devastating virus.
Support the brave: folks like doctors, nurses, pharmacists, first responders, truck drivers, grocery store clerks and all the other unsung heroes keeping us safe and fed. Proudly, our communities are banding together to provide humanitarian assistance to those directly affected and those displaced by the economic fallout.
Economic hardship is hitting hardest in the retail, restaurant, service and entertainment segments of the economy. Great sympathy is in order for the millions of willing workers without paychecks and well‐run businesses with suddenly near‐zero revenue. Resumption to normal and debt patience for these individuals and organizations will be needed to help with the healing.
We are dubious of the many “never will” predictions. Suggestions that Americans will never go to concerts, movie theaters or sporting events we feel are akin to similar predictions that no American workers would work in high‐rises in U.S. cities post 9/11. Such extreme predictions might feel justified in these moments of high emotion, but we believe will be ultimately unfounded. That said, this experience will likely accelerate existing trends in areas such as telework, online education, online retail and streaming video adoption vs. traditional distribution mechanisms. “Let’s Zoom” is now in the common lexicon.
The market highs of February 2020 already seem like a distant past as the major indexes fell at the fastest rate ever into bear market territory. The S&P remains 21% below its February record (as of the close April 6, 2020) and the Volatility Index (the stock market’s fear gauge) showed extremes rarely seen.
What can be expected next, given this significant correction in equity pricing? It’s common for investors to feel that “it’s different this time,” and certainly the challenge which COVID‐19 presents to our economy is unique. History may not repeat, but it does often rhyme. Bear markets are a regular and expected part of investing and are commonly defined as a decline of at least 20% from the market’s peak to the low during the selloff. Using the S&P 500® as representative, this has happened 14 times since 1926. When a bear market does happen, it tends to be fairly dramatic, with an average loss of almost 40%, and it can take a long time to recover those losses—the average duration is 22 months (see table below). But it’s reasonable to think, based on the speed of the current decline, and the massive government intervention, that a recovery could occur sooner in this case.
In every case, markets have come back, and often have made sizable gains in the months immediately following the downturn. The past is no guarantee of future results, but, historically, even the worst markets have been temporary dips in a general march higher for stock prices.
In the near term, we expect weakening in economic data, including record‐breaking unemployment and a sharp drop in the gross domestic product. However, the global policy response, and fiscal and monetary packages, will enable a backdrop of financial support.
While the foreseeable future may be more volatile than recent periods, we believe our consistent process will positively navigate the full cycle. Though cautious, we do feel there are compelling opportunities which will yield attractive returns for our clients. Our strategy and holdings are predicated on a belief in the long‐run success of the domestic economy. We continue to focus on building client portfolios with companies that are well managed, with strong balance sheets and unique market positioning. These principles have served our clients well over the past fifty years, and we expect they will continue to do so in the future. Our team of seasoned professionals is committed to navigating these current challenges, not with perfect foresight, but surely with your best interests at the core of all that we do. As always, please don’t hesitate to contact us and we appreciate your confidence as we serve your needs.
Stay safe and be well.
Peter J. Connors, CFA
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