Greetings Clients and Friends:

We are in for a rough ride. We all realize or are beginning to realize that the coronavirus epidemic is going to get a lot scarier and requires social distancing that will temporarily stymie our economy.  Here are three articles that drove this home for me.

• The Extraordinary Decisions Facing Italian Doctors, The Atlantic, March 11, 2020

• Massachusetts Virus Outbreak Looks Like Italy’s Just Two Weeks Ago, Bloomberg, March 12, 2020

• Infected people without symptoms might be driving the spread of coronavirus more than we realized, CNN, March 14, 2020

On Friday the markets reacted positively to the declaration of a national emergency and a deal to provide tens of billions of dollars in aid. The S&P 500 Index of large US company stocks rebounded 9.3%, bringing its cumulative decline to 16% since the beginning of the year. Our balanced, growth and aggressive portfolios are down 10%, 13% and 17% year-to-date respectively.

Yesterday (Sunday) afternoon the Federal Reserve cut interest rates again by a full percentage point and announced it would buy up huge amounts of debt. The S&P 500 futures market tumbled 5% at its 6pm opening and triggered the overnight “limit-down.” This means prices can go up, but not further down until the markets open at 9:30am.  Prices did not go back up.

These wild swings reflect the uncertainty and lack of information as investors attempt to price the impact of the pandemic. We will experience more of these swings in coming days, probably beginning with a further plunge today. The markets are struggling to price reality, and grasping at any sliver of information that might provide a clue.  Remember that this volatility is transitory, and it will abate as we move through this crisis.  The tremendous gains that we enjoyed last year were probably too optimistic, and the declines that we are experiencing now are based on even less information. 

Here is the chart of U.S. large company stock returns since 1926 that we shared in our client letter on February 20th: 

Volatility declines over time, and predictability rises.

Outlook

Social distancing on its face suggests that we must (and hopefully enough of us will) interrupt much of our consumer activities (traveling, eating out, shopping at the mall, going to movies), and this points to slowing or receding growth. However, we appear to be poised as a nation to be spending billions of dollars to stop this pandemic. We will keep buying food, ordering out, and consuming stuff thanks to Amazon and streaming services. And when we emerge from this crisis, there will be pent-up demand. We do not know with any certainty how much our economy will be affected, or how long it will take to return to normal, and in the past assets have rebounded faster than anticipated.

What is the accurate price of our current and future reality? Was it Wednesday’s close, Thursday’s close or Friday’s close? We don’t know and it will not matter eventually.  The markets will recover and go up again sooner than we can now imagine.  

Please contact me if you anticipate additional spending needs or if you would like to review your financial situation.

Sincerely,

John