April 2020 Letter

Much has changed since last quarters letter not only in our day to day living but the way we will live going forward. I will do my best to keep the economic numbers and data at a minimum. In my last letter my opening was “Living your best life, if we understand the parlance of our times, is to say live in the moment. This seems like a reasonable strategy for short-term enjoyment, but a fairly mediocre life plan” most of us would certainly go back to January 2020 and would never have thought how much our lives would change due to a global pandemic.

All schools cancelled until the end of the year with no graduation ceremonies for all those that worked so hard and will not be able to celebrate with friend and family.
We must self-distance from our loved ones not to mention anywhere we go if that is possible for some.
Entire sports seasons cancelled.
Concerts, tours, festivals, entertainment events - cancelled.
Weddings, family celebrations, holiday gatherings - cancelled.
Children's outdoor play parks are closed.
Shortage of masks, gowns, gloves for our front-line workers.
Panic buying sets in and we have no toilet paper, no disinfecting supplies, no paper towel, no hand sanitizer.
Government closes the border to all non-essential travel.
Stadiums and recreation facilities open up for the overflow of Covid-19 patients.
Barely anyone in the street or on the roads.
People wearing masks and gloves outside.
Essential service workers are terrified to go to work.
Medical field workers are afraid to go home to their families.

Simply said, these are unprecedented times. Unprecedented in terms of the speed of the market moves, unprecedented in terms of understanding appropriate social behavior, and unprecedented in terms of the uncertainty around the duration, scale and scope of economic disruption. And to state the obvious, the entire situation is quite unsettling. In my opinion, COVID-19 is a “rogue wave” that is both dangerous and unexpected, having come from directions other than the prevailing winds. It is the very definition of an exogenous shock. We don’t believe any of us have dealt with this degree of global pandemic. The numbers of cases will continue to increase (especially with testing ramping up) and it will potentially get worse before it gets better. While no-one precisely knows, medical professionals suggest the number of cases may peak in 30 days. Importantly, let’s not forget there have been thirteen epidemics since 1970 and not one has stood against the collective power of humankind. We do not anticipate this will be any different. Now before jumping into various topics that our team is discussing, we thought it best to hit upon the most popular question we’ve been receiving: “Which is worse – 2008 or now?”. In 2008, we were genuinely scared that the structure of the entire financial system was in dire straits. The “world” seemed to be coming to an end. The economy was left for dead and all but forgotten.

With regards to today’s environment, while there are clearly elements of “nesting” and demand destruction, we sit in the camp that it is all a matter of duration. How long will this last and how much will it temporarily paralyze us? If one was to look around the world, you would see that some other earlier virus-afflicted countries – far less great than ours – are already on the mend. In China for instance, various retail stores and restaurants are re-opening, manufacturing plants are repowering, and life is slowly returning to normal. In our opinion, it won’t take but a little bit of good news (e.g., medical break-through?) or very low mortality rates to meaningful settle the gravest of fears and concerns. And it is our opinion that the equity market will bottom well before the public hysteria peaks. With that as a backdrop – and recognizing there are a myriad of “ifs” for investors to ponder – here is what we are currently thinking, monitoring, and questioning:
Equity market volatility: The fear and uncertainty – both economic and health-related – show up in the minute by-minute swings in the market we believe this will eventually settle down as the equity markets are forward looking.

Credit market volatility: As investors who believe that to understand risk, you have to have an interconnected view of equities and fixed income, we are closely monitoring the functioning of the credit markets. Volatility in recent weeks have receded.

Fiscal and monetary intervention – here comes the global cavalry: The Fed and the U.S. administration are now taking this seriously and are all in on providing the necessary liquidity and fiscal support. The 2008 playbook is being revisited and while the devil is always in the details, everything is likely on the table, including a $1+ trillion fiscal stimulus package, social safety net funding, small business loans, and support for various industries (e.g., airlines, hotels, etc.) to name a few. And let’s not forget the rest of the world! The central banks of China, Japan, England and Korea have already announced accommodative moves and just yesterday Christine Lagarde, President of the European Central Bank, announced a EU750bn pandemic asset program; she went on to say that there is “no limits to our commitment to the euro” and “we are determined to use the full potential of our tools, within our mandate.” Lastly, we’ve even started to see shorting bans re-emerge and discussions over government equity stakes. It’s all very fluid…expect more to come from the U.S. and around the world. · Balance sheets really matter: In times of economic stress, all eyes move to concerns around solvency and liquidity…whether you are a corporation or an individual. For this discussion, we focus on the former. Those with "fortress" balance sheets will be able to weather the storm while levered entities could need to find solutions…quickly (again, the devil is in the details). The market has seemingly recognized this point to a degree as well and is likely part of the reason that small cap stocks (Russell 2000 Index) have underperformed their larger cap peers (S&P 500) in this recent drawdown by over 10%! As one relevant data point, according to Credit Suisse, the Russell 2000 Index net debt to EBITDA has recently been in the 3.5-4.0x range while the S&P 500 closer to the 1.5-2.0x range. Be mindful of leverage.

Market timing vs. investing: This is a repeat bullet for us. We truly believe that guessing market direction in the short term is a random walk. We do know starting points matter and time served in the market cures all ailments. And over time, we believe there is going to be tremendous opportunities for wealth creation in an attractive risk adjusted manner.

And lastly…it’s not all bad out there: Channel checks indicate China and Hong Kong ramping up, the U.S. consumer found a new “fiscal stimulus” in the form of lower energy prices, interest rates remain low (with a steepening yield curve), and companies around the world are working hard to find treatments and vaccines. If – and it’s a big “if” – the COVID-19’s risk can be “ring-fenced” (both from a health and economic perspective), there will likely be significant pent up demand.

The real challenge is to learn from experience. Not even the coronavirus shutdown is going to change the fact that every contraction in our financial 100+ year history is followed by a recovery. Assessing the time factor is what should be burdening our minds and not thoughts of fear and despair.

Do we have enough information on hand to make a rational decision on when the pandemic ebbs, or our economy regains productivity? Not yet.

Every day we get closer. The economic and earnings data will continue to look bad over the next few weeks, but even that won't tell us much. We need the number of cases to level off before we can process any information and begin to make forecasts that resemble anything more than a guess.

In closing, and most importantly, please be safe. And please be smart. Our thoughts and prayers are with you, your families and all the healthcare professionals that are on the front lines working tirelessly to return this great country in SHORT-ORDER to its wonderful, full and lasting potential.
You should remain focused on your investment goals and objectives. If you have any questions or concerns with your current asset allocation and/or investments please do not hesitate to contact me.

I believe every solid relationship should center on open communication. You have several options to access the information you need to know about your portfolio, my firm, Raymond James and the financial markets. In addition to our in-person meetings and one-on-one calls, we'll also communicate with you through other channels, such as our website, newsletters and social media. You have already been receiving regular updates and emails from me. These communications are designed to provide you with insight into the ever-evolving financial markets and help build the confidence that comes from working with an experienced advisory team. If you haven't already done so, I encourage you to go to my website to learn more about my firm and access some of the recent research and articles available to you. I also utilize social media channels such as Linkedln. If you already have an account on Linkedln consider following me. These channels provide an excellent way for me to keep you up to date with relevant, timely news. Please let me know how you prefer to receive important communications and how frequently. We'll do our best to deliver. Guiding you toward financial independence is a collaborative process, and I hope you feel comfortable reaching out to me whenever you have questions, concerns or even new ideas to help me better serve you.

Regards,

Elliot Weissmark, CFP^®, CPFA
Senior Vice President, Investments

Any opinion are those of Elliot Weissmark, CFP^®, CPFA and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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