How to Plan Out of The Pandemic

I hope you and your loved ones are well and safe.  As I sit here, self-quarantined and social distancing, I have been reflecting, reading and processing all the things that are going on around us.   A lot of “noise” in the news leads to overload and confusion.  I thought it beneficial to share my perspective as a long-term investor and give the guidance I am providing for my clients.

“In the business world, the rearview mirror is always clearer than the windshield.” - Warren Buffet.

The U.S. stock market recently experienced the fastest correction of its 52-week high, and the Dow Jones Industrial Average just dipped below 20,000 – a level not seen since early 2017.  While most every asset class rose over the last few years, in recent days, most every asset class fell.  People are getting sick, lives are being disrupted, corporate earnings are suffering, and uncertainty hangs over us like a dark cloud.

However, there are 3 things we need to ask ourselves:

• How long will coronavirus last?
• Do you think this recession will last forever?
• What is your time horizon on your investments?

If your perspective is like mine, the answers probably look something like this:

• Short term, look for the companies that will rebound quicker than others
• No, the economy will most likely kickstart and be back and running before year end.
• Long term, which is why we are taking smart action now.

Here are the key takeaways that I am imploring you to consider for your long-term investing strategy

1. Life is one big history lesson
2. There will be an end, and a new beginning. How do we want to be positioned for that new beginning?
3. Should we sell and get back in when it looks safe?
4. The COVID numbers – they will go up, but what does that mean?
5. The dominant narrative leads sentiment
6. Gut check – Is your head, heart and stomach in alignment?
7. “Yesterday is history, tomorrow is a mystery, today is a gift of God, which is why we call it the present.”
   ― Bill Keane – American cartoonist

1. Life is one big history lesson – Something we say often in our industry is that historic returns are not indicative of future performance. This is true, but that doesn’t mean that we shouldn’t look to history to make an educated guess to how things may work out.  We need to learn from the lessons of the past.   What in particular should we look at to draw comparison?  Most often compared in the news are the two events of late:  September 11, 2001 and the financial crisis of 2008.  In my opinion, this is a blend of both events, but more comparable today (and hopefully in the future) to 9/11 than 2008.  For 9/11, our country was attacked and fear and uncertainty are what motivated markets lower.  People were afraid of large gatherings, but the markets had a V shape recovery before the year ended.

2008 was a different story.  We had structural issues in our banking systems and the underlying economy.  Individuals were over leveraged, banks were over leveraged, and the economy imploded.  The rebound took about 18 months.

The Covid-19 pandemic is more event and fear driven, like 9/11, with potential future long-term economic consequences, like 2008, if this continues into a multiple month’s shutdown.  Like those two events, there will be a rebound.  Some business will be impacted greatly, some may go out of business.  However, if we can identify businesses with good balance sheets, cashflow, and business models that will persevere after this is over, that is where we want to be.

2. There will be an end, and a new beginning. The Covid-19 virus will end. Let’s look at the hardest hit and where it all stemmed:  Italy and China.  We are seeing two straight days of no new cases in Italy, which most have considered the hardest hit.  China, two months later, has progressed dramatically.

So, if we believe that this is a major short-term blip, than as long-term investors, what companies and investments do we want to own coming out of this pandemic?  What do we feel we can capitalize on in the long term that will help us feel that we have made secure financial decisions (and a plan) to succeed?  This is where people who are chasing Regeneron, Zoom, and Gilead may be missing the big picture.

3. Should we sell and get back in when it looks safe? As many have said before, timing the market is a fool’s errand.  When I take on new clients, I constantly remind them that we want to buy low and sell high.  I talk about when times are tough is when the money is made.  To paraphrase, Warren Buffet has said that moments of opportunity come when others are fearful or greedy. However, what do most people do when the markets fall?  They lose their conviction, stray from their plan, sell low, and then when they feel it is safe to get back in, they buy high.  So, what keeps me optimistic?  A few things do:

For one, over a 20-year period ending in 2017, an investor would have had a 9.85% annualized return from being invested in the stock market.  Simply missing the 10 best trading days over this period of time would have reduced your return by 50%!  In addition, six of the 10 best trading days occurred within two weeks of the 10 worst days of panic.  Trying to perfectly time the markets is just about impossible.

Congress will be coming to a deal.  We are in an election year and the following comments are meant to be factual and not political.  Democrats want to win and they feel they have President Trump in a corner.  They want to come out of this looking like the victor, drum up their base, and win over the middle.  The government has the tools to jumpstart the economy.  President Trump and the republicans want the White House and his approval ratings are down.  Something will seemingly get done.

The Federal Reserve has been using its powers to create stimulus.  Fed Chairman Jerome Powell has reacted faster than the Fed of 2008 to keep the stimulus going by dropping rates and injecting cash into the economy by buying bonds (aka quantitative easing).  That hasn’t worked…..yet.  Our markets do not like uncertainty.  We still have uncertainty as we wait for Congressional action and for insight on how long the virus will keep us shut down.  Once we have a better idea of both, you will see the positive reaction of the Fed’s measures.