No getting around it, 2020 has been a tough year so far. What started with watching uncontrollable fires burning across Australia morphed into concerns for Iranian retaliatory aggression to a U.S. drone strike. The U.S. turned inward to watch a home-grown drama play out around a presidential impeachment trial, not to be outdone by the denouement of the Brexit saga whereby the United Kingdom and Gibraltar (Gibrexit?) officially divorced from the European Union. Oh yeah, and while this all played out, a global pandemic started that caused markets to experience one of the fastest bear market declines in history. What began with headlines grabbing our fleeting attention spans quickly morphed into concerns about economic supply, demand, liquidity and perhaps, eventually, a solvency crisis.
Fortunately, our knights in shining armor have come to the rescue (yet again). Global Central Banks, individual countries and supranational institutions have offered double-digit trillions in lending facilities and backstopped loans. Rates have again been cut to the zero boundary (or maintained at less than zero in many cases) while governments have passed fiscal relief best measured in percentage-of-GDP statistics.
The amount of support is staggering. Programs are too numerous to be a good use of your time to list here, but some of the efforts were more eyebrow raising than others. Here in the U.S., this “helicopter money” approach has seen the Fed backstop corporate credit risk, secondary market vehicles (like corporate bond and municipal bond ETFs), below-investment-grade securities, and indirect “direct” loans to “Main Street.” The global response to the crisis has been to do “whatever it takes” to offset financial market calamity.
Given the unprecedented halting of economic activity around the globe, it’s entirely prudent to do “whatever it takes” to help ensure the continued operation of the mechanisms that support commerce. The financial system is the equivalent of our body’s vascular system and the money (manufactured by debt) that circulates within it brings the oxygen to our vital organs and extremities. Without that, our body will die.
This time it is different – at least in part
We understand that many are frustrated by what seems to be a continued rescue of corporate America. The complaint oft heard during the Great Financial Crisis (GFC) was that we were in a period of “Lemon Socialism” – effectively, that we allowed for the privatization of profits and the socialization of losses. But this time is different. Losing 40,000,000 jobs in about two months is materially more acute than the loss of 6,100,000 jobs lost during the crux of the GFC (9/2008-12/2009).[i] Further, economic actors did not create this reality, the government did.
Heading into this crisis, the U.S. had witnessed record household net worth ($115 Trillion) and debt service ratios at 40-year lows (9.7% of disposable personal income).[ii] Jobs were plentiful and unemployment notched its second-year-in-a-row with sub-4% rates.[iii] Wages increased measurably without sparking significant inflationary concerns. The chair, the porridge and the bed were just right. But prudent disaster planning would assume that during a normal recession, or even depression, consumers who could afford to spend would be allowed to spend. If the government tells you to stop going to work, it’s entirely reasonable to expect the government to pay you during the duration of the crisis.
Having said that, it’s likely that many weak players in corporate America will probably have their demise accelerated, not bailed out. Over-leveraged retailers and energy-related exploration and production companies come swiftly to mind. In spite of the litany of relief programs, we expect many of these businesses’ losses to be “owned” by debt and equity holders – and ultimately felt by their employees. Beware as the political discourse related to this challenge is likely to be heightened during this election season. What we know from history is that attitudes and approaches often change after these kinds of events, but the nature of these changes is fundamentally unknowable. Hardly anything lasts for “several decades” in the public policy realm.
What “shape” the Recovery?
We’re often asked about what “letter” we think the recovery will look like: Will it form the shape of a V or W or L? We can’t proclaim to have any better insights about the future than anyone else, but if we’re put on the spot, we’d likely look for more of a W-shaped recovery; maybe a “double-W” (but that’s not a letter!) Witness the S&P 500’s 38% gain since the intra-day low on March 23rd through the close on May 28th having now recaptured its 200-day average[iv]. That makes this a V-shaped recovery in markets thus far. Of course, as we’ve discussed in previous missives, the market does not tie directly to the economy – at least not in the short run. We don’t know of any serious investor that believes that corporate America’s values change by five to ten percent in a single day.
Of course, the final shape of the economic recovery will be wholly determined by how the virus plays out. But what seems fairly certain at this stage is that until we have a vaccine, and perhaps only after seeing how well that vaccine actually suppresses virus replication rates, will we as individuals and communities start to normalize behaviorally. How the current loosening of restrictions will play out in terms of infection rates is still to be determined.
Fortunately, many of the issues related to the current virus are likely to be solved with time. We may luck out that COVID-19 becomes hamstrung by warmer weather; this is supported by recent findings that suggest it does not spread well outdoors. But this would only be temporary until we find ourselves forced back inside come fall and winter. As of now, replication rates are clearly moving in the right direction and in most states (45 out of 50[v]) are now at a level that suggests declining cases. Whether this is the beginning of the end, or the end of the beginning, is up for debate.
Control what you can
In the meantime, what can be done to facilitate your personal long-term financial health? The first priority is to focus on your actual health, including paying attention to the recommendations being offered by health officials.
Assuming you remain healthy, the next step is to focus on what you can control. In many cases, that’s personal spending. Fortunately, one consequence of these shelter in place orders is that most people are finding themselves spending a whole lot less than they normally do. If you’re currently living off your portfolio, it may be prudent to attempt to reduce your portfolio distributions. If you’d planned a large or expensive vacation later this year, perhaps this would be the year to set your sights more locally.
If you’re younger and fortunate to still be employed and (hopefully) not seeing too significant a reduction in income, this might be a good year to consider increasing that 401k contribution. Or, if you’re already maxing out tax-deferred savings options, then consider opening a new taxable investment account. Doing so, historically, has generally been a good thing, but risks and uncertainty still abound.
We strongly discourage reactionary trading or action for the sake of “doing something” about your portfolio during a crisis. Ideally, well before this crisis, your advisor has worked with you to confirm your long-term objectives and assess your likely sustainability throughout a wide range of contingencies. At Halbert Hargrove, these analyses include a 1,000-scenario iteration of market returns, including periods where markets significantly underperform expectations. In addition, HH’s Resources and Claims Analysis can give you a real-time snapshot, a Personal GPS™ if you will, showing where you are on your lifetime financial-health journey. In combination, these efforts can help you see both the forest and the trees.
For now, until the larger crisis is known more fully and addressed more comprehensively, we all need to continue to tend our own financial gardens as carefully and thoughtfully as we can.
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Disclaimer:
The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment.
Sources:
[1] https://en.wikipedia.org/wiki/Job_losses_caused_by_the_Great_Recession
[1] J.P. Morgan: Guide to the Markets – U.S. Data as of March 31st, 2020
[1] U.S. Bureau of Labor Statistics
[1] Koyfin.com
[1] Rt.live
