We are living in an age of nonstop stimuli coming at us every waking moment. Headline news reports facts, revelations, recent biases magnifying the negative, fear of the unknown and speculation on outcomes. There is so much information it is almost addictive, and investors anxiously wait for the next dose of news, good or bad. It’s no wonder that it is hard to put things into perspective. If we stop and pause to catch a breath and shut off the constant messaging that surrounds us, we may be able to get a clearer picture of where we’ve been and where we are at this moment, and recognize there is more positive in the world than we think.
The world seems to be smaller. As a global community we are all in this together, but this time it is different for all of us. After the initial panic a sense of worry begins to set in as investors sift through what has taken place. Answers are difficult to find; but worry heightens. The fear and anxiety of when this will end remains with us all. Temporary disruptions can feel like eternity when you get caught up in the moment. Keep in mind it will end, and that is why we need to look at the positive side even while we are in dark moments.
What history tells us
As we open our current quarterly reports our minds may take us down a path of self-destruction if we don’t look back at where we’ve been. The sudden sell off in the market was not caused by a technology bubble or by severe economic and/or financial imbalances, but instead by a virus that spread globally like wildfire. Like a wildfire, not everything works in lock step since weather can change from positive with rain to negative with wind.
No one ever has a playbook for crises. Today’s headlines are like those we read in 2008-09, the difference being that we are fighting a virus that has caused world economies to partially shut down. This is not a permanent shut down of our economy caused by bad business plans or financial imbalances. Great companies’ stock prices have fallen because of the fear of the unknown, but not even close to levels seen during the Great Recession in 2008-09.
During 2008-09 the Federal Reserve learned that providing liquidity to the markets in the form of loans to banks and businesses, driving interest rates to near zero and implementing a strategy of buying back bonds in the marketplace eventually stabilized our economy. They took the fear and anxiety out of the markets. Today the Federal Reserve is acting aggressively with various methods of injecting economic stimulus. Currently world economies are using various tools much like the Federal Reserve was and is using, because they worked in the past. We recommend listening to a CBS “60 Minutes” interview with Minneapolis Federal Reserve President, Neel Kashkari (13:23 minutes long) at https://www.cbsnews.com/video/neel-kashkari-small-businesses-need-loans-60-minutes-2020-03-22/.
We wrote about “Worry” in one of our market commentaries during the Great Recession. We think it’s applicable again today with updated information. Legendary investor Shelby M.C. Davis, sums up investor worries:
"History provides a crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.”
Investors have faced a myriad of crises over the past five decades:
- In the 1970’s they faced stagflation, rising energy prices, and the S&P plummeted 44% over two years.
- In the 1980’s they were dealt the collapse of the major Wall Street investment bank Drexel Burnham Lambert and Black Monday, when the market crashed over 20% in one day
- In the 1990’s they weathered the Savings and Loan crisis, the failure and ultimate bailout of hedge fund Long Term Capital Management and the Asian Financial crises.
- 2000 witnessed the technology and telecom bubbles bursting, the 9/11 attacks and the start of two wars.
- 2008 saw the collapse of residential real estate prices, economic uncertainty and turmoil in the financial services industry.
- 2020 we’re in the middle of a pandemic and its impacts………the story is yet to be written.
Despite all these crises, the long-term upward progress of the stock and bond market has not been derailed. Look at the graph below - we have been through market declines before and we’ve recovered.
What do we do next?
Jim Fullerton, former Capital Group chairman, wrote an article in 1974 titled “Investing against the tide” (https://www.capitalgroup.com/advisor/pdf/shareholder/MFGEFL-228-467941.pdf). One of his quotes is appropriate today: “Courage! We have been here before. Bear markets have lasted this long before. Well-managed mutual funds have gone down this much before. And shareholders in those funds and we the industry survived and prospered.”
There is always a silver lining no matter the crisis. We will face headwinds and uncertainty in the foreseeable future. The initial wave may be behind us, but the aftershocks may come in the form of layoffs and dividend cuts as companies report earnings in the next few months. It is too early to tell whether the Federal Reserve’s interaction, the Treasury’s $2.3 trillion plus stimulus package, and world stimulus packages will ward off investors’ reactions to both the virus and layoffs in the months ahead. The impact to our world economies has and will be felt financially for some time.
There is no question the effects of this virus will be felt by everyone around the world. Some of us have lost or will lose family members and friends, forever changing lives. The shelter-in-place orders and social distancing have bought some time to produce the necessary equipment for our health system and our health care workers. The uncertainty of when a vaccine will be available has created fear and anxiety, but the best minds around the world are working around the clock to solve the problem. The healing is yet to come, but we will all heal.
We will read about failures on both the economic front and on geopolitical issues, but consumers will be back, particularly when a vaccine is developed. Consumers are creatures of habit. We will once again return to favorite restaurants, workplaces, and travel - airlines, cruise ships and hotels will still exist. Our lives may be temporarily disrupted as we return to a new normal, but our lives will return to normal. We’ll enjoy face to face visits with families, friends and colleagues; hugs will be allowed. There will be adjustments – both temporary and permanent - but we will prevail.
Keep in mind, our economy was strong before the virus, banks are in the best financial condition, and a world economy is working to provide the stimulus necessary to get us all back on track. Although there will be days of good and bad news as we navigate through this crisis, we are confident that each day we get closer to an end. We remain optimistic for the future. It may be a slow process; but we know this time will pass, and brighter days will be ahead.
Our philosophy has always been to prepare before a crisis and remain invested. This has not changed; however, we are in the process of identifying which sectors of the economies domestically and internationally will prosper in the recovery phase. You may see some changes in portfolio holdings but not necessarily the asset allocation. We may trim from some of the areas of the portfolio to take advantage of others that are quite attractive due to the changing conditions. Portfolio managers are likewise actively identifying opportunities that better position your money for the future.
We will continue to guide you along the way as we have in the past. Past results are not predictive of future results, but history’s lessons show us how we have survived and prospered. Our advice is don’t get derailed by the things you read or hear. Understand the preparation that we have placed in your asset allocation to withstand the shock waves that come with a crisis or downturn. We know the path ahead will not result in all companies surviving, but new companies will emerge out of turmoil and we will move forward.
Thank you for believing in our investment philosophy and helping you manage through good and bad times. We are grateful for the tremendous trust and support you have placed in us. Please call us with any questions or concerns. We hope you stay healthy and safe.Thomas L. Menzel, CFP® Laura Biermann, CFP®President Vice President
1 CBS, 60 Minutes, March 22, 2020
2 Davis Funds, “Wisdom of Great Investors”
 2020 Capital Group, “Investing against the tide”, November 1974
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