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Market Update – March 23rd, 2020

Dear clients and friends,

My outlook significantly darkened when whole states and countries started closing down. The main question in my mind is how do we reopen? I have not come up with a great solution so far.

Here are the scenarios I have come up with so far:

  1. The virus goes away because of spring or isn’t as deadly or as transmissive as we thought and we reopen in 4-6 weeks
  2. We decide we’d rather have people die than close our economy.  We probably would not decide this politically though for at least 2 months, likely more.  The total cost in lives would likely be smaller from the disease than from other interruptions if this goes on for more than a month or two.
  3. We get a vaccine or cure…experts say 12-18 months.  I hope that is expedited to closer to 3-6 months somehow, but can’t count on it.  Distribution would take another 3 probably.
  4. Enough people recover and are now immune to go back to work.  Scientists say we don’t know that yet, but they may mean we can’t prove it yet.  I think most viruses you can’t get twice without a mutation or else vaccines wouldn’t work but I’m no scientist.  This would mean the economy starts ramping back up in 2-4 months, but slowly.
  5. We stay shut down until we increase our ability to effectively hospitalize people with this disease, 3-8 weeks.  Then we declare we’ve won, our hospitals won’t be overrun, go back to work and if you get it, you’ll be treated.  It’s now just another risk of daily life.  The economy starts back up but spending will be low as people will still be scared so growth in the short term would be lower than if we truly beat this disease.

There are more of course, but these are the positive ones. Of course, this is based on what the Governments and the media are reporting. Who knows what the truth is. If you can think of any more positive scenarios, please let me know.

I’m hoping for 1, but I personally am betting on scenario number 5 as of right now.
In all of these scenarios, except for number 1, this turns into a nasty recession as people are scared and not spending. As of today, they are talking about $4 trillion+ in Government stimulus, counting the Fed actions. The Fed actions won’t boost the economy in the short run, as they only inject money to the banks and mess with interest rates. If the banks don’t lend, then it doesn’t help the economy. The Fed of course could come up with some nifty new programs, and I expect that to happen. For example, they could guarantee mortgage or small business loan repayment, so the banks can lend to anyone with loose underwriting standards. I haven’t seen that yet, but it wouldn’t surprise me. Please keep in mind, these scenarios are playing out in almost every country in the world right now, not just ours. I doubt it will turn out the same in every country, so we will get disruptions from abroad as well.

The fiscal part of the plan is currently supposed to be about $1 trillion, which is equal to about one month of economic activity in this country if you count a 1.75x multiplier effect. I believe 2 is the standard multiplier, but with these disruptions, a lower number is likely more accurate. The economy isn’t fully shut down right now, but as the shutdowns spread and supply chains get disrupted, the percent of GDP happening will likely go down. This means this stimulus, even if they do it right, is likely only the first of several fiscal injections to the economy. I expect several fiscal plans as well as more creative Fed plans, as they work to keep our economy afloat while it’s shut down.

For those of you who are retired or close to it, right now we are working under the concept of, “Keep our clients retired rather than get the best possible return.” What that means is that we are reducing stock positions, even though the standard formula says to buy. We are worried this is not a standard market downturn. We will then be buying back in slowly if there is no change or positive change, or more quickly if there is significant negative change. For those of you who are not spending your money right now, we see this as a huge potential opportunity. We expect the headlines to get worse over the next few days and maybe weeks. For example, we expect millions of people to be laid off, entire countries to continue to shut down, and potentially even worse problems arising if this crisis lingers too long.

Today we got some good news from the Fed about our bond positions. They have started buying slightly lower credit quality bonds and removed the cap of how much they can buy. What this does is basically provide an emergency buyer for the bonds if no one else wants them. Unfortunately it is only for the top credit qualities so far, and lower rated bonds are still suffering. For most of our clients we have not started liquidating much of them, but it is on the table. If the economy gets really bad, there could be significant problems there too. Of course the Fed could start buying all credit quality bonds instead of just the top quality bonds, making them guaranteed investments basically.

In summary, things are changing so fast right now that it’s hard to make a plan a week out. For right now the S+P is down about 31% YTD at 2237. On December 24th, 2018, The S+P closed at 2351 All we were worried about was tariffs then. It is about 5% lower today than then. My view of the future of the economy and future corporate profits on 12/24/2018 was much brighter than I’m seeing for the next 6 months, and 2351 was the price that future supported.

For the short term, we will go into what is considered the safest investment in the world, treasuries, as we look for buying opportunities. We are starting to think a decline of 50-75% in the stock market is possible and buying in big right now might be too aggressive. We will be using a systematic approach based on a combination of time and price triggers. Remember, the market fell almost 60% in 2008, and if these shutdowns persist, the economy will be much more damaged now than it was then. We do hope to make large profits for our clients if we are correct in our assessment. If we are incorrect, we will be happy to not have as much risk, and slightly annoyed that we missed some upside. Please keep in mind that this is currently a global problem, and we are not seeing coordinated responses across the globe. That will mean more supply chain disruptions are likely and there could be a severe global recession.

With the rate of change of information, our outlook could change dramatically in the next few days, or even tonight. The stimulus program could knock it out of the park with how well it is written and how it fixes every problem, although I doubt with the current amount of politicking that that will be the case.

Feel free to contact us at any time with questions about your individual situation.

Sincerely,

Alexander D. Parrs, CFA, CFS, ChFC, CFP®, CASL

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