Our hearts continue to go out to everyone during this tough time.  Fortunately, early glimpses of light are illuminating the end of the tunnel.  We have seen both things I believed had to occur in advance of the markets finding some footing: two consecutive solid “up” days (March 24th and 25th), and good news on the medical front.  Last week the S&P 500 jumped up +12%.  So at this point our relative “bottom” of the current downturn occurred on March 23rd, only a few short weeks after the all-time historic high on February 19th.  The markets have never fallen so far so fast, thus the sharpness of last week’s rebound is not surprising.  News of planned business re-openings on the West Coast and a flattening of medical numbers in New York is very welcomed.  Companies like Starbucks, Apple, and Nike have re-opened stores in China, and have shown promising recovery numbers.  Europe and the U.S will follow.  That being said, short term numbers around earnings, employment, and other economic markers will be dizzying, yet should be taken with a grain of salt.

Many of you who are able have taken advantage of these lower levels and added to your stock allocations over the past few weeks.  We are, though, by no means out of the woods, and it is impossible to predict market bottoms.  Earnings releases for the first quarter started this week, and the range of estimates vary wildly.  Governments across the globe have sent crystal clear messages that they will step in and provide whatever support is needed, and the Central Banks are in solid positions to fulfill that.  Their policy response in providing liquidity while simultaneously back-stopping the credit markets has been key, and will ultimately preserve the financial health of individuals, small businesses, municipalities, and corporations.  The monetary and fiscal programs are very complex, but banking systems are structurally sound and married with thoughtful public health responses, will lead us through this more quickly than many anticipate.

As I have said, I will be watching earnings very closely and assessing how the shutdowns will affect results.  The supply/demand impact will vary industry by industry, and I believe valuations will be influenced more significantly by sentiment than by earnings projections.  There is a decent amount of health to the recent rally and despite near-term challenges, high-quality U.S. stocks of companies with strong balance sheets will remain, in my opinion, the single best place for investment dollars.  With the yield on the 10-year U.S. Treasury hovering at just 0.6%, equity investments remain the optimal vehicle in which to grow wealth.  Now is the time to maintain a coordinated, disciplined, and patient approach to investing.  Please continue to reach out with your questions and concerns – we are working very hard to keep communication flowing with everyone.  And most importantly, please stay safe and healthy, and thank you for your continued trust and confidence.

The fixed income and equity markets continue to change very quickly, and in unexpected ways.  Governments across the globe have sent very strong messages that they will take whatever steps are needed to support economies through this difficult time.  Having a solidly structured portfolio of high-quality investments, married with proper financial planning, is key to navigating uncertainty.  Now is the time to avoid making mistakes.  I recently spoke with a client who noted that now, everyone is talking about the importance of having high-quality stocks and bonds, specifically those from entities with low debt and good revenue growth.  It is with intention that we have consistently recommended securities with solid financials to be prepared for difficult times in advance.  We have never recommended high-flying investments, as they struggle to survive difficult times.  It is almost impossible to predict the end of event-driven market drops that have started when economies have been very strong, but I thought it would be helpful to share some key points about what we are doing:

1.  Today represents, in my opinion, one of the best opportunities in history to buy stocks.  If it is suitable for your situation and you are able, please add extra cash to your portfolio for us to invest.

2.  Proper diversification and asset allocation continue to be key – these lower levels represent great opportunities to buy stocks, but trying to predict daily market movements can hurt returns since the biggest down days occur right next to the biggest up days.

3.  People are living longer, yet the supply of available shares in publicly traded companies continues to shrink – I believe stocks are still the single best way to transfer earned income into wealth.

4.  The current yield on the S&P 500 is around 2 1/2% while the 10 year U.S. Treasury is at 0.6%, so stocks continue to be the best way to generate income from your savings.

5.  Finding yield in fixed income investments has been incredibly challenging because supply is very low, but we have been able to fund some decent rates on very short term CD’s.  Short-term high quality tax-free municipal bonds have been very difficult to find.  There is an abundant supply of short-term fixed income with poor credit ratings at very high yields as companies scramble to raise cash.  Yesterday I saw an offer for 8.2% for 1 year – in my opinion, these types of junk bonds carry way too much risk in any type of environment, especially today.

Now is the time to be making the very best financial decisions that are based on tried and true principles.  The current quarter will be very important as we assess how changes in earnings will affect the overall financial health of companies.  Over the past several years, we have worked very hard to be prepared for this exact type of environment.  Difficult times ultimately lead to meaningful, positive changes.  No doubt the current situation will catalyze dramatic improvements in how services such as healthcare and education are delivered, and will also make all of us hone in a little more closely on the important things in life.  We thank each and every one of you for your ongoing trust, and hope that everyone stays safe.  Please keep your questions coming – we are working very hard to help everyone during this challenging time.  

Thank you very much,

Katy

Many are asking for greater detail around what exactly is happening in the markets and what actions, if any, we should be taking.  Well-thought out investment plans are put into place for the very purpose of helping you move through times like this without making big mistakes that derail progress towards your financial goals.  As is the case during volatile times, there are many moving parts to what is happening, and most aspects today are both highly technical and happening very, very quickly.   That being said, I am going to try to add some color to hopefully start to shine some light on the end of this tunnel.  There is no reason we won’t move through this.

Liquidity – Since companies are having to shut down certain aspects of business, they are scrambling to liquidate assets to raise cash needed for operations, so in essence all asset prices are falling together.  This indiscriminate selling is by no means unprecedented.  The overall plumbing of the U.S. economy is directly related to liquidity, which is largely driven by creditworthiness.  The scale of response by the Federal Reserve, the European Central Bank, and the Bank of Japan demonstrates a commitment to provide much needed liquidity.  Unlike in 2008, banking sector liquidity is not currently a problem, but it will take time to get dollars infused into the economy.  

Earnings and Credit – We invest in stocks with little or no debt, good earnings growth, and rock-solid cash-flow – and I believe these companies are best-positioned to come through a difficult time such as this.  The current price:earnings ratio for the S&P 500 has fallen from over 20 to around 13.  I will be watching earnings very closely for the next two quarters to see if there will be any adverse impact to balance sheets (meaning will companies have to take on excess debt to fund operations).  The current market is trading based on sentiment (fear), not valuation.  Companies will quickly return to last years’ earnings, so later this year I will be using those figures to assess valuations.  Over-leveraged companies will not survive this, but companies with strong financials will not only survive but thrive.  I believe we will quickly see innovations that will catalyze the start of our next great economic growth cycle, especially within the healthcare and technology sectors.

Market Volatility and When to Buy – We started adding to stocks in late February for more aggressive clients.  It is impossible to identify bottoms, but markets tend to overshoot.  We came into this with a very solid economy – and currently the Leading Economic Indicators are still rising and the yield curve is steepening.  While I expect those patterns will likely change for a very short time period, right now presents one of the best buying opportunities for stocks in history.  I am watching for two things that, in my opinion, signal we are somewhere close to a bottom – two consecutive solid up days in the stock market, and some type of significant good news on the medical front showing successful results of a vaccine or treatment.  I will also be watching how the economic impact of the shutdowns and quarantines moves through China and Europe, as we can expect somewhat similar trends here in the U.S.

We have been through difficult times in the past, but challenges such as this only bring us through to the other side as better and stronger communities.  Please let us know anything we can do for you during this time.  And most importantly, please stay healthy and safe.  Thank you to our clients – we appreciate having your trust and confidence, especially during uncertain times like today.

Thank you very much,

~Katy