By: Ralph C. Freibert III, Chief Investment Officer
Let’s simply admit this pandemic is worse than expected. That is not to say it is the end of the world. As a New Orleanian, I remember the day after Katrina when we recognized the hurricane had not destroyed the city, but then the water started coming in and rising. My friends in my neighborhood sent texts that started, “Everything seems okay. You lost some roof, but the house looks good”. Then following, “Not sure what’s up, but water is building on Argonne”. Later that day, “Okay, it is really beginning to rise”. I didn’t receive any more texts from there, until I received one a week later. It read, “Floated past your house today in a boat. You got water…Lots!”
Looking back on that moment, today, it seems a bit funny. However, that is the benefit of hindsight. But back then I had no idea what it meant for my family, my business and my friends. Today, I have no better prediction for the future, except the benefit of that experience and my faith, deepened by the experience of losing my dad just a year ago.
I certainly do not think this is a time to panic. That does not help any situation. Nor do I believe it is a time to ignore the facts that continue to mount. Businesses worldwide is shutting down for two-weeks to one-month. That will have immediate and lasting impact to the world economy, and we are not immune to this event.
We are very happy to report that your investment portfolios are designed provide some protection in times like these, through the application of asset allocation. That approach was little benefit last year when the market rose 30% and asset allocation limited gains, but this is when you benefit the most from an allocation strategy tied to your personal risk tolerance. But, in times like these there will be losses across most asset classes. Unfortunately, when markets begin to react like they are right now, there are very few places to hide from loses as correlation across different asset classes begins to increase.
Today, I took the step of selling our hedged equity position across all portfolios that held the position. In our more aggressive models, this position held a smaller position than that of our more conservative portfolios. This is not a sign that I believe it is time to sell. In fact, there is no way to predict the severity of this event. However, the equity hedge it provided has reached its limit and no longer offers any protection against the downside while it caps upside. The position served its purpose and muted losses in equities. We are happy to have utilized that position but feel that the purpose of the position will not benefit portfolios when the market begins to recover.
However, moving forward we either want full participation or less participation in the markets. Looking at some of the economic and pandemic models, it is likely we could see a greater decline in earnings which will likely be compounded by a further contraction in the earnings multiple (P/E ratio). The removal of the hedged equity is simply a recognition that it no longer provides the benefits for which is was purchased. We would rather wait to see the long-term effects of this worldwide event before acting.
Again, this is not a strategy of raising cash, though that is the ultimate outcome. We see no reason to abandon the current investment strategy we established with you when your account was opened with TD Ameritrade and our new firm. This is simply a recognition that a change to this position was warranted and rather than simply leave it invested in equities, we have decided to move to short-term treasuries.
Andrew and I are monitoring this with one of our new allies, Robert Heintz, CFA®. We are meeting daily via a Zoom meeting and discussing the events as they unfold. If we feel additional action is warranted, we will act accordingly. But, if this ends up being less of an impact to earnings and we are back to business sooner than later, then this market will respond to the 1.5 Trillion-dollar stimulus that is being launched. In case you cannot comprehend a trillion dollars (it is hard for me as well), it is a lot!
I will continue to provide commentary throughout this event and will be monitoring the impact to investments, and your investment portfolios.
If you would like to discuss personally, don’t hesitate to call. I’m working from home and happy to discuss this or any other related event. If you have upcoming plans and would like to discuss the impact, we can do that as well.
Like the title says, “this too, shall pass” but in the meantime, we are here for you. Each of you are in our prayers. Please continue to do your part by protecting yourselves from contracting the virus or spreading it to others through social distancing.
This commentary reflects the personal opinions, viewpoints and analyses of Planning Associates Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Planning Associates Wealth Management, LLC or performance returns of any Planning Associates Wealth Management, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Planning Associates Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.