By: Ralph C. Freibert III, Chief Investment Officer
To say, “This is a very fluid environment”, would be a tremendous understatement. However, to go on to state, “This is will be worse than 2008” would be an equal overstatement. The reality is, we do not have any information that can guide during an event like this. The Models, today, are no better than a weather forecast in rapidly changing weather conditions.
Models are used to provide some thoughtful direction to unpredictable events. Economic models use observable data to provide thoughtful guides to future economic activity. They use the past to offer insights into the future. However, the Coronavirus presents an environment that has no reasonable comparison and pandemic models are similarly based upon theoretical assumptions. Both are useful to aid in planning and decision making, but neither will tell us what is truly ahead.
President Trump has now extended the social distancing guidelines until April 30th, compared to the original target of April 12th. Right now, COVID-19 continues to spread at an accelerating rate in the U.S. and until that rate begins to slow, we truly won’t be able to make any plans to lift the current protections. I have been tracking the spread in the U.S. using a website created by Avi Schiffmann, a high school student in Washington state. It is very well done and captures information from around the world in an easy to read format (https://ncov2019.live/data). If universities ever open again, I believe Avi has a nice scholarship coming his way!
While the spread of the virus is accelerating in the U.S., it appears that social distancing is working in the hot spots like the states of New York, and Louisiana and specifically New York City and New Orleans. As the rate of increase has begun to decline over the past few days in these areas. This is also happening in areas in Europe previously overwhelmed by the virus.
This does not mean cases are declining. It merely states that the rate of growth has begun to decline. The number of infections each day continue to increase, and the number of deaths is getting larger and larger. New York reported its largest number of deaths in one day, just yesterday at 237.
In Louisiana the rate of increase surged to a 40% growth rate, almost two weeks ago, but since then has steadily declined and as of yesterday was just 6.8%. But this simply means that social distancing is helping to slow the spread and therefore will be used in areas not yet severely affected. It is conceivable that we could see restrictions being lifted in some areas and tighter in others, but that continues to create disruption to the economy, especially for small businesses, which make up 40% of the U.S. Economy. It is conceivable to see these restrictions being in place in some areas a late as June.
In previous writings, I have stated, “We do not believe this to be a long-term impact”, but that doesn’t mean it will not impact the economy. It already has, and the magnitude cannot even be estimated. Our research firm’s Chief Investment Strategist, Sam Stovall, recently presented a webcast that showed that we are currently trading at approximately 14 times the projected 12-months earnings estimate, which is far off the previous 19-times earnings. And, we truly don’t know what earnings will be in the coming months. However, despite the social distancing and work from home recommendations, people are still spending money and corporations are still generating revenue.
If my recent trip to Costco is any indication, retail sales are likely to be quite high for this recent period. So, while the economy is likely severely impacted, many industries are still generating revenue. In the most extreme estimate reported by US Allianz, a 20% decline in earnings and a contraction in the multiple to 10 (which was what we experienced in 2008), could bring the S&P 500 down to 1,304, which is a 44-percent decline from Friday’s close of 2541. However, that is reporting the large cap stock market. Investment markets are made up of many investment assets and some of those assets are up over the recent period of volatility. With the tremendous stimulus hitting individuals and business, I am doubtful we will see these extreme levels (not a prediction). We are going to see a lot of changes going forward.
We plan to begin our rebalancing activity this week (barring any significant movement in the market) and will continue over a two to three-week period. Based upon the current decline in stocks from the high on February 19th, we will be buying stock investments, but only as an adjustment to get back to the proper allocations. Whether this is the right step will be revealed over the next 5-years (long-term view), but it is the proper step and why we follow asset management strategies.
Stocks pay dividends 3-5 times the rate of interest paid by a 10-year treasury bond. Could dividends go down? Certainly, but by 5-times over the long-term? I don’t think so.
I’m a New Orleanian. I stood ankle deep in the vilest disgusting sludge amid my life’s accumulation with no idea of what the future held. But I took step one two weeks later and gutted my house. I made no long-term decisions because I didn’t know anything beyond that point. My neighbors came back one-by-on and stopped by and asked, “Are you coming back?” My answer was, “Whoa! I don’t know what I am going to do, but step-one is to gut”. They followed my lead and we started to recover. It would be disingenuous to say I didn’t question my sanity on occasion, but when faced with unprecedented circumstances, we must continue ahead one step at a time. I am not suggesting I single handedly brought Lakeview back, but “activity begets attitude”.
If we replace the 20% reduction in stocks, from the recent decline, and the market goes down 44% from here, we increase the decline by an additional 9% in addition to the declines based upon our current allocation. But this is the prudent next step. To not do so, would be altering our approach to investing and place us in the tenuous position of being outside our knowledge base.
We see no reason to abandon this approach at this time and we do not believe this event will alter the world economy over the next 5-years, which is the time horizon we use as our outlook.
We did not hold a conference call late last week as expected, because there was no information to report and we were not getting any calls of concern from clients. I have begun reaching out to all and will continue to do so, via email to discuss your personal portfolio and what we expect. We will make decisions that we believe are correct for each person, but as we know, things change quickly and in retrospect those decisions could prove incorrect. But, until we have the benefit of hindsight to make decisions, we will continue to operate “as usual”. To state in the words from Mother Theresa of Calcutta, “We are working as if everything depends upon us and praying as though everything depends upon God”. Each of you and your families are in our daily prayers.
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.