“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.”
– Helen Keller

 

Introduction 

• The market and our country have been resilient in the past and we expect that things will improve down the road but might get worse in the interim.
• We, as investors, expect market recessions as part of any full market cycle. Market contractions, while painful, are necessary and lead to greater market expansion.
• Expect recurring bouts of volatility until the number of new COVID-19 cases plateaus.

In times like these it is important to remember we have seen market disruptions before. Each “panic” is different, but similar enough that we can make some judgments about how it will play out. The U.S. economy has been resilient in the past – confidence will be restored in the fullness of time. The Federal government knows what to do and has the resources to defeat the COVID-19 and provide the necessary support to small businesses, workers and the industries most affected by the subsequent market volatility and uncertainty. Hopefully soon, we will get the fiscal policy response the economy needs, as we have already received the monetary policy actions from the Federal Reserve (“the Fed”).

The Economics

• The Fed took aggressive action on Sunday to buffer the U.S. economy from the fallout of the COVID-19 containment measures.
• The Fed cut interest rates by a full percentage point to near zero; we are now at the “Effective Lower Bound” (ELB).
• Quantitative Easing (QE) is back with a vengeance; the Fed has committed to buying $700 billion in bonds, U.S. Treasuries and mortgage-backed securities.
• More will be required of the Administration and Congress; we expect it will be forthcoming but on a political timetable, not the markets.
• We expect much more stringent social distancing guidelines, an aggressive approach to containment, to be announced soon.

Starting points matter: we entered the current environment with a headwind of GDP, a strong banking system, and equities that were not significantly overvalued. For long-term investors, even given a social distancing recession, market moves have likely enhanced projected long-term returns from equities while reducing them for bonds. These factors all bode well for a recovery once the fear subsides. Low interest rates provide the scope for a massive fiscal stimulus package.

The Administration and Congress have taken steps to address the spread of the virus and bolster healthcare infrastructure. We are moving swiftly to increased restrictions on all sorts of economic activity. The Administration must bring the full weight of the government to bear. It is going to take a sizable fiscal stimulus package to make an impression on markets – the bill may eventually be in the trillions, costing more than the 2008 Wall Street bailout or the 2009 stimulus bill.

The Black Swan is a book by Nassim Nicholas Taleb, subtitled “The Impact of the Highly Improbable.”  A suitable title to capture today’s global environment. The book was published in 2007 and widely cited during the 2008 market crisis. Taleb defines a “Black Swan” as an event that is unpredictable, carries a massive impact, and after the fact, we concoct an explanation that makes it appear less random than it was. We can say that COVID-19 was certainly unpredictable and is having a massive impact.

Looking at the situation outside our own borders, last night saw not only a tsunami of domestic liquidity from the Fed but coordinated Central Bank action to enhance the provision of U.S. dollar liquidity to help ease strains on global funding markets. The purpose is to help improve the supply of credit to households and businesses, in the U.S. and abroad.

Credit Markets

The Fed has unleashed a crisis-coping playbook in stunning fashion. This is a very aggressive move to combat the uncertainty.  Credit spreads are widening, and a measure of bank credit “stress” (the “TED spread”) has also widened materially, but less so than expected given the move in High Yield and Investment Grade Corporate Bond spreads. This is likely because the U.S. commercial banking system remains in good shape. Bank credit stress is what caused the Fed to take action in an emergency meeting on Sunday, March 15^th. The bond market must function properly for the fear in the stock market to subside.  Beacon Pointe will continue to look for clues from stabilizing credit spreads and higher U.S. Treasury yields, to guide our view of investor sentiment and the direction of the stock market.

The Fed has more tools at its disposal and can request more from Congress should it be necessary.  Direct purchases of corporate bonds and other credit products or risky assets – including direct purchases of equities.  The size of the Fed’s balance sheet is unlimited in theory.

Conclusion: How to Move Forward Amidst Uncertainty

The Coronavirus will fade in the fullness of time. The market has and will continue to price in a worst-case scenario until the virus is contained and the government has put a floor under the economic damage. Steps to contain the virus are likely to get more restrictive – we should expect this in the interest of public health. And, if the Fed’s massive response is not enough to arrest the stock market sell-off, it may be necessary to employ more circuit breakers to break the fever while the government marshals its considerable resources. We believe price action in the stock market will continue to focus lawmakers’ attention on the task at hand. The wheels of political progress are known to move slowly. An immediate response is to restore the optimism necessary to support stocks, and the economy. It will be forthcoming.

As we weather the emotions of market volatility, it is important we remain steadfast in our long-term strategy and remember that patience and discipline are key ingredients of successful long-term investing. Pulling from our commentary on March 12^th, it is important to keep perspective and remember that crisis events are certainly not a new market phenomenon – there have been and will be points in time when fear overshadows rational thinking, resulting in extreme short-term market gyrations.  History has shown that, with the benefit of time, investors are able to digest the new information, evaluate the real-world implications of the event, and adjust to the risks and opportunities presented by the current environment.

Next Steps: A Thoughtful Course of Action

There are several investing disciplines and principles that we believe are critical during this time:

1. While many investors have the urge to sell equities from their portfolios, now is the time to add to the position. A portfolio weighted 70% to the S&P 500 stock index and 30% to the Barclays Aggregate bond index at the start of the year, might now be weighted 65% stocks and 35% bonds. Investment basics would suggest rebalancing the portfolio back to the original weighting.
2. With the plunge in interest rates, the importance of finding sources of income elsewhere increases, including alternatives such as real estate, private credit, etc.
3. The current dislocation of the market has provided opportunities for active managers who have been holding cash to deploy it by investing in quality companies that have the financial stability to survive the downturn and thrive in the economy moving forward.

Rest assured, Beacon Pointe is actively overseeing client portfolios, rebalancing and seeking sources of income where needed, and employing the proper investment managers to achieve our clients’ investment mandates.

A Dedicated Commitment to Client Service

Beacon Pointe client portfolios are positioned to weather the storm – Beacon Pointe assets are down well less than the S&P 500 year to-date. No matter the catalyst, the economy and the market will bounce back, once the “Black Swan” event has passed. A tsunami of central bank liquidity is a start.  A tidal wave of fiscal stimulus will be coming next.

Like other advisory firms, Beacon Pointe has been monitoring the ongoing health crisis and we have made some adjustments to our daily operations to keep our employees healthy and productive, while maintaining service to clients without disruption.

As of this week, we have directed several members of our staff to work from home, while others continue to work from our regional offices. Importantly, every member of our professional staff can work from remote locations via a secure link to our network and applications, which is consistent with our regularly tested business continuity and security plans.  In addition, we are maintaining full communications with each member of our team, our Investment Committee, our clients, and our counterparties in order to operate without disruption.

Your Beacon Pointe advisory team is diligently monitoring client portfolios and is available to you for any questions or concerns. Please feel free to call your Beacon Pointe advisor should you need additional information or have any questions.

 

For regular market flashes authored by Beacon Pointe’s CIO, follow @BeaconPointeCIO on Twitter.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

© Beacon Pointe Advisors. All Rights Reserved.