We will all be working remotely from our homes this coming week. We have been prepared for situations such as this and can all work remotely with all our services at full capacity. Our phones will be answered as normal and any and all services will be available. We are here to serve you and be here for you if you have any questions or concerns. We realize these are trying times for all, and we are here to support and serve you through this period in time, however long it may last. We can still conduct your personal reviews via our online services or phones. Just let us know a convenient time you’d like to schedule your personal review/update, and we will schedule it for you. Our primary concern is to protect your health and safety as well as stay healthy ourselves.
We have said over the past years that we didn’t think another 2008-2009 financial crisis would occur again for many years. We could not have anticipated that a new strain of virus would cause the chaos and panic we have seen over the past few weeks. With all that has transpired over COVID-19 in the past several weeks, financial markets, governments, and citizens all over the world have not only panicked, but unprecedented financial measures are being taken to stave off the economic impact that the virus may cause.
We have been trying to make sense of the international reaction to COVID-19 based on statistical data up until this point and have had a hard time making any logical sense of the entire situation to date. Since no one can predict when and how this will end, we can only look to history and provide our opinion as to why we find ourselves in this current situation. Again, we are not medical experts, but we want to give perspective in an effort to assist you in looking ahead into the next few weeks. Hopefully, we can provide you with information that proffers insight into what might happen in the near term in order to help prepare you for the coming weeks.
Looking back to recent history, we have to remember what happened in 2009 when the H1N1 (Swine Flu) was declared as the first pandemic in 40 years. The question in our minds is why are we reacting in such an extreme way globally compared with 2009? For one, the global economies were in a financial crisis at the time that was labeled as the worst since the “Great Depression” and we now refer the time period as the “Great Recession.” One big difference today is that the U.S. went into our current situation with a fairly strong economy and low unemployment. Today’s economy is drastically different than 2009, when we had high unemployment and an economy in the process of coming out of severe recession. Looking at the CDC’s website for reference, it does allow us insight as to how the 2009 pandemic progressed. On April 15, 2009, the first human case of the H1N1 flu was detected in California. (Yes-this one originated in the U.S.) By April 23rd of 2009, two additional cases were detected in Texas. The World Health Organization (WHO) declared a public health emergency of international concern. On June 11, 2009, the WHO declared it a global pandemic. By June 25th, at least 1 million cases had occurred in the U.S. alone. On July 22nd, clinical trials testing the 2009 H1N1 flu vaccine began. By August 2, 2009, the CDC School Dismissal Monitoring System was activated. On September 15, 2009, the FDA announced approval of four H1N1 vaccines. The H1N1 reached its highest level of reporting week on October 24, 2009, with 48 of the 50 states reported widespread activity. November 23, 2009, there were no school closures throughout the U.S. for the first time since August 25th. August 11, 2010, the WHO announce the end of the H1N1 influenza pandemic.
Do any of you remember mandatory quarantines, entire cities shut down, multiple business closures, cancellation of church services, global travel restrictions, government bailouts (due to H1N1), and cancellation of sporting events, etc. during that time? It is estimated that there were between 43.3 and 89.3 MILLION cases in the US alone and between 8,868 and 18,306 deaths in the US from H1N1. (PubMed.gov) As of today, there are approximately 335,362 of COVID-19 worldwide, and 14,611 deaths across the globe (worldometer.info). In the US, the numbers are currently 32,356 cases and 414 deaths to date. Why such an extreme reaction to COVID-19 compared to H1N1 just based on the statistics at present? We can only speculate. Perhaps due to the 2009 economic environment, our economy could not have withstood further economic pressure such as mandatory business closures, travel, etc. The US government had already had to bailout major corporations such as GM and Chrysler, as well as major banks and could not have withstood the pressure of further economic decline. Maybe today, after learning some lessons from 2009, the WHO and CDC reacted much more swiftly and decisively so the statistics from COVID-19 will be much less deadly than the H1N1 flu. Time will tell. To date, reported cases for the COVID-19 virus now total 335,362 and 14,611 death worldwide. Recovered cases stand at 97,594. (worldometer.info)
Today cases of COVID-19 continue rising worldwide as governments accelerate stimulus spending and central banks unleash unprecedented levels of easing. The US and most parts of the world will likely continue to see “new records” in cases, as more tests continue to be performed. This should not come as a surprise. The Federal Reserve has now even began purchasing municipal bonds. We still have concern for fixed income (bond) markets over the coming month and will maintain the fixed income allocation of client portfolios in cash until we can see other opportunities. We continue to see somewhat of a liquidity crisis within the financial markets for the short-term; however, we do not believe bonds have yet to price in this reality. We continue to believe this to be a speed bump to the world economy, one that hasn’t been navigated previously. The financial crisis of 2008-2009 in contrast was a wide detour. This liquidity crisis could likely continue to be messy and create volatility, but we remain optimistic regarding the incredible opportunities that have been presented within the equity markets. As for bonds, we will likely begin adding fixed income/bond funds back to the allocation side of portfolios once we see more appropriate pricing.
We have not yet started increasing any meaningful amount to equities/stocks for most low and middle risk clients; however, that will likely begin changing this week and throughout the weeks ahead. We will rebalance most client portfolios sometime this week, which will begin the process to gradually move towards more equity/stock exposure. For our lower risk clients, this will be investing them back towards their lows. For example, a capital preservation account (our lowest risk) may hold anywhere from 15-30% public equities (stocks). These clients have only been around 15% exposure. With such severe declines recently in stock prices/valuations, this percentage has meaningfully dropped. For these lower risk clients, we will get back to at least their minimum exposure levels for stocks. For more aggressive clients, we will begin shifting to an increase in allocation towards stocks. We would not expect to get stock allocations to the highest levels based on risk until more confirmation comes within the market. Normally we would say this would be the following months, however at the rate markets have been moving lately, it could be weeks.
While the general public continues to be fixated on the virus, we continue to be surprised how much the financial markets have sold off as well. We now are finding extremely unusual opportunities within lower stock prices and valuation that would not otherwise exist. To help illustrate this, let’s briefly discuss one company most of you are familiar with: Clorox. Clorox makes bleach and cleaning products, which many of you probably use in your homes. As you can imagine, these products are currently selling out everywhere as the public frantically tries to abolish the virus from every surface on the planet. So, it makes sense for their revenues to see a temporary surge, temporary being the focus. We do not believe that this will lead to a decade of increased sales. Now, the market wouldn’t price this to infinity for such a short-term surge, right? That assumption would sadly be wrong. Currently, Clorox’s stock (CLX) is trading at all-time highs in every valuation metric since the company has been public. We believe this could be detrimental to investors piling into names like these with the hopes of investing in the stock and products that depend on the demise of society from this virus. We adamantly would take the other side of the argument, investing in companies at all-time lows, especially those that seem solely impacted by the fear of the virus. We continue the view that this situation will be fairly short-lived, and we should get back to some normalcy and life will go on. Much like we all did after (and for many even during) the H1N1 pandemic of 2009.
We continue to be optimistic for many of the valuations currently paid to buy stocks of good companies today, regardless of what unfolds in the months ahead. As for the “markets,” we have no idea what direction the Dow Jones Industrial Average, S&P 500, or other market indices will take. We can only emphasize the incredible long-term values we remain capable of finding in this environment. We have positioned client portfolios to be able to continue taking advantage of these opportunities if the stocks continue to fall further. Our main concern continues to be with the bond markets over the next few weeks. We do not believe the world will end. We do believe much of the headlines that could come in the next few weeks will make many feel that America as we know it has come to an end. The media could very well become more sensational over the coming weeks, and we want to help you to be prepared for this. This virus is a health risk, but it seems at this time to be similar to or even less severe than other outbreaks we have experienced in the past. The constant media scrutiny, social media, and data dumps continue to be the largest difference. For those at risk and who were at risk of various sicknesses before this outbreak, we continue to ask you to be careful and do take it seriously. As for client portfolios, we continue to be concerned with the economic impact of government and central banks decisions especially as they all continue to rapidly escalate their responses. We remain vigilant in assessing these risks and are focused on attempting to position our clients’ portfolios to benefit for the decade ahead as this all comes to an end.
Let’s set up your personal online or phone review if you have not yet done so this quarter. Call us today.
Your Team at F.I.G. Financial Advisory Services, Inc.