COVID-19 Update

Wow. What a wild start to 2020 it has been for investors and the global economy. As of writing this, the Dow is >20% off its high after a bit of a rebound (1).  Investors are wondering what comes next. This post intends to serve as a commentary on COVID-19 developments in addition to our global economic expectations and market strategy.

As COVID-19 has become a global pandemic, public and private sectors across the world have taken unprecedented measures to stem the social and economic fallout of this human tragedy. Individuals are participating in commendable efforts to social-distance so that we can slow the spread of the virus and keep our health-care system equipped to serve everybody. Manufacturing companies across the world have shifted operations to PPE and other medical equipment. In the US, our politicians are setting public health guidelines and enacting all-encompassing legislation to protect our citizens and economy. Examples of these measures include shutting down restaurants (dine in), encouraging people to work from home, and discouraging gatherings of over 10 people. It is indisputable that these measures have slowed down economic activity and are likely to stay in place for at least a few more weeks. On top of the public health guidelines, congress passed an emergency relief package that aims to ensure that citizens can weather this storm and that businesses have the resources to maintain operation. While this virus presents an unparalleled shock, our economy came into this quite strong and our elected officials have a substantial toolbox. Given the strong economic and regulatory foundation our country has been nurturing, we believe the economy can eventually come back stronger than before.

Much to the dismay of pundits and celebrity money-managers, nobody can predict market conditions with certainty. With that said, it’s only prudent for one in this industry to consider the impending economic developments and hypothesize how things will shape up looking forward. Just a few weeks ago we experienced the quickest plunge into bear-market territory in history (2), leading many to question how much selling the markets will endure before  entering a recovery. The CARES act that congress passed seems to have assuaged investors by providing a cushion for businesses and consumers.  It is not a cure-all. Sooner or later the markets need to see signs of renewed economic growth, such as the hiring of new workers and re-ignition of commerce. These are likely to correlate with strong readings on unemployment and from the Consumer Confidence Index. No one knows exactly when the tide will turn, but there are a few things to look for that may prove effective in persuading investors. The first is data that supports the expectation that distancing measures will slow the transmission of the virus. The second is approval of treatments that lessen the acute and dire consequences the virus has had on many while a vaccine is in the works. Lastly, the reopening of businesses and eventual reporting of optimistic forward guidance would likely signal to investors that the worst of the storm is behind us. In light of all this, we aren’t anticipating the historic volatility levels to continue, nor are we expecting a linear recovery.

Sharp declines like we’ve seen recently are often met with heightened anxiety, which is a natural human response to hard times. A widely accepted concept developed by psychologists in the 70’s called “Prospect Theory” tells us that investors are often more effected by losses than they are by gains of the same amount. Seeing dips in value is part of investing, and during times like these it can be easy to forget that the long-term trajectory of the markets has been upward. Like in any other facet of life, the way one responds to adversity is what can better position them for once the clouds are past. The broader strategy for dealing with times like these starts long before the first virus case is logged. It is formulated when we discuss “time horizon”, “risk tolerance” and potential uses for funds. It’s never a desire of ours to sell promising investments while they are down. Well-diversified portfolios contain equities and bonds that produce yield among holdings that tend to be less volatile than non-dividend paying securities (3).  A strategy that we like to implement during bear markets is to draw from those assets for income if needed and shift out of them into more risk if one’s financial picture has the appetite for it. While we are likely in the midst of a recession, recessions are simply part of the business cycle. During recession, businesses are forced to become more efficient and entrepreneurs are able to seize on opportunity. Historically these factors have translated into opportunity for investors. We understand that times like these can be challenging and we look forward to answering all questions that arise.

We hope everyone is staying healthy and happy during this unprecedented lock-up period. More updates will be provided to this page in the near future.

Source(s): https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/prospect-theory/

Ref:

1)       DJIA down more than 20% off of highs:  Yahoo Finance DJIA close:  02/12/2020 29,551.42, 04/08/2020 intra-day 23,210 off of prior low of 18,591.93 on 03/23/2020

2)       Quickest Plunge into bear market territory in history – Markets.Businessinsider.com

3)       Yielding Securities in a portfolio being less volatile – Fidelity.com

The information expressed herein are those of August Financial Consulting, LLC, it does not necessarily reflect the views of Mid Atlantic Capital Corporation (MACC) or Mid Atlantic Financial Management, Incl (MAFM).  August Financial Consulting, LLC, MACC and MAFM do not provide tax or legal advice.  All opinions are subject to change without notice.  Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase or sale of any security.  Investing involves risk, including possible loss of principal.

Historical data shown represents past performance and does not guarantee comparable future results.  The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by August Financial Consulting, LLC, MACC or MAFM as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy.  The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

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