1st Quarter Client Note – Covid-19 Edition

There are decades when nothing happens; and there are weeks when decades happen.

I’m pretty sure that’s the first time I have quoted Vladimir Lenin in a client note. And probably the last.

A great deal has indeed happened since my first post on the coronavirus pandemic, when the implications were just beginning to emerge.

The public health implications and economic fallout from Covid-19 are too numerous and extensive to catalogue in a short note. On account of social distancing, both voluntary and mandatory, depending on where you live, businesses large and small are closed for an indeterminate period. Millions of employees have been furloughed or laid off, pushing the unemployment rate to 15% and beyond. Jobless claims now exceed 16 million. And GDP is expected to fall by 25 -35% in the second quarter. We are already in a recession that may be one of the deepest we have faced and will be of uncertain duration.

The Government response has been extraordinary. There have been three separate pieces of legislation; providing for health care spending, additional and extended unemployment insurance and the $2 trillion CARES Act to provide forgivable loans to small business that maintain their payrolls. As well as unprecedented monetary stimulus from the Federal Reserve.

As economist Robert Shiller said, we really are experiencing two pandemics; the actual virus and the economic anxiety.

Market Reaction

The first three months of the year were the worst for the S&P 500 Index since 2008, and the worst for the Dow Jones industrial average since 1987. From February 20 to March 20, the return on the S&P 500 Index was -37.4%; certainly enough to make any investor lose some sleep.

The S&P 500 lost 19.6% for the quarter. And that was the best performance of all the equity asset classes followed by our friends at Dimensional Funds as reported in their Quarterly Market Review.

On the whole, fixed income performed as would be expected for the quarter, despite some unusual circumstances rattling the bond market at the height of the market volatility.

The Bloomberg Barclays Aggregate Bond Index (40% Treasuries, 29% agency mortgages, 21% investment grade corporates) gained 3.2%; which somewhat softened the blow. Diversified portfolios held up reasonably well during the worst (so far) of the volatility.

Fortunately, the markets have reacted generally positively to both the social distancing and the fiscal and monetary responses and have recovered a good bit from the lows experienced in mid-March.

Radical Uncertainty

The markets are generally quite efficient at rapidly incorporating into prices news and information as it unfolds. Particularly regarding the future earnings prospects of companies – and then discounting those future earnings to present value, to ascertain the prices at which stocks should trade.

But the cause of all the recent volatility is the lack of information. Market participants know that the economy and firms, both large and small, are going suffer. They just don’t know by how much and for how long. Until we have some consensus clarity about the prognosis of the virus and the effects on the economy, the volatility will undoubtedly continue.

Nobody knows precisely how this is going to unfold. I wouldn’t heed either the dystopian Cassandras or the eternal optimists. We are likely going to need to reopen the economy at least partially and in stages, even before the virus is no longer a threat. It’s going to be an exquisite balancing act until we develop a vaccine and/or herd immunity. With the best-case intermediate scenario involving continued social distancing (which already seems to be working), more robust testing, development of effective treatments and organized response to the inevitable waves of future outbreaks.

While I don’t put a lot of stock in predictions (especially, as Yogi would say, about the future) these are two excellent pieces: One from from Morningstar that integrates the medical and economic components to argue a base case, best case and worst-case prognosis. And the other, entitled, Roadmap to Reopening from the American Enterprise Institute. These might serve to put your thinking about the crisis on a more balanced footing.

Human beings and their economies have proven to be resilient over many centuries of instances of hardship and we can expect this one ultimately to be no different.

Stay the Course or Course Correction?

I will spare you the myriad charts floating around that show that every bear market has eventually been followed by a bull market — and how long it takes to recover. We all know that history. And it is relevant. But every bear market is unique. And homilies like “stay the course” – coined by my idol, the late  John Bogle –  are only useful if you are on the proper course designed for your individual circumstances. Our job is to really understand your values and priorities and how they are connected to your plan. And to utilize the tools and resources at our disposal to make our lives as good as they can be.

No Need to Panic. Our financial futures may not be as rosy as projected to be, even as recently as couple of months ago. So, in times like these it makes good sense to look at the map and GPS to assess your flight plan and make any adjustments if necessary. While selling all your stocks and going to cash is never a good idea, it may be reasonable to make a modest adjustment to your asset allocation, assuming with a bit more conservative portfolio you can still reach your goals.

Dynamic Spending. Exhaustive academic research shows that having a dynamic spending policy increases the long-term sustainability of portfolios. This includes both increases when times are good and reductions during bad markets. And it’s not necessary to guess which of those myriad strategies is the most superior. It could be small permanent cuts. Or more drastic temporary ones. These are easily modeled in the planning software.

Obviously, it’s difficult to cut back on necessities. But this is a perfect opportunity to be more mindful with your spending. And cutting back modestly, to start, on discretionary items like travel and eating out shouldn’t be hard. They’ve essentially become verboten.

Liquidity. Cash and high quality, short-term bonds are like the seatbelts in your car. They are not sexy, like the snappy turbo engine or the 14-speaker surround sound – but absolutely necessary. It is important to own enough cash and short-term bonds to cover several years of spending needs, so you don’t need to sell equities when they are down. You will be surprised at how long a significant sleeve of conservative investments, together with the dividends from your stock portfolio, can support your lifestyle.


I know that in order to be there for my family, friends and clients, I need to take care of myself. These are a few of my personal prescriptions:

News Withdrawal. I am a TV news junkie. Business news. Political news. Sports news. I generally have the TV on while I work. But I have turned off the television. There is no sports news. (How many different ways can you spin Tom Brady signing with the Bucs?) The elimination of the constant barrage has helped me focus better and be more at peace during this topsy-turvy time. To stay informed, I check in with the NY Times and WSJ websites. And we are binge watching Downton Abbey.

Yoga. With the economy on the mat, so am I. I have practiced yoga on and off for 30 years. The last few have been with a fantastic wall-yoga class. I have never had much of a home practice. I love the instruction, the camaraderie and the Namaste of group practice. But now I have no choice and am gradually starting to get into a practice here at home. Undoubtedly, I am just making up some of the poses.

Long Walks With Manny. Needs no explanation.

Sleep. Trying to get as much rest as possible. Like many during this time, my dreams are off the chart.

Zoom Neighborhood Dinners Once a week four couples in the neighborhood order takeout from one of our local restaurants and we enjoy each other’s company over Zoom. Please pass the ketchup.

Humility, Kindness, Gratitude and Sacrifice

Someone you know and love is very likely going to get sick, suffer severe economic loss or possibly even die.

I thought these two blogs took a rational and calming approach to the predicament we are in. Your Covid Thoughts are Not Crazy is a short essay on how to balance thinking about the immediate with preparing for the long term. This is hard. You are not crazy. You are not alone.

Finding Peace with the Pandemic reminds us that the most precious thing is our health.  And concludes:

We are in the midst of a global social experiment; one in which we are isolating ourselves now so we can be together in the future. Many sacrifices have to be made, but on the flip side, we have the unique opportunity to be still for a moment and reflect on how grateful we are to have the relationships we have.

While we all want to know when this virus will pass, the bigger question is how will we use our minds until that day comes. If we spend tomorrow and each subsequent day in fear, we will re-enter a world that was just as restless as before the pandemic struck.

But if we spend tomorrow in peace, we will re-enter the world with a renewed sense of gratitude that only sustained reflection can instill.

I look at the stay-at-home orders and shuttering of businesses as a medically induced coma for the economy. St. Louis federal reserve president James Bullard is calling it an investment in our survival.

We are not stuck at home. But safe at home.

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