by Brad M. Weafer, CFA Chief Investment Officer
In the brief time since we penned a note to clients last week titled “Managing Through Volatility”, stock and bond market volatility has increased. This has made adherence to our suggestion of sticking to the long-term investment program even more challenging. As difficult as it has been to see more of recent market gains evaporate, our conviction to not react during a severe sell-off remains in place. Emotions get tested often by markets, and emotion is the most important thing to manage in times of fear.
With respect to Covid-19, there are some things we know and some things we do not know. Economic activity is clearly under pressure given social distance restrictions being put in place. A recession in the U.S., and many other global economies, now seems quite likely. A decline in corporate profitability will follow and the impact on certain industries will be harder than others (think airlines and restaurants). As during most recent recessions, credit conditions contract, exacerbating problems for firms with more aggressive balance sheets. What is less certain is the duration and magnitude of the expected decline in economic activity. A stronger response from government policy makers will likely limit the duration of the crisis and is the best longer-term course of action. While the current state of affairs feels unprecedented, it is not the first and will not be the last crisis we face as investors or as a nation. It never appears that markets and life can recover, but our system is resilient and we will overcome the coronavirus and expect that markets will recover given enough time. Figures reported out of China and South Korea are encouraging as the spread of the virus appears to be slowing following government actions there.
We also know that this does not pacify client emotions. Many of you might share the sentiment one client shared pointedly with us on Friday, “How are you protecting our investments?”. There are several things we can and are doing to manage risk. First, managers are actively working to ensure the appropriate levels of cash are in place in client’s accounts as may be requested. Life and near-term spending needs do not correlate perfectly with the rhythm of the market. We understand this and will respond in kind where necessary. Second, we are reassessing how well-suited all our individual companies are to weather the near-term disruption to their businesses. It is critical to manage those near-term concerns against the amount of fixed financing costs facing the company. Fortunately, our investment approach disfavors companies with significant debt, but we still need to manage these risks for certain companies. Third, in times of market stress, all stocks tend to behave badly, and correlations increase markedly. When this happens, there can be instances where the baby gets thrown out with the bathwater providing opportunities for us to capitalize on the volatility and initiate new positions or add to existing holdings that have been unfairly punished. This might appear imprudent in the short-term when fear levels are high, but historically has proven to be the right approach for investors with the ability and willingness to withstand volatility.
Like many companies, we have taken steps to protect employees and our fellow citizen and our teams are working remotely. We are however available, and our staff has done an admirable job of making sure we can work effectively under these circumstances. It is our job as trusted advisors to help clients through these periods of stress and set portfolios up to achieve attractive total returns. For specific actions being taken within your portfolios, please don’t hesitate to reach out directly to your Wealth Manager.
Market Commentary Disclaimer: This publication is for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information contained herein is the opinion of Boston Financial Management and is subject to change at any time based upon unforeseen events or market conditions.