Q1 2020: The New Normal

WHAT HAPPENED?

• World economies already in slow growth mode and now many of them are pushed into a recession.

• Stock valuations started the year at unprecedented levels and had further to fall when COVID-19 took over.

• Bond yields were low at the beginning of the year but recessionary fears have driven yields down further.

• The Coronavirus and the oil war between Saudi Arabia and Russia allowed for the largest drop in oil prices in history. At current oil price levels, many mid-level shale producers in Texas and other smaller oil companies will be driven out of the business. Suspicions are high that collaboration between Russia and Saudi Arabia are strategic to hurt America at a very vulnerable time. They very much dislike our oil independence.

• Major business interruption and lifestyle changes occurred almost overnight due to the world pandemic.

STATISTICS:

• At the end of Q1 2020, the Dow was down approximately 23%. It had fallen further and has experienced some rallies to the upside, but we believe this market will be susceptible to more volatility.

• Not to belabor the bad, but the following represent the full quarter end returns

DJIA            Nasdaq     S&P 500     Russell 2000     Global Dow     Fed Funds    10-year Treasury

-23.20%     -14.18%    -20.00%     -30.88%             -24.04%            -1.50%          -1.22%

• The market downturn was the 2nd most precipitous in Wall Street’s entire history. Literally, most fund managers said that they felt like it fell of a cliff. The only faster market decline was 1931.

• The average recession is approximately 11 months. The 2008 recession was 18 months.

• 5 things to invest in when a recession hits: core sector stocks with reliable dividends, real estate, precious metals, and yourself.

THE FUTURE:

• DON’T PANIC- It won’t change anything, and recessions are a necessary part of the cycle. Stocks were too high at the end of the year to find any desirable value.

• Equity markets are already pricing in a recession; therefore, any good news about the slow down of COVID-19 or an end to the oil war will be a catalyst for equities. We already know that China, Russia, and Saudi Arabia cannot afford these oil prices.

• GDP will undoubtedly pull back hard in the 2nd quarter. Estimates range from negative 17-35%. Additionally, unemployment will be a double-digit number, but exactly what it will be is harder to gage.

• There will be an obvious dearth of demand and supply chain disruptions due to the pandemic in the second and most likely the 3rd quarter of 2020.

WHAT TO DO?

Turn off the television. Check in less often. We are minding the store, and no one has ever made any money by taking drastic action in these crises. Most of our clients have 3 to 5 years before they need every penny of savings. The financial markets should be well on the way to recovery by this time. After 2008, most of our investors recouped the previous 2007 and another 40% return five years later. Letting time take time is the key here.

Time is needed for Global Demand to return. Asia accounts for 10% of S&P500 companies’ revenues and China accounts for about 4% of overall revenues. Therefore, 2020 is going to be the year that we reposition by selling our laggards and buying great dividend generating companies that can be acquired at incredible values. We need the time to see Q1 earnings projections and future pro formas so that we can accurately access what is an opportunity and what is not.

Diversify- Maybe all of this volatility has taken you mentally and emotionally to a new place in your investment mindset. For example, maybe you have been positioned in 100% equities with your investments as far back as you can remember, and today’s environment combined with your current age has given you a new risk palate. Now is the time to speak with us and let’s get corrected risk and asset allocation targets for you. This is an active measure right now in which you can participate to take some control back. We welcome your calls at any time, and make no mistake, we are here to serve you. Stay calm and this too will pass.

Warm regards and please be well,

Zandy Campbell