Commentary on Financial Markets and The Way Forward

We are all in this together, uniformly, collaboratively fighting a common enemy. Here is a brief review of what has happened so far, what will happen moving forward and I will unveil the four keys to overcoming this issue successfully.

The markets continued to merrily go about their way to all-time highs through mid-February when the volatility hit in earnest. There are actually two incidences in the last twenty years when markets fell farther then they have now. Markets fell approximately -45% when the dot-com bubble burst at the beginning of the new millennium and markets fell nearly -60% in the global financial crisis of 2008.

What is truly different this time is how quickly the recent downside commenced.

Never had markets fallen this swiftly in such a condensed period. Stocks, as represented by the S&P 500, fell approximately -20% through the first quarter of 2020. Bonds, as represented by the Barclays Aggregate Bond Index, were up slightly. We would have liked to see stronger returns from bonds. Still, more importantly, they served their purpose of working as a shock absorber to reduce the overall volatility of a well-diversified portfolio that has a mixture of both stocks and bonds within it.

Is now the time to be running to bonds?

Absolutely not, in our opinion. Our portfolios, and the portfolios we suggest retirement plan investors utilize themselves, are designed to be all-weather in nature. They must be designed to fit your particular needs, time-horizons, and unique circumstances and adhered to during the sunniest of economic times (like just up until mid-February) or during the darkest of financial storms (like about a week ago when markets bottomed and we were all fearful of the unknown if grocery stores and other essential services were going to stay open).

"The situation is currently too fluid to make significant changes to underlying strategies or any strategy outside of our direct control that was constructed correctly in the first place."

Unfortunately, fear continues to be the most impressive weapon in the arsenal of poor decision-making tools and was out on full display – at historic levels – last week. On Monday, March 23rd, more retail investors sold stocks according to Merrill Lynch then had every been recorded in market history for any one day dating back to 1866. The most sells of stocks on one day ever! Unfortunately, what happened on the exact next day for those who panicked sold, the stock market had its strongest up day in nearly 90 years.

Can the markets go lower from here?

Absolutely but we don’t know that for certain. What we do know for sure is those people who panicked have permanently monumented losses compared to their overall risk-profiling. Even if they still needed to sell because say they were misallocated in the first place, not waiting for an inevitable bounce just a few more days after such carnage has cost them dearly. For our discretionarily managed portfolios we are monitoring every single position to make sure they are still adhering to the objectives set out for them – which I’m glad to report that they are. We are also taking advantage of objective opportunities such as tax-loss harvesting and putting additional funds to work.

What should retirement plan investors be doing?

We recommend that they continue down the same path. Keep contributing to the same investments as always. Regularly scheduled contributions are buying some great investments at significant discounts right now. Would you go running away from a sale at a store if you saw discounts of over 20%? I hope not, so why would you do the same as the market is offering a sale in the form of lower prices?

"Moving forward, the headlines will unquestionably get worse."

Unemployment will probably spike at the highest rate in history; overall economic activity will likely contract to the point of throwing the economy into a recession technically. The purveyors of news have it in their best interest to make the headlines as scary as possible. We know this will happen, but we don’t know how much of this is already factors into the performance of markets.

"What we do know is that there is bipartisan support to do whatever it takes to help those most impacted and that historically large amounts of stimulus have already be signed into law."

This market situation isn’t 2008 in which politicians questioned their legal authority to intervene or the potential political fallout of bailing out so-called fat cat bankers. During that last crisis, it took nearly two years to get the full level of stimulus passed to help quell market worries. Now, the stimulus that dwarfs the entirety of what was passed during the 2008 crisis was finalized in days. As graphed, this current stimulus is very broad in its reach. Extending unemployment benefits for those laid off, providing forgivable loans to small businesses, and extending tax payment deadlines. Central Banks have also done their part quickly by slashing interest rates to zero but more importantly, have provided unprecedented amounts of liquidity to make sure markets continue to function properly. Moving forward, these two initiatives comprise half of the keys to victory in overcoming this crisis.

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The Path Forward to Victory

  1. Local Response:

    City and state authorities are doing what they can to marshal their local resources and infrastructure to slow down if not stop the spread of COVID-19. We are living this ourselves daily. This is a sudden shock to local economies, but a necessary step in this fight.

  2. Healthcare Response:

    This is the front line. Thousands of healthcare professionals are fighting to protect and save lives. Scientists and researchers globally are racing to find a vaccine. This is the long-term solution but will take time to achieve. This is the victory we’re all after. 

  3. Fiscal Response (as mentioned above):

    The US Federal government is working to provide short-term and near-term support to the national economy. Tax relief and delays and even direct cash is on the way to help those most effected.

  4. Monetary Response (discussed above as well):

    The Federal Reserve is deploying an ever-increasing set of tools at its disposal to keep the financial markets from seizing up while keeping credit flowing freely.

We all need to do our part in however we are personally involved on these four fronts. Everyone can do their part to make wise decisions to help slow or eradicate the spread of this disease in their community. We’ll keep doing our part, working as diligently as possible on behalf of our clients during these difficult times.

The material and opinions provided in this document are meant for general illustration and/or informational purposes only and should not be construed as investment, tax, or legal advice for any individual. Although the information has been gathered from sources believed to be reliable, each reader must decide whether it is valid and applicable to his/her own unique circumstances. To determine which investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any economic forecasts made in this commentary are merely opinion, and any referenced performance data is historical. As a result, neither is a guarantee of future results, as all investments involve risk. All referenced indices are not managed and may not be invested into directly. Investment advice offered through Resources Investment Advisors LLC, an SEC-registered investment adviser.

James Battmer on April 7th, 2020

Posted by James Battmer

James Battmer currently serves as Chief Investment Officer for Resources Investment Advisors. In his role, James is responsible for providing executive oversight of the firm’s investment strategy and execution, in addition to overseeing all institutional and high-net-worth client accounts. James has 20 years of experience in the industry, his experience lies in macroeconomic policy, fixed income management and equity selection. Prior to joining Resources Investment Advisors, James previously worked at UMB Bank and Morgan Stanley.

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