The past few weeks are a period we won’t ever forget in the financial markets and more importantly, in life. Economies around the world simultaneously stopped as the COVID 19 virus impacted every corner of the planet over the past three months. This is unprecedented and has led to the fasted bear market (when stocks decline 20%) for stocks in the United States. Shares have rebounded off their March 23 lows as the Federal Reserve (Fed) and Congress have responded to address fundamental issues due to the virus’s impact on the economy. Over the next weeks and months, we expect the record books to be rewritten as economic data declines faster than we have seen previously.

Investment Strategy

In times of stress, our human reaction is to shorten our time horizon and worry about what is going to happen today, tomorrow, and maybe next week. We are trying to look through the negative news flow and ask ourselves how do we want to be invested when things recover because we are confident things will recover.

Moving forward, we are planning to reinvest your cash holdings in two trades. Our first move will be to increase our weighting to smaller cap companies in US stocks. Historically they tend to have strong performance out of a bear market. We are also going to reduce our holding in low volatility stocks and ETFs in our large cap stock allocation and remove it entirely from our small cap allocation. Our low volatility stock exposure has limited losses this year. As we prepare for the next bull market, we will want to reduce this holding because it tends to underperform early in an economic cycle. The proceeds from selling low volatility will be invested back into our growth and value large cap ETFs and stocks.

Our timing to make this first purchase is likely to occur in the next few weeks. We expect stocks to see some pressure after the recent rally over the past two weeks, particularly as economic and corporate news starts to be released. We have identified certain market levels which we plan to act. We are not calling a bottom in the bear market, but we are more confident to wade back into the water.

You can read more about the two tactical moves we made in your portfolios in March here and here.

Outlook

The ultimate all-clear signal will occur when we have a vaccine or effective treatment for COVID 19. We are not doctors or epidemiologist so we will not speculate on when this could happen. Historically bear markets end well before the economic data reaches its bottom. We expect that you’ll see stocks start to rally sometime before the full economic impact is felt and more importantly, before we see a peak in COVID 19 cases. Shares have rallied about 15% off their lows seen on March 23. Bear markets are known for sharp rallies and we think that rally over the past few weeks is just that.

We are monitoring five market items or other data points to offer perspective where we are in a possible recovery.

• Bond Markets Stabilize

• Fiscal Stimulus

• Corporations Reset Expectations

• Economic Data Released

• Progress on COVID 19 Cases and Treatment

The bond and credit markets have stabilized and improved considerably since mid-March. The Fed took unprecedented steps to support bonds by pledging unlimited purchases to make sure this market is running smoothly. The Fed has done an excellent job during this crisis and has learned from the 2008-2009 financial crisis that they needed to be bold and act fast. Bond markets did not become nearly as distressed this month as they did during the financial crisis. There was panic selling in mid-March in both the bond and stock market. As the Fed intervened, panic selling abated in both markets. This is still a work in progress but the improvement gives us confidence.

Congress has passed the CARES Act, which will provide financial support to large and small businesses, as well as, cash stimulus to individuals. Passing this legislation happened quickly, by Washington standards, but getting the funds to companies and individuals is now the critical next step. If this gets to businesses and individuals rapidly, it can reduce the economic strain many are currently feeling.

Companies will start to report their first-quarter earnings next week. This will offer a glimpse of how companies are being affected by COVID 19 and the economic fallout. Economic data will also start to show some indication of how bad things are getting. We and the markets are expecting the numbers to be terrible, and the markets are pricing this in.

Last but most importantly, we are watching the new COVID 19 cases around the world. Europe is a few weeks ahead of the US and it will offer some comparisons to how things could look in the US. Vaccines and treatment options are in initial clinical trials. This is a positive first step and everyone is anxiously awaiting progress here.

Looking at our five market indicators, we see significant progress on two. It is too early yet on the last three to expect any improvement.

We usually discuss market valuations to provide some guidance on future returns. Using 2019 data does not offer much value, given the world has changed so much since it was reported. 2020 estimates are hard to predict because of uncertainly around the duration of COVID 19’s impact. We are using a matrix of different scenarios to help estimate what the potential market value could look like this year and next. We are essential discounting earnings in 10% intervals. This lets us see different market prices compared to market valuation levels. This technique was useful during the 2008-2009 financial crisis. At the moment, we don’t think the market is generational cheap based on this analysis. If we revisit the lows seen early in March, that is a price where we see a margin of safety. The range of outcomes is simply too wide to have confidence buying at a specific level, so we are not trying to pick the precise bottom.

We’ll leave you on two positive notes. The first is executives are buying their stock at the highest levels in years. This is a good sign because the only reason they are buying shares is they are optimistic they’ll make money. The second is we are seeing early signs that China and other Asian economies are coming back online. Our path won’t follow theirs in the same exact fashion but there is a path forward.

Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

US Viewpoints: March 31, 2020