At M3 we’re focused on investing in the market and having a long-term outlook. We are the gatekeepers of your wealth, and we want to ensure you can preserve it for your family’s financial future.
As the COVID 19 Pandemic unfolds, we want to share our take on the recent developments in financial markets and our strategic outlook. Our objective is that of achieving our clients’ long-term goals. That is easier said in rosier times, but it is especially in challenging ones that long term strategy is of paramount importance.
Our approach is to balance our clients’ risk levels with the expected duration of their investment plan. The active management of cash flows, the rebalancing of portfolios and the implementation of tax-saving strategies, in the context of big picture strategic planning, is how we articulate our value proposition in turbulent times.
This global pandemic is scary, there is no doubt about it. For our sector and for the economy as a whole, this is as serious as a heart attack. Never before in economic history have wide swaths of the economies of countries all over the planet been shut down suddenly and at the same time.
As the decade-old bull market crumbled at an astounding speed, the Federal Reserve cut interest rates to zero, reopening the 2008 Financial Crisis playbook and announcing unlimited asset purchases to keep money markets from freezing and to support the financial system as a whole. A few economists are announcing the arrival of a financial crisis that might be as severe as 2008.
The U.S. economy most likely has entered a recession and, according to a new projection from Goldman Sachs, US GDP could contract by an annualized 6% in the first quarter and an astonishing 24% in the second quarter. However, this is a global pandemic and its repercussions can be seen all over the globe. Everywhere, from China to Europe, from South East Asia to Latin America, shutdowns and shelter-in-place orders are being enacted. It appears as though the only way to slow the spread of the virus is to stop economic activity almost altogether.
As social gatherings were canceled, the stock markets fell and people stocked up on necessities. It is natural for our clients to feel anxious. And where there’s anxiety, there’s tunnel vision: It’s too easy to focus in on the threats in this situation, but that can lead to short-termism, making mistakes later to be regretted.
BUT that is now. This virus will subside, the economic scars will heal, and a lot of analyst said that they expect a V shaped recovery (no matter how deep the bottom) when countries exit the COVID 19 crisis.
The COVID 19 response
While the situation remains extremely fluid, with updates by the hour, there is a consensus on a huge fiscal stimulus to keep the economy going while businesses are shutdown.
The case for moral hazard is void in this scenario: Moral hazard is the risk that government intervention will lead to excessive risk-taking, as businesses end up counting on taxpayers to bail them out if they get into trouble in the end. This argument is always weighed against government stimulus packages, and it was in 2008, especially as banks (who were partly to blame for the subprime crisis) were being bailed out. In this case, however, the government is shutting down the economy for health reasons, and without fiscal support, people will lose jobs, businesses will go bankrupt and the recession will be prolonged. This has nothing to do with risk-taking behavior.
Nobody wants this. The government will step in as the “spender of last resort” as this is a textbook case for government intervention. Now the discussion is on how to do so, but according to the latest reports, Congress and the White House have reached an agreement on a close to $2 Trillion package to be delivered during the current quarter. Furthermore, this consensus is building internationally – given the global scope of the COVID 19 contagion – making major fiscal spending in all the affected countries extremely likely.
Lastly, Central Banks understand the limited ammo they currently have and are hellbent are doing everything in their power to prevent a market meltdown. The measures announced by the Federal Reserve are unprecedented: the open-ended commitment to keep buying assets under its quantitative easing measures for as long as it takes means injections of capital into the economy as needed – a backstop. Furthermore, rates are at zero, which means the economy is set to benefit from access to credit when the situation stabilizes. While the government will act as a spender of last resort as necessary, the Central Bank is allowing for the possibility of becoming the investor of last resort.
What does this mean for your portfolio?
So, what are investors to do? If we had a crystal ball, it would have been awesome to sell and go to cash at the first sign of this at the end of January. Sadly, that is not the case, so the best thing to do is for investors not to panic sell, maintain their asset allocation and let their long-term portfolio ride the roller coaster through this. The most likely scenario is that of a speedy recovery in asset prices once Coronavirus passes.
It is a natural instinct to want to limit losses when markets are down – just as when markets are up, we wish we would have invested more. However, those who cave in to the psychological pressure tend to buy high and sell low as they invest more in a rising market and pull money out of a falling one.
Research by Blackrock on Morningstar data shows that investors who have followed their emotions, joining the crowd of other emotional investors, have historically regretted it. Periods that followed investors cashing out of the market have provided above-average returns, while periods that followed investors adding to the market have provided below-average returns.
M3 has blogged extensively about letting financial planning and cash flow drive asset allocation. At the top of the longest bull market in history, we advised our clients to look at the cash they needed to take out of the market and to not do it in a 40% downturn, but out of low-risk fixed income. If they did that, then they don’t need to sell their portfolio now, which gives it a number of years to recover from this bruising sell-off.
If you are concerned about your plan and cash flow, then our M3 Command center is an awesome tool to provide you with the confidence of knowing now in detail your baseline and your future.
A lot of investors may still be in a gain, but in the case they have losses, they could tax-loss harvest. This works to reduce one’s tax liability by offsetting future gains and/or other income. Selling at a loss and then buying in again means reducing tax liability and reinvesting at a lower cost. This strategy should be discussed with your financial advisor to make sure it is appropriate for your situation, but nevertheless this could be an opportune time to implement it.
Additionally, minimum volatility funds could also be a good move given current market conditions. They provide equity market exposure by sectors constrained to its parent index (so not just anti-cyclical or all utilities) and they can be a great move for investors looking to de-risk without losing equity market exposure.
At M3, we invest in the long haul and we are committed to be the gatekeepers of your wealth. We carefully assess the risks to our performance in accordance with the desired level of risk of each of our clients, with an outlook that reflects plans for 10, 20, 30 years into the future.
Coronavirus has without a doubt already had an impact on everyone’s portfolio, but the most realistic case is that of a quick recovery in the second part of 2020 and support (both fiscal and monetary) is being supplied to the macroeconomy as rapidly as possible. Our take is to not give in to panic and to continue to let cash flow needs and asset allocation drive investment decisions. Long-range planning and budgeting with asset allocation provide you with a strategy and possibly the peace of mind to ride through bear markets. Behavioral health specialist often suggest you should turn off the scary news, and check out Netflix’s or your old favorites on Disney
If you are concerned about your plan and cash flow, our M3 Command center is a powerful tool that can provide you with the confidence to know your baseline and future.