Uncertainty and turmoil do not mean ‘catastrophic’
In contemplating the ‘new normal,’ remember the resilience of the U.S.
We are now weeks into an economic and social environment that few of us could have ever imagined at the beginning of 2020. This country has weathered numerous recessions and the Great Depression, but we have never been forced to metaphorically put the economy into a coma due to the country’s gravest public health crisis in over a century.
With each passing day, the political pressures are increasing to “reopen” the country to greater economic activity while still amidst a global pandemic that we are just learning to comprehend. We don’t know whether we are experiencing a severe recession “flu” with potential for a quick bounce-back or something inherently wider, deeper and longer-lasting.
Collectively, we are trying to adapt as a country to many serious disruptions, ranging from school closings, loss of employment, a massive devolution in the consumer sector, social distancing and work distancing. While markets are wandering around seeking a signal from the future, risk assets suffered a whiplash, with record equity market sell-offs followed by equally intense rebounds since the end of February.
Everybody loves the financial counsel they receive in a bull market, but it is times like these where we, as fiduciaries, genuinely “earn our keep.” This means we remain calm and we stick to well-thought-out plans through an unprecedented mix of social, political, financial and public health turmoil.
As Warren Buffett famously said, “You only find out who’s swimming naked when the tide goes out.”
For years we have preached the values of planning, financial discipline and knowing one’s own strengths and weaknesses. We have been rewarded and grateful that so many of those practices are now taking hold — and paying off when they matter most. We were prepared for this type of perfect storm before it arrived.
We are not Pollyannaish. The profound economic, health and mortal toll of Covid-19 will not simply vanish in the days, weeks or months ahead. But just as emerging from this crisis will take bold planning and execution at many levels, the same can be said for us as individuals. Panic only begets more panic. If we fully understand what we do have control over and how we can best prepare with the proper perspective and context, we will all be more than just survivors.
In a recent memo, Howard Marks of Oaktree Capital offered this perspective: “In the global financial crisis (2008) I worried about the downward cascade of financial news, and about the implications for the economy of serial bankruptcies and among financial institutions. But everyday life was unchanged from what it had been and there was no threat to life or limb,” he said. “The world will go back to normal someday, although today it seems unlikely to end up unchanged.”
How do we handle the new normal? During a recent conference call with clients, we offered perspective via manageable pieces of historical information through the four “V’s” before us:
• Valuation (asset prices were extended coming into 2020)
• Volatility (stock market swings exacerbated by algorithmic trading and ETFs)
• Virus (public health)
• Vitriol (a less-than-harmonious global or national geopolitical environment)
We talked about how each recession is unique, but that recovery always happens, so we must now focus on what is clear.
For example, the financial markets are relatively strong with historically low, near-negative interest rates, immense Federal Reserve cash infusions and massive government spending such as the CARES Act. There is little doubt that much more will be needed in order to stem the current tsunami of economic damage.
The cash infusions come with a rocket boost to the burgeoning federal debt, and there is no doubt that higher taxes are on the horizon. Now is the time for serious, long-term tax planning.
It is also time to do “loss harvesting” from equity losses and learn how losses can be incorporated into one’s tax planning. Investors may currently require more equity than fixed-income investment options, which will require a new paradigm of individual choices and risk tolerances.
Two years ago, we made a sizable investment for our clients investing in two-year Treasury bonds at 2% and it paid off. We weren’t just lucky. We know that when equity valuations are rich, we need to continue to manage risk in a holistic way.
A lengthy period of great uncertainty and turmoil may lie ahead but that in itself is not catastrophic. There was no assurance that the country would rebound so quickly from the horrors of World War 1 and the 1918-19 influenza, which killed more than 600,000 Americans and tens of millions globally — but it did. And no one knew when or how the Great Depression would end — but it did.
Even the recessions from the 1970s, spurred by oil embargos, to the Great Recession in 2008 driven by a collapse of our financial system, eventually led to robust recoveries. Whatever its flaws, America has always proven itself a remarkably resilient country.
In the spring of 1939, the British government created a series of striking red posters that inspired a nation that would soon be at war. The message? “Keep Calm and Carry On.” Never has it seemed more relevant.
Tom Sedoric is partner, executive managing director and wealth manager and D. Casey Snyder, CFP, is partner, senior vice president and wealth manager of The Sedoric Group of Steward Partners in Portsmouth.