Before I dive into the quarterly commentary, I wanted to take a moment and mention that March 6th was the one year anniversary of starting this firm. My days at TheBANK of Edwardsville feel like quite a distant memory at this point, and since the day my confidence has never wavered that I made the right decision.
Both on a personal and professional level, 2019 was an incredible year. Rebecca and I welcomed our second child, Cecilia, to the world on May 24th. Many of you are aware of the traumatic experience we had during that time, but we’re happy to report she is doing very well and her big brother, Sawyer, loves her dearly.
Some of you asked me throughout 2019 “how are things going?” with respect to the business. I believe some were asking out of genuine curiosity and a few probably asked just to make sure their financial planner wasn’t going to end up in the poorhouse. Although I was confident when doing my business planning, I had still planned of a bad case scenario happening.
Luckily the bad case scenario did not manifest, and I am happy to report that things have gone well. Over the last 12 months 120+ client households have joined and $60 million+ in assets under management (this was last calculated 12/31/2019, and I’m sure it’s changing considerably day to day with the market) has come to the firm. Both of these totals exceeded the initial targets I had set, and because of that I was able to lower the maximum client fee by over $1,000 annually.
As I am quickly approaching personal client capacity I decided to increase the minimum for new clients coming onboard, which will naturally slow the flow quite a bit. This minimum will be waived for any family member of an existing client.
I could never thank the clients enough that made this transition with me and supported me with referrals of friends and family during the first year on my own. Many of you wandered into a little red building (now blue) in Maryville that had a sign out front reading “Meredith Heating and Air Conditioning” to transfer over your life savings to a 30 year old. The confidence shown by all of you will never go unappreciated.
“Everyone has a plan until they get punched in the face”
2020 is over……sorry I mean the 1st quarter of 2020 is over. It felt like a year. Here are the monthly returns for the US Stock Market as measured by the Vanguard Total US Stock Market Index:
That comes out to a 1st quarter decline in US stocks of nearly 21%. Stocks outside the US did not fare much better, declining a little over 24%. A 13%+ decline in a month is not too common, this is only the second time this century it has happened. What happened exactly?
The economy has completely shut down, and this has never happened before outside of a brief period after 9/11. This shutdown is not just the US economy, but just about every major economy in the world (although the Swedish have decide to continue operating). To the surprise of a few, the market has rallied recently. Since the lows, the market is up over 20%. A friend recently asked me “Why is the market up today? There is no good news”. I sent him a quote from legendary British investor, Jeremy Grantham:
“Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade of less black than the day before”
Over 10 million new unemployment claims were filed during a recent two week period. Here is a historical chart of weekly unemployment claims from the St. Louis Federal Reserve Bank:
Most state governments have forced non-essential businesses to close, and on top of that the recent stimulus package that was passed provides for an additional $600 a week in unemployment benefits (for 4 months, on top of the state level benefits). Even if these businesses do plan to reopen, there has been a benefit to their employees to lay them off if they qualified for unemployment benefits. In Illinois, you may be getting somewhere in the neighborhood of $800-$1,000 a week in unemployment benefits, which for some is not a loss in income, but a net gain.
When you start seeing data like this you begin to wonder if the cure is worse than the disease. A recession/depression type of scenario leading to massive unemployment has shown to cause dramatic increases in the divorce rate, the suicide rate, death rate, and a decline in mental health. It would be quite difficult to quantify the number of lives lost due to a recession, but it has also been shown difficult to quantify the number of expected lives lost to COVID-19.
Economic productivity coming to a complete halt definitely justifies a downward adjustment in market prices. The question is how much of the drop is from changing fundamentals, and how much is from investors changing their risk appetites (which has lowered valuation multiples)? We suspect this year will be quite abysmal for corporate earnings and GDP growth, but what about next year and the years after? The companies are going to get back to operations at some point, and a high number of them will resume with a backlog of work to do.
So is now a good time to buy stocks? Investors have moved prices and valuation metrics downward with the expectations of highly uncertain times ahead, which in theory should increase the expected premium return in the future from equities.
In hindsight, 2008-2009 looks like it would have been a great opportunity to buy stocks, but today investors argue it’s different this time. I have a secret to share:
-Every panic is different
-Every panic is terribly horrifying during the moment
-Every panic leads to extreme market valuation changes
-Every panic has looked like an opportunity in hindsight
Now would you rather put your money in a 10 year treasury bond for the next decade that will grow at 0.75% or would you rather own a small portion of global corporate earnings that is derived from products you buy, services you use, and places you visit? You could buy gold or other commodities, but the long-term data on those asset classes is not in your favor.
Unfortunately I cannot tell you how long it will take the market to recover, but I am confident it will recover. Recent data has been positive in terms of the virus outbreak. The charts below were obtained by worldometers.info/coronavirus.
Italy, which is one of the hardest hit countries, appears to have seen a recent downward trend in daily new cases.
Spain, also hit very badly, is seeing the same.
And we hope that April 4th turns out being the peak for the US:
The long-term effect this will have on the economy is a guess, and you’ll probably need to ignore the so-called experts because like we have just witnessed, the unknown can always occur. Did anyone in November or December of 2019 predict this would become a global pandemic with a peak to trough market decline in excess of 30%? No. So why should we give attention to any prediction at all? We shouldn’t.
Investors generally agree before a market decline that they think it’s prudent to buy low, but once the market starts sinking lower their initial instinct is to do the opposite. The greatest trait an investor can have is not IQ, but temperament.
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