Stay Cool, Calm, and Collected
President Trump, as well as most leaders, have ordered a state of emergency in their country to limit the spread of the coronavirus. Ironically, China and South Korea, where it all began, appear on paths to recovery which gives reason for optimism as we learn how best to contain the virus. While no one knows how long the contagion may last, the rapid responses by governments, businesses, and individuals have been phenomenal and should help mitigate the spread of the virus over the next few months.
Near-term economic impact to the U.S and elsewhere will be painful but it does not alter our long-term view of global growth. Even though we might even enter a technical recession, it is a one-off event which does not alter our long-term outlook.
We continue to believe that the worst of the coronavirus will be behind us by the end of the second quarter and growth will slowly resume and accelerate throughout the second half of 2020 into 2021. However, many industries directly hurt by the coronavirus including retail, travel (airlines, hotels, cruises), restaurants, in-person education, all forms of entertainment (gambling, theater, sports ) and many small to medium size businesses may take longer to fully recover than others due to concerns that may linger.
The winners will be companies that use the internet to transact businesses as more of us are at home spending more time on our computers and devices. Also, we are favorably inclined to diversified companies with strong balance sheets, above average dividend yields and the financial resources to take advantage of this situation; companies with stable demand and strong financials such that their dividend yields are also far above the 30 year treasury yield and are safe and finally, many leading technology companies with promising long-term futures that have been unduly hit by program trading. Hopefully the SEC will finally reinsert the uptick rule which may impede 1000 point daily swings taking no prisoners.
We are confident that all governments and monetary authorities will do all in their powers to provide all the liquidity to the financial system needed to avoid any systematic risks; provide testing and healthcare benefits for all; provide financial relief to companies and individuals directly and indirectly hurt by weakening demand, and implement stimulus plans to offset bolster growth.
This is a synchronous drop in demand due to coronavirus. This is not a financial crisis.
Here are a few of the actions already announced to provide liquidity to financial institutions, businesses and individuals:
- The Fed injected $1.5 trillion into the system including accelerated Treasury purchases with more actions to be announced this week to provide added liquidity, push down mortgage rates below 3% to open a new round of refinancing, and let it be known that the Fed will do everything in its power to offset any negative financial effects of the coronavirus
- The President declared a State of Emergency freeing $50 billion to combat the coronavirus, provide more flexibility to doctors and hospitals responding to the outbreak, waive interest on student loans, and purchase more crude for the stockpile. This is all in addition to $8.3 billion emergency coronavirus spending package approved earlier in the week with included delaying April tax payments 3 months adding $200 billion to individuals and small businesses for the short term.
- The President and the House reached a deal to provide free coronavirus testing; as much as 14 days of paid sick leave; and as much as three months paid family and medical leave. It also provides more money for State Medicaid programs.
- Germany will wield a ‘bazooka” to fight the coronavirus. The government will provide unlimited liquidity (more than $600 billion), permit companies to defer tax payments and go along with the ECB in raising debt limits for all countries. France, Italy, and all other European countries are unleashing billions to offset the negative effects on businesses and consumers caused by the coronavirus. Japan is prepared to do it too as well as countries in South American and Africa. Ironically, China is willing to help other countries in need of financial aid.
We are witnessing unprecedented actions to mitigate the spread of the coronavirus within and amongst countries. Warmer weather should help, too.
While we recognize that economic growth may come to a standstill for a brief period, we are more confident than ever that the spread of the coronavirus can be slowed in the months ahead due to these aggressive actions such that growth will resume in the second half of the year into 2021. Specific actions include borders being closed; cruises and international flights being cancelled; offices, stores and schools being closed with work taking place virtually; sports events/concerts/shows/venues all being cancelled; and restaurants being closed. On the other hand, testing is becoming more available by the day and medical companies are working 24/7 to find medicines to contain the virus and vaccines to protect against it.
Markets hate uncertainty. It cannot be more uncertain more than now! But we see governments, monetary authorities, businesses and individuals all moving in the right direction providing financial support on one hand while limiting the spread of the virus on the other hand. Pretty amazing! We did not expect to see moves occurring so quickly and virtually everywhere.
While we fully get that there is no near-term visibility, it is time to look over this valley as the virus will peak and economies will resume growth once again, albeit slowly, by the second half of 2020. Some industries will recover faster than others. While we expect those industries and companies most hurt by the virus to recover, it may take longer than you think. We fully expect governments to give these industries/companies financial lifelines to stem them over until demand returns but it will also be a financial burden for years to come. On the other hand, any industry and company that uses the internet to provide its business, products and services will be long term beneficiaries. For instance, Amazon will not only continue to increase market penetration, but also add products and services to its growing Prime customer base accelerating overall growth. There are many other companies that we own like Amazon. We like to invest in those industries/companies with the wind to their backs rather than in their faces. But again, program trading takes no prisoners providing opportunities for investor to add to positions at even better prices.
Our bottom line is that the overall market remains undervalued for investors with more than a six-month time frame. During such unsettled times, it is paramount to focus on a company’s balance sheet and financial strength to make sure that the company can not only weather the near-term storm caused by the coronavirus but come out stronger on the other side.
Our portfolios continue to hold an above average amount of cash as we turned defensive several weeks ago selling financials as we saw spreads narrowing, sold economically sensitive companies including global capital goods, industrials and commodities, sold entertainment companies, retailers and reduced special situations that had economic risk. On the other hand, we maintained our technology exposure tied to the internet and added healthcare.
While we fully expect the number of coronavirus cases to increase and more businesses to temporarily close over the foreseeable future, we will be monitoring closely to see how well the virus is being monitored and contained. We will also watch closely to see the actions of the Fed and government next week to provide added liquidity to the financial system and businesses/individuals most in need.
Uncertainty provides ripe opportunities for the investor. This is time to stay calm, cool, and collected.
The weekly Investment Committee webinar will be held Monday morning March 16th at 8:30 am EST. Type https://zoom.us/j/9179217852 into your browser or dial 1-408-638-0968 for listen only mode.
Remember to review all the facts; pause, reflect and consider mindset shifts; turn off your cable news network; look at your asset mix with risk controls; do independent research and…
Paix et Prospérité LLC