To one degree or another, we have all taken our turn at forecasting what lies ahead of us. Will schools re-open in the fall? Will we travel again? Will we feel safe dining out? How long will it take the economy to recover from being shut down? Will we go back to our “old normal” lifestyle or are we irreversibly pointed to a “new normal” way of life? While we all have an opinion to the questions associated with the Corona Virus Pandemic, there seems to be a wide spectrum to our respective answers. Here is how we see the current situation and our look forward.
Ruin and Opportunity
Ruin and Opportunity – the two ends of the spectrum in the current economic environment – we see some of both present in the markets. Capitalism as a way of economic life has a certain amount of a Darwin Survival trait to it; so, when it shows its face we should not be surprised at its appearance. We anticipate that the pandemic shutdown of a large chunk of the economy will foster traits that had positive momentum and accelerate areas where declining interest was present. For example, on-line shopping has accelerated in the pandemic and we believe footholds gained will not be lost as the economy re-opens. Brick and mortar retail will most likely see continued erosion to the point that it finds its sustainable level. It is in this example that we see the forces of both ruin and opportunity co-existing and the presence of creative destruction.
Our economic outlook is shaped by our belief that human ingenuity and effort will lead us out of this pandemic induced calamity. We believe that treatments will be developed and honed to an efficacious result, a vaccine or vaccines will be developed and absent those panaceas, we will learn how to shape our lives so that economic continuity can and will occur. We anticipate the recovery to be herky-jerky and fitful over the course of the remainder of this year. Employment gains will follow the course of the economy, with businesses cautious in their re-hiring. Demand for products and services will exhibit the same fitful behavior as the economic re-awakening. However, we believe economic strength will be sustainable and lead to a 2021 economic year laced with green shoots of growth.
We anticipate interest rates remaining low – but with the potential seeds of inflation being sown in the supply chain disruptions evident in the manufacturing and food businesses. The proliferation of government debt issued in an effort to stem the affects of the pandemic may also be a factor on a possible increase in interest rates or the cost of money.
Given this background and our view that financial markets spend the bulk of their time in a forward- looking mode, this is how we are invested:
Equity – Stock Asset Allocation
We have increased our positions in U.S. based large companies by reducing our exposure to international based companies, publicly traded real estate and gold. We have also added exposure to the financial and health care industries. We believe the banks are much better prepared to weather the pandemic crisis than they were the 2008 downturn and will be better able to not only navigate the ruin; but to benefit from the opportunity. We added investments in the following individual companies: Google, Amazon, JP Morgan, Square, Disney, and GE. Our equity portfolio is forward looking while cognizant of the near-term risks and we expect it to reward us nicely from a gradual increase in an economic recovery.
Portfolios with less than $150,000 to invest in an equity portfolio have a simplified portfolio due to the logistics of effectively implementing a portfolio with more numerous positions. Therefore, we have eliminated the added positions in the financial and health care industries and the individual company investments in these smaller portfolios.
Fixed Income Allocation
We will maintain our posture in short-term fixed income investments with a sprinkle of concern for possible upticks on the inflation front with an investment in Treasury Inflation Protected Securities (TIPS) and money market positions.
Thank you for the opportunity to work with you – we hope and pray that you, your families, and friends are and will continue to be safe and healthy.