I write to you from my office in my home. My children are in other rooms logged in to their virtual schools and my wife, usually a practicing dentist, is busy preparing ‘school’ lunch for us all. None of this sounds unusual to you, of course - a fact that is very unusual itself. This is week number four in our new pandemic reality. The situation around COVID-19 continues to spiral and churn with great uncertainty and unknown risks. Stock and bond markets have experienced dramatic declines from recent peaks and historic volatility continues daily.
The end appears unlikely to be quick or a clean break to normalcy. Resumption of activities we took for granted just weeks ago will take months. I envision a jagged line moving slowly toward returning us to our ‘former’ lives. People and businesses will respond and adjust to the declining threat at their own paces and time frames. Pricing the long-term damage is theoretically left to the capital markets. Losses are already being offset by central banks and governments (AKA future taxpayers) around the globe. However, until we have clarity on how the health crisis will end, volatility will reign.
As COVID-19 struck, the stock market (S&P 500), went from an all-time high to a freefall that destroyed ~35% in value in just a few weeks. Many markets fared poorer. Energy stocks, travel, and small company stocks sustained bigger losses. Even ‘safe’ assets like municipal bonds and corporate bonds lost appreciable amounts as leveraged players shed any asset they could for liquidity. However, since the low point of the stock market, there has been a substantive recovery.
While the desire to do ‘something’ in a situation like this is natural, figuring out what to do and how to do it right is thorny. Stock market moves of five percent or more, within a day, are happening with frequency, making market timing impossible. When there is a real recovery, the market will know it, and react, before we can. In the meantime, some experts predict another drop, or even worse to come. All this noise and volatility is precisely why we don’t make material changes to long-term allocations on the fly in times like this.
Here’s an example: The other day, a long-time client called me and asked me to recommend investments that would protect capital in a hyperinflationary environment given all the ‘stimulus’ and ‘quantitative easing’ going on in response. One option, commodities, may be an antidote to inflation. Precious metals like gold and silver along with ‘softer’ commodities like oil, grains and butter(!), should hold value relative to any currency. Assuming we agree that this is a viable strategy, next is how to gain exposure. We can’t do it ourselves, so we need an expert. There are many commodity funds available, but most don’t deliver what we are looking for, for various reasons. We can also invest directly in the biggest, most experienced players in the commodity spaces. These would be large global corporations that own reserves of oil (Exxon), gold (Newmont). Others use futures contracts to buy corn, wheat, soybeans (ADM, Cargill). These companies also have the processing power to make money off those reserves and contracts for years and decades to come, in any currency environment, theoretically. So how does one invest capital in these companies, you ask? Well, you buy their stock! As the popular Post Malone song goes, “Run away. But we’re running in circles.”
Readers of this space know that the stock market is volatile, unpredictable and downright scary sometimes. Seeing losses from previous highs is always disappointing. However, there may be a silver lining. In times like these, when markets reset and value comes back into focus, we gain the ability to enhance the quality of asset portfolios without (necessarily) sacrificing long term returns. For example, there are now opportunities opening in municipal and corporate credit(bond) markets that may offer attractive risk and reward profiles given the dislocations that have appeared. We are actively investigating these options and staying tuned!
On an administrative note, our office is operating virtually through the end of April, and likely through the end of May, too. We are fully functioning at the same phone and FAX numbers, email so if you have any questions at all, please call, write, email, or let’s have a Zoom meeting! In the meantime, please accept our wishes for good health to you and your loved ones.
Enjoy your Spring, at a distance!
LIONSHEAD WEALTH MANAGEMENT, LLC
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