Larry's Client Update - 2020 #4

While I blog only periodically, I do write a fair bit specifically for my SecondHalf Planning clients, especially during times of financial market panic like now. Here's an update I sent clients last night (March 16, 2020 PM) that may be of interest to others reading this blog.

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Continuing with the more frequent general updates for clients....

You undoubtedly heard the news that stock markets took a record beating today. From the most recent closing highs in January and February:

• US large cap stocks (symbol SPY): down around 29.1%
• US small cap stocks (IWM): down around 38.9%
• Global developed market stocks excluding US (VEU): down around 32.5%
• Emerging market stocks (VWO): down around 31.3%

When there’s panic in the financial markets even good assets can get pulled into the price downdraft. That’s fairly typical and SecondHalf client portfolios have experienced some of this lately. Precious metals (especially silver) and essentially any bonds other than US Treasuries have at least temporarily declined more than one might expect. The energy fund (MLPA) I bought for clients back in December has tanked (no pun intended) along with the broader energy complex. But I’ve been loathe to sell it over what seems to mostly be a Saudi-Russia wrestling match for oil market share. The energy complex has been comparatively cheap (vs other stock sectors) for many years now—nobody could have predicted it would very suddenly get a whole lot cheaper.

While stock returns are very ugly and some of our good assets have also gotten pulled in, most SecondHalf discretionary management portfolios are only down around mid-single-digits (give or take) so far this year. For regulatory reasons, I can’t publish specific numbers without an audited track record, but you [clients] can always check your portfolio’s specific performance here on Blueleaf.

Given the reduced prices in stocks, last Friday I added a couple small positions for most clients in the US stock market (SPY) and a preferred stock fund (PFF). Those investments went up about 4% and 3% respectively on Friday after I bought. Over the weekend, the Federal Reserve announced extreme measures of dropping short-term interest rates to near zero, buying $700 billion in treasury and mortgage bonds (“QE5”), loosening certain bank reserve requirements, and greater coordination with other global central banks. You’d think that the Fed “pulling out the Bazooka” like that would send stock markets off to the races again on Monday. That has certainly been the pattern. But today’s stock market action was a bloodbath so I got clients out of those small SPY and PFF positions, thankfully with only about a 0.75% hit to portfolios.

The fact those extreme measures by the Fed didn’t even move the needle in stock markets suggests fear and sobriety have re-entered the picture. Goldman Sachs projected Q2 economic growth will likely be around -5%. The Empire State Manufacturing Survey (New York) released this morning dropped from 12.90 to -21.50. That’s a huge differential especially when the Investing.com consensus was for 4.0. But the point is not so much that the consensus missed it so badly, rather that the survey may have given us the first look into the underlying economic—the economic, not market—impact that COVID-19 will have as things unfold. And where business is drying up and profits are disappearing, the support for high stock prices goes out the window.

If that’s the path, then we almost certainly have lower stock prices ahead. Yes, I’ve been saying for a long time: these things should create opportunity for us to buy good assets at good prices since we’ve been prudent and have “dry powder” in cash and stable short-term investments. If things continue on the current path, it looks like we’ll finally get that opportunity.

A couple final thoughts I’d like to remind folks about:

• Investors often say things like: “my portfolio lost 22% this year” or something to that effect. But when you see your portfolio decline (hopefully far less than 22%), it’s important to remember that is not necessarily a loss. Rather it’s usually just a temporary swoon in portfolio value, which often recovers in time and marches on to new heights. You generally don’t have a loss unless you sell after price has steeply dropped or if you own an investment that has become permanently impaired (which is very unusual for diversified, liquid funds which we typically use).
• It’s critically important to your well-being as an investor that you think percentages and think comparatively. If your portfolio is down $10,000 but you have a $250,000 portfolio, that’s only a 4% decline. Nothing to get concerned about, especially if you own arguably good assets that are simply temporarily caught in the downdraft of 20%-30% market carnage. 

That’s it for this round. Please let me know if you have any questions. As always, thank you for the opportunity to be of service.

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If recent financial markets stress has caused you concern about your portfolio or broader financial picture, feel free to reach out.

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