March 24, 2020
Dear Valued Client:
A U.S. recession is now nearly a certainty because of business disruption done by the Covid-19 outbreak. The question now is: How bad will it be? How much further the downturn extends is dependent on how severely governments, firms and consumers react. Consider the industries poised to suffer because of lost business or disrupted supply chains: Anything linked to travel like cruises, hotels, airlines, concerts, festivals, trade shows etc. Such businesses make up about 3% of GDP. Consumers are sure to grow even more cautious; The volatility in the stock market will hold back the buying power of the American consumer. We believe that the public health crisis is sensationalized, however the public’s perception of the danger is enough to do major economic harm. We expect the unemployment rate to tick up to about 5%. This is still near historic lows, but above last reports a rock-bottom 3.5% figure.
This may sound bleak, but let’s not lose sight of the positive factors. Unlike during the last recession, the financial system is sound. Stricter regulation and years of repairing balance sheets mean that banks aren’t at risk of failure the way they were in 2008. The economy was in good shape before the virus hit, which will help to ease the blow. Consumers are nervous, but household finances are fairly good. The latest reports were of the average wage worker receiving a large raise in pay compared to executives. So any recession, while potentially severe, should be fairly short and may rebound quickly. This means a slide into contraction during the second and third quarters, and then a return to growth is possible. In that case, the economy may even eke out a slim GDP gain for 2020.
Note one potential silver lining of the COVID-19 outbreak: Innovation. The SARS virus took over a year to sequence during the 2002 outbreak. COVID-19 took less than a month. Synthetic vaccines can be more precise in producing an immune response in patients and don’t require refrigeration. This is a big advantage in less developed parts of the world, and supports a faster recovery. We are likely still a year away from this if accelerated.
A new COVID-19 aid package is imminent. Democrats and Republicans agree on the broad strokes, though at press time a few key details were still being worked out by the White House and House Democrats. Expect expanded food aid and unemployment insurance. A lengthy period of mandatory paid sick leave for workers with the virus or family members who have it, plus a tax credit to offset the cost for small employers. Bailouts, while controversial, do help owners of companies in the long run, like you.
Streaming video companies Netflix, Amazon and Apple stand to benefit. Their global reach gives them a huge advantage as more folks stay at home because of the virus and binge-watch movies and shows. Expect viewing hours to shoot up, especially for Netflix, and new customers to jump on upcoming deals.
If equities have been part of your investment mix for growth and dividends. Don’t sell or stop buying them now just because indexes have fallen some 35+% from record highs. Buying amid huge daily drops can lower your per-share cost basis. Prices might drop further, and no one can predict a bottom but foundations of wealth are laid in bear markets, not charging bulls. Let’s not get emotional about our investing and see that the smartest people are buying at the moment. Most of the assets have held up extremely well compared to the general market and you may be surprised (in a good way for once) by a discussion with us about your portfolio.
We hope you, and your loved ones are safe. Reach out to us for anything you think we can help with. We have enacted emergency protocols in our business continuity plan. This means that we are more available to you than ever before. The office phone is monitored from 7am to 11pm CST and even on weekends. We are in this global fight together and thank you for your continued business in a difficult time. At the time of this letter I am at my desk in a suit and ready to work.
Michael Wyatt Holland