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Notes Along the Path April 2020

Notes Along the Path April 2020

April 06, 2020

Dear Friends,

I hope you may benefit from this edition of Notes Along the Path. Today we will be discussing:

  • Covid-19 Status and outlook
  • March market review

First, an admission. I was quite wrong about the virus. My initial take at the end of February was that it would likely be contained. That was before I knew that the entire pandemic response infrastructure at the white house had been disassembled. Well, I should have known better.

However, even if we had an earlier understanding of the coming numbers of infected Americans we would not necessarily know when to buy and when to sell investments. As I have said before, timing the market requires you to be right twice. Staying the course and rebalancing when your allocation changes markedly is still a sound strategy as long as you have a long time horizon of 5 or more years. Please never hesitate to give me a call to review your time horizon and investment position.

Obviously, it has been a difficult month for investors. Since the February 19th peak, the S&P 500 Index has shed 34% to its most recent low (St. Louis Federal Reserve). That's roughly in line with the average bear market pullback (LPL Research), with bear markets defined by at least a 20% sell-off.

However, the rapid decline in the major stock market indexes has been unsettling. The 34% drop occurred in just over one month. It's unprecedented.

But what we see in the economy is without precedent, too. There is an enormous amount of uncertainty. Many industries that require person-to-person interactions are shutting down. And many of the service-related companies that remain open have seen a significant drop in traffic.

Since there is no modern precedent on which to model economic forecasts, the second-quarter projections for GDP have been incredibly varying. The chain of causation works like this: the economic uncertainty causes earnings uncertainty, which in turn, causes incredibly volatile markets.

A government-induced economic coma

To slow the spread of the pandemic, the government has encouraged social distancing, and most states have ordered lockdowns or strict shelter-in-place mandates. You may go outside to exercise or head to the grocery store, but there is a ban on social gatherings, which would spread the virus.

While social distancing will slow the spread of COVID-19, the economic impact has been unparalleled. You could say the government is putting large sectors of the economy in a coma to stem the spread of the virus. When health and safety dictate, the goal is to bring the 'patient' out of the coma.

But policymakers at the Fed and Treasury aren't expecting the economy to bounce back on its own. Policies are being put into place to revive the patient when the time comes.

The government response is to soften the expected economic blow with extraordinary measures that go well beyond what we saw during the 2008 financial crisis.

The Federal Reserve has dropped the Fed funds rate to zero. It has implemented programs designed to support Treasury bonds, investment-grade corporate bonds, commercial paper (short-term IOUs issued by the largest corporations), money market funds, mortgage-backed securities, and municipals.

Further, a new program designed to support small- and medium-sized businesses will be forthcoming.

During the financial crisis, the Fed's focus was on Wall Street and critical credit markets. Today, the scope of support extends well beyond Wall Street and into Main Street.
Meanwhile, Congress has passed, and the President has signed a $2 trillion stabilization bill.
In addition to mitigating some of the damage from surging layoffs, the Federal Reserve and the Federal government are trying to put a foundation in place that will support a robust economic recovery.

Will it work? Much depends on the duration and severity of the recession and the path of the virus.

Road to recovery

I see four essential steps.

1. A massive response by the Federal government and the Federal Reserve is needed.
I think we can check that box. While continued volatility is likely, the Fed and the $2 trillion stimulus (really stabilization) plan fueled a modest rebound from March's low stock prices. If further stimulus is needed there is currently no indication that political posturing will prevent it.

Other pieces of the recovery puzzle include:

2.A peak in new US cases and subsequent decline.
3. An effective treatment and vaccine.
4.Clarity on the economic direction – an answer to the question, what will be the steepness and duration of the recession? No one rings a bell that sounds the all-clear signal. Collectively, markets attempt to price in future events. Given the wide range of possible outcomes, volatility has been the rule.

But stocks will likely bottom before the economy rebounds if they haven't already done so.


I spend an enormous amount of time discussing the importance of your financial plan. It is our roadmap in good times and bad.

It is based on a simple premise: stocks rise more than they fall, and stocks rise more than they fall because historically, the US economy has expanded over time. The advantages that make the US stock market the best long term investment in the world remain. Among them: the most transparency, the most robust property rights, and a tax system that favors corporate profits.

I understand that what is happening is unprecedented. We are in the midst of an economic and health care crisis. Both breed fear and uncertainty.

But I am confident this pandemic eventually will pass, and I am satisfied that the underlying fundamentals of the US economy remain strong. Resilience and ingenuity are part of the DNA that make up America. We will persevere, and we will recover.

If you have questions, concerns, fears, and doubt--well, I get that. I do. And please remember, my door is open, although for now that I mean that figuratively. I'm always available, and once we are able to stop social distancing it will be literal again.

Table 1: Key Index ReturnsTable 1: Key Index Returns  MTD% YTD%Dow Jones Industrial Average -13.7 -23.2NASDAQ Composite -10.1 -14.2S&P 500 Index -12.5 -20.0Russell 2000 Index -21.9 -30.9MSCI World ex-USA* -14.6 -23.9MSCI Emerging Markets* -15.6 -23.9Bloomberg Barclays USAggregate Bond TR -0.6 3.2Source: Wall Street Journal,, Morningstar, MarketWatchMTD: returns: Feb 28, 2020—Mar 31, 2020YTD returns: Dec 31, 2019—Mar 31, 2020*in US dollars 

Social distance yourself from COVID-19 scams

Whenever there is a natural disaster, there are always people who prey on those who want to help. Today, the disaster is a pandemic. Many are fearful, many are scared. It makes us especially vulnerable.

The FTC has warned Americans to beware of the potential scams that are proliferating. Here are some precautions to take that will keep you safer:

Hang up on robocalls, and don't press any numbers. Scammers are using illegal robocalls to pitch fraudulent COVID-19 treatments and work-at-home schemes. Press a number to be removed from a list, and you'll likely get more calls.

Ignore online offers for vaccinations and unproven home test kits.

Ignore texts and emails about cash from the government. Stimulus checks will be forthcoming, but, per the FTC, anyone who tells you they can get you the money now is a scammer.

Please be suspicious of emails that claim to be from the Centers for Disease Control and Prevention (CDC) or experts that claim they have information about the virus. For the most up-to-date information about coronavirus, visit the websites of the CDC or the World Health Organization (WHO).On the same note, malware and phishing scams are on the uptick. Legitimate companies will never ask you to verify passwords or usernames via email. Fraudsters will.

Do you see misspelled words or grammatical mistakes? That's a sure sign that the official-looking email originated from a suspicious source.

Here's a warning from the Securities and Exchange Commission (SEC), updated on March 30th:

Fraudsters often use the latest news developments to lure investors into scams. We have become aware of a number of Internet promotions claiming that the products or services of publicly traded companies can prevent, detect, or cure coronavirus and that the stock of these companies will dramatically increase in value as a result.
Please be aware of the substantial potential for fraud at this time.
Please be careful. We are living in uncertain times. While I am confident this will pass, uncertainty breeds fear, and there are criminals all over the world ready to cash in on your fear.
How to spend your free moneyFour in 10 adults say they would struggle to come up with $400 in an emergency, according to the Federal Reserve's annual check-in on Americans' financial health. Well, most are about to get at least $1,200 after passage of the stimulus bill designed to ease the economic downturn that is occurring. Throw in $500 per child and a family of four nets $3,400.
Are you eligible? For singles, $1,200 is phased out between $75,000 and $99,000 in adjusted gross income. For married folks, the range is $150,000 to $198,000.
So, how will you spend your windfall? I would like to suggest that you should go and spend it. After all, it was designed to help the economy. And please consider purchasing from a small business in your neighborhood. Undoubtedly, they need the help.
But first let's consider the underlying financial principles that drive your balance sheet.
Do you need a rainy-day fund? Do you have three to six months of emergency cash, just in case? If not, consider putting your check into savings. If you don't expect to be furloughed, an emergency fund is one way to go.
If you have at least six months in savings, look at debts, especially high-rate credit cards. That will provide you with an immediate return.
But be cautious about putting your cash into student loans. Borrowers are receiving relief from the government. So you may want to hold off paying down student debt, at least for now.
Can you give it away? Are you in a strong financial position?
You may gift the check to your parents, your children, or those who are in a difficult place. When businesses reopen, consider generously tipping your server who has been out of work. Even something as simple as a lavish tip to the delivery person can generate tremendous goodwill.
It's not the reason we do things, but it makes it easier to note that when we take our eyes off ourselves, the blessings we give away rebound in our direction.

If you like it this newsletter I encourage you to pass it on to any contacts you have that might benefit.

I remain honored and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.

All the Best!

Gordon Achtermann