First Quarter 2020 Update

We are living through an historic time for the markets and the world economy. Some of the drastic swings we have experienced have been the largest in history. For example, we had the worst quarter on record for the Dow, in its 124-year history, during the first quarter. The S&P 500 lost 20 percent. Unemployment claims last week were a record 3.3 million, and this week, they were twice that, at 6.6 million, another record. During such times, it is easy to lose perspective, and this is the reason so many people panic and sell all of their investments. I am pleased that I have been able to communicate well with my clients during this time, and that they have maintained their focus on their long-term objectives.

Highlights/Key Takeaways

• Portfolios significantly outperformed the overall market during the quarter – the average portfolio declined about 8 percent while the S&P 500 lost 20%
• I avoided the worst of the impact from the crisis by holding significant cash leading into the crash
• Portfolios are now well-positioned to take full advantage of the coming rebound in stocks

Performance Summary – highlights from 1Q20

I entered the first quarter holding 100 percent cash for stock portfolios. The S&P 500 ended 2019 at 3,231, hitting a peak of 3,373 on February 20th. From there, it has been mayhem. From February 20th through March 23rd, the S&P 500 dropped to 2,237, or by 1,136 points, which represents a 33.7 percent decline. I would characterize this as a crash, although I have not seen the financial press referring to it as such.

I began reinvesting cash on March 9th, and then purchased additional positions on March 11th. As noted above, the market continued to fall, reaching the current bottom on March 23rd. After that bottom was set, the market bounced with good trading volume, and appears to have set “the bottom,” although we will not know if that is the true bottom until we get past the crisis.
One key aspect of my investment strategy is to attempt to avoid taking losses whenever possible. This is why I frequently raise and hold significant cash positions. Over the years, this aspect of my strategy has worked extremely well. Avoiding losses is much more important than making profits. This was especially valuable during the recent market crash.

Note: Once a loss has occurred, the portfolio must increase by a larger percentage, as compared to the loss percentage, to get back to even. A simple example is, if you started with $100 and lost 10 percent, that would be a $10 loss and you would be left with $90. To get back to $100, the portfolio must gain back the same $10. However, a $10 return on a $90 starting value for the portfolio represents a 11.11 percent return. Thus, the portfolio must gain an extra 1.11% just to get back to even. This unfortunate outcome gets exacerbated the larger the loss. For example, if we again start with $100 and lose 20 percent, or $20, we are left with $80. To get back to even ($100), we need to gain the same $20, which represents 25 percent, or a full 5 percentage points more than the 20 percent loss.

As one can see, avoiding losses is significantly more important than making profits. During the first quarter, portfolios lost, on average, about 8 percent overall. This is a dramatic loss, but it is less than half of the 20 percent that the overall market (S&P 500) lost. Further, because cost bases for individual stocks in portfolios are significantly lower than the break-even point for the market overall, portfolios will get back to even and begin making profits long before the market gets back to even.
There are significant implications of this. Because so many people panicked, and sold at very low levels, they will be reluctant to buy back in until they feel comfortable that the crisis is over. By that time, the market will have rebounded substantially (today’s action is a clear example (April 6, 2020). This is the typical, but unfortunate, reality of the individual investor reaction to any crisis – sell low, buy high – the opposite of what an investor should do.
I feel very comfortable with the overall situation, and with the positions I currently hold for my clients, and I am very confident that we are going to have a very profitable 2020.
Position Selection

I selected stocks that fall in a number of key sectors, including consumer discretionary, industrials, financials, energy and technology. These are the sectors that include some of the hardest hit companies, and are the sectors I believe offer the most attractive upside potential, once we get past the crisis. Within those sectors, I chose well-established, very large, high-quality companies that should benefit, not only from a rebound in the economy, but from investor recognition (the largest companies tend to be the most familiar to the average investor and thus they tend to be the ones they buy first), and also that should benefit from consolidation – the largest, financial stable companies tend to swallow-up the smaller, weaker companies that do not have the financial strength to weather the storm.


My overall strategy is to hold the positions I have currently and (hopefully) to benefit from a very powerful and rapid rebound in stocks, once the crisis reaches its peak, and investors realize that the worst is behind us. I believe that the combination of the reduction in uncertainty regarding the magnitude of the negative economic impact from the crisis, coupled with the positive impact of the giant stimulus package, and the positive psychological impact from consumers being cooped-up for weeks and wanting to get back out and live life, should combine to drive stocks up dramatically, and in a very short time-period. We could easily see a 3,000-point rally for the Dow Jones Industrial Average. For the S&P 500, I would expect to see that index rally above 3,000 in the near-term, and at that point, depending on other factors, I would likely sell some percentage of the stock portfolio – perhaps 25%, and hold cash waiting for a possible correction.

Pending Recession

Economic conditions will be a variable that will be difficult to gauge. My belief right now is that the crisis and the stimulus will act in concert to actually delay the recession that will inevitably come. Before the crisis, we have had an 11-year bull market and global economic expansion. All good things must (eventually) come to an end. My expectations were (before the crisis) that we would enter into recessionary economic conditions, meaning negative GDP, around the 4th quarter of 2020. I expected the recession to last 2 to 4 quarters, to be fairly mild, and to be followed by another period of economic expansion, that would be somewhat weaker and shorter than our previous 11-year expansion.
Due to the crisis, and what I noted above about consumer psychology and the stimulus, I now expect the economy to roar back during the second half of 2020, and for the recession to be delayed until at least the second half of 2021. The implications for stocks are that, if I am correct, we should have ample opportunity for stocks to post very attractive gains during the second half of 2020, and that there should be additional opportunities going into 2021, especially if the second half 2020 gains are followed by a significant correction (or more than one) and I are able to take advantage of it/them.

Obviously, there are a lot of variables to consider, and we are in a time of extreme uncertainty, fear, panic, and risk. Many things can change as we navigate the next several months, and so active, creative, and flexible investment management is critical at this time. I will continue to work every day to provide the very best investment management discipline and strategy possible to maximize client portfolio returns.


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