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A Reset in the Midst of Unprecedented Uncertainty


At US Advisory Group, we are committed to helping our clients navigate these challenging times.  While we continue to monitor the economic changes that are happening at an unprecedented, rapid pace, we are also taking all recommendations by our local and national experts seriously.  The health and safety of our clients, employees and communities that we serve is incredibly important to us.  We know that this virus is unsettling to all of you and we want to let you know what we are doing about it and how we will continue to assist you.


First, a quick reset on recent financial events

One month ago, major US equity indices registered all-time highs, and new employment numbers, GDP, and corporate earnings data suggested the US economy was strong as ever. Interest rates were low and stable, the Tariff rhetoric had subsided, and we were gearing up for 2020: The Year of the Election. We were heading towards a positive opening quarter of 2020 on the heels of a year where we saw enormous growth in both of the leading equity indexes. On February 12, the Dow Jones closed at 29,551. 

The last few weeks have been dominated by extreme and historically large pull-backs due to Coronavirus fears, along with a few other factors.  After Monday’s close (3/16/20), the Dow has fallen to 20,187, close to January 2017-levels. As we have mentioned many times in this space, the markets do not perform well under uncertainty – COVID-19 has proven the axiom tenfold. Monday’s -2,997-point drop was the largest one-day-decline in Dow Jones history. In the last month, the Dow Jones has seen daily changes of > 1,000 points ten times, including three days of over 2,000-point swings.  Monday’s change represented a decline of 12.9%, the 2nd largest ever.  To be clear – volatility is normal, and to be expected for stock/equity investors. Most years have multiple 5% swings in the market. But these levels are clearly historically atypical. We believe, along with many of the analysts we follow daily, that the market has already priced in a recession, as the 30% drop in the Dow most obviously indicates.  The bigger question remains how long we will stay down.


Why the Drop? COVID-19 is Answer #1

When we talk about uncertainty, COVID-19/the coronavirus presents the most complete scenario imaginable for investors.  While experts predict cases will continue to rise as testing becomes more available and accurate, there are questions about how this will affect supply chains and services, let alone who is sick or contagious.  What we do know is that testing capacity is being ramped up and the US Government’s response from a medical/healthcare policy perspective appears to be trending in the right direction. We can also draw some conclusions from how other countries have responded, albeit these are not apples-to-apples comparisons. China is perhaps most comparable from an economic perspective, and we at USAG are buoyed by actual data that show the Chinese economy getting back online at a rather rapid pace – we will be watching this closely and more on this as the picture becomes more clear.

With the US Federal healthcare response causing some of the market turmoil in the last few weeks, the US Government’s economic response has been frustrating for investors as well.  Monday, the White House said that it supports the idea of sending cash payments directly to Americans as part of a broader $850 billion stimulus proposal.1 We believe the market will react favorably to concrete leadership, and it seems as if the government has taken this far more seriously in the past few days than in weeks past.  While we know this will not single-handedly turn around a falling stock market, we also know that the fewer questions the market has about government leadership the better.

Additionally, the Federal Reserve (the Fed) cut interest rates on 3/3 by half a percent.2 This was another historically unprecedented move, and already-jittery investors, fearing the Fed knew something they didn’t, fueled another rapid stock market selloff.  On Sunday, March 15, the Fed went further in slashing rates, this time by a full percentage point to near zero.3 The moves are aimed at stabilizing the stock market and allowing business across the country to borrow money more easily in order to stave off recession. So far, the moves have yet to yield a less volatile stock market. Having said that, we believe the Fed’s actions were and are absolutely necessary – what is important, however, is that they are working in concert with and in conjunction with Congressional & Trump Administration policymakers.

Finally, on top of all the fears around COVID-19, Russia & Saudi Arabia have decided to get into an oil war following an abrupt end to negotiations on easing oil supply in the current global economic environment. The falling price of oil has had a ripple effect on many industries.  Crude oil settled at a 4 year low on Monday, with US prices below $30 a barrel.4 The timing of Russia and Saudi Arabia’s plans was both unpredictable and alarming, and adds another layer of uncertainty for investors to work through.


So What is Next? 

Coronavirus WILL be contained, businesses will get back to business, and the US economy will roll on. It will certainly take weeks and months to recover, but we started 2020 with a solid economic foundation, and we can get back to that point. We will be living in a post-Corona-world, but we will get back on track! Again, China has levers to pull that the US does not, and vice-versa, but as an economic engine, the Chinese market is already showing signs of getting back to pre-virus strength. The US can absolutely do the same. The coming weeks will be consequential as tests are given to more citizens and we learn more about the spreading, containment, and treatment of COVID-19, and they will be consequential for markets as well.

In the meantime, as always, we will continue to monitor & adjust our portfolios as needed, even if the State asks us to work remotely.  As we relayed last week, we take an individual approach to all of our portfolios to ensure asset allocation aligns with each of our clients’ needs, and that philosophy remains the same.

In light of the Fed’s moves (lower rates & greater liquidity), we made adjustments last week to a portion of our fixed income allocations.  We lean towards shortening the duration and high credit worthiness of the debt we want to own.  Fixed Income is an instrument we use to dampen volatility in your portfolios, and relative to your benchmarks, we are doing well there.

On the equity side of portfolios, we are confident in the managers and analysts we use in our portfolio construction.  It is important to emphasize, the ETFs that many of you own have active management in many cases, which means that investment decisions are made continuously to best position a given allocation for the intended purpose of a specific fund.  At this time, given the spike in volatility and uncertainty about the direction or duration of what lies ahead, we are sticking with the equity managers that we have used to grow our portfolios at a time when the market was in the “later innings” of the market cycle – this is intentional, deliberate, and by design!

Having said that, the same managers and styles we want to use for the next part of this cycle may be a bit different as the market settles and the economic outlook grows less hazy and more opportunistic. We have no intention of abandoning the strategies that are time-tested and data-driven, but we will be looking to likely add more opportunistic tools as the market begins its recovery – we will be talking about this more with all of you on both a larger & individual basis, and this is not something we are planning to do in the immediate future, but more on this as volatility settles over the coming weeks.


We will closely evaluate opportunities that will undoubtedly arise from this crisis with the goal of stability and generating higher returns.  When we identity those opportunities, we have the tools to capitalize and we will communicate our thoughts at that time.  It is important to remember: Markets rebound! A brief look at history reminds us of this. Even in the last 24 months, we saw a 20% dip in the 4th Quarter of 2018, the markets recovered. In February 2018, a trade dispute with China sent the market down 10%, markets recovered.  While there are obvious differences at play here, we believe in the resiliency of the market & the US economy as a whole.

When it comes to investing, we believe we add value to our clients in two ways: We provide a guiding hand to reduce emotional behavior so that you can realize your investment goals, and we provide an exceptional blend of both active & passive management for your portfolios, especially for when markets become unpredictable and uncertain. Every day, we get more information about our fight with COVID-19.  It may take months, but we will get through this. We thank you for the confidence you have placed in us.  And we will continue to keep you all apprised of our ongoing efforts. Please do not hesitate to reach out to us anytime.

In the meantime, let’s all practice the new “social distancing” policy – stay safe, and stay healthy!

Sincerely,

  • Tucker, Chris,
    & Rick McDonald
  1. https://www.nytimes.com/2020/03/17/world/coronavirus-update-latest-news.html
  2. https://www.nytimes.com/2020/03/03/business/economy/fed-rate-cut.html
  3. https://www.washingtonpost.com/business/2020/03/15/federal-reserve-slashes-interest-rates-zero-part-wide-ranging-emergency-intervention/
  4. https://www.marketwatch.com/story/oil-prices-plunge-after-fed-move-doesnt-stem-fears-of-global-economic-collapse-2020-03-16
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A Perspective on the Recent Market Instability

*This email was shared with Clients and Friends of the Firm on Thursday, December 27, 2018.

I hope you had a wonderful few days celebrating the holiday.  We have obviously been watching the markets closely these past few weeks and while many recent headlines have been discouraging, we want to remind you that we are long term investors that make our decisions with proper planning and asset allocation and we do not use emotion when we manage your assets.

We know that when the news pours in that the Dow has lost 300 or 400 points in a single day, emotion tells us to run for cover.  But our portfolio management process begins long before this or the next correction arrives.  We diversify the portfolios across industry, company size and geographic location.  We prepare for markets to behave “normally” which means we expect to take the bad days along with the good days.  And furthermore, each portfolio is built for you – for your time horizon and your appetitive for risk.  Remember, volatility is normal; It cannot be eliminated, and it is an enormous part of investing and therefore in order to grow your portfolio, we must deal with it.  Volatility does not change one’s appetite for risk and it certainly does not change one’s time horizon.

Here are some of our own (apolitical) observations on what we see driving the swings in the markets.

  1. Tariffs. The effects of the Tariffs are starting to work their way into supply chains.  These should be temporary effects that we expect to work back in a positive direction once the so-called Trade Wars are resolved; we do not expect the current situation to continue indefinitely. Specifically, the tariffs with China were the spark that lit the most recent round of volatility. President Trump, exiting the G20 meeting in Buenos Aires, announced there was a deal and the market shot up; the deal turned out to be less tangible than the market expected, and the markets came down.  Talks with China are ongoing and seem, by accounts, to be moving towards a conclusion – we are still very much in wait-and-see with respect to a resolution here.
  2. Federal Government shutdown. As taxpayers, it is frustrating when our elected representatives seem incapable of performing the job(s) we elected them to do. When the Democrats take the House on January 3rd, they will likely reintroduce the package that was approved by the Senate 100-0 before the shutdown and will leave it to President Trump to decide to keep fighting or to find some way to open the government back up.  We do not make guesses on the outcome here so again, we are wait-and-see.  Certainly, federal government shutdowns do influence the US economy, but markets in the past have seen growth during these periods.
  3. Perceived uncertainty vis-à-vis the Federal Reserve & Chairman Powell. President Trump has taken to Twitter frequently over the past few months decrying the Fed’s policy of raising interest rates.  The Fed has thus far resisted that pressure, leading to stepped-up attacks from the President on Chairman Powell.  In recent days, various administration surrogates have voiced support for Chairman Powell, but as we know, that does not necessarily mean that’s the end of the story, and the markets have reacted accordingly with fear.  Regardless of Powell’s position, all 5 Chairs of the Board of Governors have supported this most recent rate raise and will likely continue that policy into 2019.  The real question is “how far” into 2019 will rate raises go.  The Fed has issued guidance in the past that they are planning on 3 rate hikes (of the same .25% each).  Recent volatility will put added pressure to perhaps back off that plan.  For the market, whether the Fed hikes or doesn’t is a bit of a double-edged sword, as a rate hike signals the Fed continues to feel the US economy is strong enough to sustain higher rates, while on the other hand, pausing rate hikes, while typically a positive for markets, would signal the Fed’s perhaps less-confident outlook in the US economy.

We often ask ourselves, “What is value?”  It goes hand in hand with confidence and perception.  Putting politics aside, this is about feeling like things are working.  Interestingly, the numbers for holiday spending came out today and we set another record.  Some $850 billion was spent by holiday shoppers this season which is a record over the past 6 years.1  This is good news.  Our economy is basically doing well.  But confidence in Congress, in business ethics and in how we show up on the world stage defined by principals is under question.  This will pass.  Perhaps our swings are more pronounced today than in prior times, but while no one likes what the market did in December, we do not see this as permanent impairment of capital, unless one sells out.  That is not the intent of us here, nor our beliefs that the world is ending.

When the markets enter periods of pullbacks or corrections, we are reminded of one of Warren Buffet’s famous sayings: The stock market is a device for transferring money from the impatient to the patient.  We will continue to monitor the markets and act accordingly, but we will not do so emotionally.  As always, we encourage you to call us if you have any questions or would like us to review your investment profile and goals with you.  We are here to help you and will remain steadfast in doing so.  We greatly appreciate the trust you place in us and the confidence you have in our work.

Sincerely,

Chris McDonald

Tucker McDonald,

and Rick McDonald

1 https://www.foxbusiness.com/markets/holiday-retail-sales-are-strongest-in-years-report

Investment advisory services are offered through U.S. Advisory Group (USAG), a Registered Investment Advisor.  Investment Advisor Representatives of USAG may also be registered with PCS, member FINRA, SIPC, and Registered Investment Advisor, as Registered Representatives and/or dually registered Investment Advisor Representatives.  USAG and PCS are not affiliated.

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