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Take a Deep Breath - Part II

By: Stephen Colavito Jr.
Chief Market Strategist, Lakeview Capital Partners, LLC

March 2020
















Source: BBC.com

The Covid-19 pandemic has made lockdowns, quarantines, and “social distancing” the norm in much of the world.  Violent moves in the market have become commonplace, a natural response to uncertainty about the spread of the virus and resultant impact on economic growth.

Current medical studies (CDC, World Health Organization, etc.) have discovered that Covid-19 is far less lethal than SARs, MERs, and Ebola.  However, the danger with this virus is how easily it spreads even by individuals who don’t appear to be sick.  Europe is now the epicenter of the outbreak, with more reported cases and deaths than the rest of the world combined apart from China.  The virus is spreading in the United States and Canada; however, we see steps by cities and states to limit social interaction, thus slowing transmission.

There are three main issues with this virus that cause havoc with the economy and markets;

  • The pandemic creates a supply shock, disrupting the availability of goods
  • Any economic activity requires social interaction. Without it, an economy does not exist.
  • Workers are not required if an economy stops (a domino effect), causing a larger and more complex economic problem (deep recession).

In my opinion, economic activity, unfortunately, is unlikely to resume until one of three things happens;

  • The outbreak is contained, or we have significant evidence containment is near.
  • A drug(s) is found to fight the virus
  • Governments shore up the medical systems(s) to handle a large number of patients and allow the virus to circulate (thus, the population builds a natural immunity).

So as we work from our homes and do our best to keep our social distancing, I want to give you my perspective as well as offer a list of books that continue to reference to help me try and make sense of all of this.

 Navy Seal Mentality  

Call it what you will, but we are in the fog of war. Our fight is against an enemy that we can’t see.  But it is causing havoc in our lives personally, and it is affecting our income and portfolios.  

I have read a lot of books, both written by and about Navy SEALs. While renowned for arduous training and elite physical conditioning, it is the SEALs mental strength that makes these operators the very best at what they do.  Their ability to assess problems and make smart decisions in the fog of war is what separates them as the best soldiers in the world.  This manner of thinking is a process; it works, and more often than not, yields exceptional results.

So I wanted to share with you some of the economic and market data using some of these thought processes.  These are not my ideas, but that of US Navy Seal commander, Jocko Willink, who lead SEAL Team-3 Task Unit Bruiser to become the most highly decorated US special operations unit of the Iraq War.  I have read two of his books, “Discipline Equals Freedom: Field Manual” and “Extreme Ownership,” which he wrote with his business partner and one of his platoon leaders, Leif Babin.  I highly recommend both.

When it’s out of your control

According to Mr. Willink, even the best-laid plans can be shaken by tactics from the enemy.

“If it’s stress of things that we cannot control, what you have to do is mitigate that stress as much as possible. You’ve planned, you’ve trained, you’ve done everything you can in your power to mitigate the stress that’s facing you.  And then after that, there’s nothing you can do.  So you have to let that one go.”

I think its sound advice, so let’s look at what is out of our control, but as investors, we need to watch;

Global GDP






.

Estimates on forward GDP estimates from macroeconomists are rolling in, and currently, those estimates are not pretty.  As an example, Goldman Sachs estimates a 20% decline in Q2 GDP.  In the most recent Bank of America Fund Manager Survey, global growth expectations saw the most significant monthly fall going back to 1994.  Most economists that I have spoken to agree that the longer the economy is in shutdown, the harder it will be for the economy to snap back. 

To be clear, forecasting growth in this environment is incredibly challenging.  Last week, the Federal Reserve decided to forego their regular quarterly forecasting exercises, given this difficulty.  Without a historical precedent to anchor my forecast (or anyone else’s), all of us are just guessing.  The way that Governments, Healthcare, and the population deal with the issue will be the deciding factor as to how far the decline truly goes.  At this point, it’s out of my control and not something I worry about for LCP clients.

The Fed 

If you have read some of my previous papers over the last 18-months, you’ll know I have been a harsh critic of the Federal Reserve.  My criticism lies with the Fed’s (over) response to what I deemed as non-crisis moments. 

With that being said, I am pragmatic and can give credit when it is due.   The Fed is meeting this crisis head-on and throwing the kitchen sink at keeping liquidity in the markets and allowing various sectors to trade. 

As of Monday, March 23, 2020, the Federal Reserve has announced an unlimited expansion of programs to backstop the US economy.  Bonds like municipals, corporates, mortgage backs, and commercial paper have all struggled to trade over the last week.  During their statement on the additional purchasing, the Fed stated, “It has become clear that our economy will face severe disruption.  The Federal Reserve is committed to using its full range of tools to support households, businesses, and the US economy overall in this challenging time.” 

At some point in time, I will address the legacy of this effort (exploding balance sheet) and what that could mean to interest rates and the economy.  But, I give Chairman Powell and the Federal Reserve credit for doing anything and everything to keep capital fluid.

When it’s in your control, and you can confront it

In discussions I am having with clients and prospective clients of LCP, I often highlight what can be controlled.  Sharp declines in markets or portfolios should not mean that a “deer in headlights” mentality should prevail. It’s the opposite.

In his book “Extreme Ownership,” Mr. Willink discusses this issue as a consultant to corporations and their executives. “A lot of times, people have something they’re afraid of, and they let that stress hanging over their head.   I don’t let that happen.  I am not going to let that thing hang over my head and wait till the last minute and be scared of it,” he wrote. “No, if I’ve got something to do, I am going to attack it.  I am going to attack that stress.” 

We need to take that same mentality, control what we can, and let everything else go.

Refocus, Review and Rebalance

Under stressful times, it’s easy to lose focus on what your objectives may be.  Stress causes marriages and relationships to fail.  Stress can cause businesses to file for bankruptcy.  Stress can cause investors to sell investments at the wrong time.

As investors, we need to refocus on long-term objectives.  Investors need to work with their advisors to review historical aspects of assets and why holding assets over longer-terms work to address their needs.

Investors need to review their portfolios and assess actual risks they are willing to take.  Most of the time, investors thinking about “theoretical” drawdowns in a portfolio doesn’t deter them from taking too much risk.  However, when “theoretical” becomes “actual,” investors risk tolerance can quickly change.  Working with sharp advisors who can review goals can be extremely helpful while experiencing these drawdowns. 

I have always been a fan of establishing appropriate liquidity reserves when discussing portfolio allocation for clients.  At times this can hinder performance, but during times like these, clients appreciate being “powder dry.” Market volatility has historically created opportunities.  I don’t think this time will be any different.  Consequently, investors should selectively “harvest” tax losses and reposition proceeds into investments that could offer superior growth prospects and/or lower risks depending on an assessment of clients’ real risk.  Investors also need to be aware that the investment environment has changed, and that some investments that looked attractive before the pandemic may be less attractive even if the pandemic is contained.  Some cyclical or indebted companies may struggle to weather the economic slowdown.  As my daughter would say, “those are just facts.”

Work with your advisor and rebalance your portfolio.  Make a wish list and be ready to use your liquidity when opportunities present themselves.  Think like a Navy SEAL, attack it.

Filter News from Noise

Over the last few weeks, I had the opportunity to have some fantastic discussions with one of the top realtors in Atlanta.  We have gone through the gamut of topics, including real estate, interest rates, and, of course, the virus.  As we were discussing the infection and death rate, she said: “I get my information right from the CDC at 4 pm EST every day.” Her statement was brilliant because she is doing what all of us need to do, get news and not noise. 

News organizations over generally sell on fear. It’s their jobs.  However, we don’t need fear; right now, we need facts.  I have spent countless hours trying to find the best information I can to stay informed, but not to freak me out (I don’t own a closet full of toilet paper, and I am not hoarding Purell). 

How we process news and information is something we can control. It’s essential to get information from different sources and take any information with a grain of salt.  Covid-19 needs to be respected, but don’t let social media or 30-second sound bites create fear.

Take a deep breath










Source: Newsweek

It is easy to get torn between the extremes of greed and fear at times like this.  I read a statement by Chen Zhao the other day, and I thought it was timely advice: “The speed of the expected stock market rally could mirror how prices have fallen.  This is the key reason why investors should neither try to time the market bottom nor sell into a panic.”  The frightening headlines about Covid-19 may not fade for months.  The markets, however, may turn long before the end of the crisis.  When investors see containment measures working or the ability to treat victims, the market is likely to change course. 

For us, we need to take a deep breath.  We need to let go of what we can not control and attack what we can.  But most importantly, don’t allow fear to overwhelm us.  This will improve, and we will get through this.  Let’s Navy SEAL this! 

Until next time.  Be well.

 Take A Deep Breath PDF

 

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