Investment portfolios have seen a wild ride in the past year. The somewhat good news is that most diversified portfolios, as of today, are nearly flat to up over the last twelve months. The next question is, what will the remainder of 2020 bring us in terms of an economic recovery? Matthews Barnett, CFP ® provided a review of the market and GDP response to COVID-19 in his blog last week. Here is a synopsis of what the largest asset managers are saying on their company blogs.
The initial response to COVID-19 was a market decline of 30-40% across the world, a similar response to the 2008 great financial crisis. Markets have recovered most of these losses due to government fiscal interventions. BlackRock is cautious about the virus returning in the fall, but believes the most bearish market performance would not come near what happened in the 2008 financial crisis, despite the initial shock. This is not a banking crisis and governments worldwide reacted much faster than in 2008. The biggest risk is policy execution; getting funds to the individuals and businesses that need it. Corporate insolvencies could create a financial crisis.
The US economy was on good footing prior to COVID-19. The best-case timeline for economic recovery will require testing being readily available by the end of May and June. Six vaccines are in human trials, 81 others are in development, thus getting a treatment option by Q1 2021 or sooner seems possible, but fully opening up the economy will need more accurate and widely available testing.
Vanguard refers to the COVID-19 market sell off as the “Great Fall,” with a two-phase economic recovery partly “v” then “u” shaped. Vanguard’s prediction is based on restrictions ending over the summer with different parts of the economy opening back up at different speeds. Getting the economy back to full speed could take two years. This means that the labor market may not return to pre COVID-19 levels until 2023. The Federal Reserve would therefore keep interest rates near 0% until then. Markets worldwide are being held up by government policies founded in a ‘whatever it takes’ approach. This is not another 2008 financial crisis. None of the predictions are inclusive of a fall shelter-in-place.
I add Warren Buffet to this list simply because his take on any economic event is always sought out. His guidance in 2008 brought reason to a very volatile market. I find it very interesting that he has been so quiet during COVID-19. At his recent shareholder Zoom meeting, Mr. Buffet reported that in April, when the market had fallen by 30%, his investment company bought and sold a net -$6 billion in stock. This includes liquidating all positions in his US airline holdings. His statement was that the virus has an “extraordinarily wide” range of possible outcomes and that the “world has changed” for the airlines. The big news was that the Oracle of Omaha was not buying stocks during the 30% selloff. Perhaps his friend Bill Gates has influenced him on the COVID-19 possibilities or he’s just investing like an 89-year-old should. His quietness is concerning.
A consensus amongst all the large money managers is that a fast recovery is possible IF the government can execute rescue plans efficiently, there are test readily available and the virus does not spike again. All of this has reinforced our current portfolio strategy of holding quality stocks and favoring US treasuries as a hedge to any surprise events. No one knows the future, but I would be ready for another market selloff and then a strong recovery. Americans know how to fight if we have to.
Casey T Smith