April 2020 Market Outlook
Market Outlook
These are historic times in both the financial markets and our daily lives. The jarring images from New York City and Milan – to name two hot spots impacted by the COVID-19 – and the rising death count impact not only the markets but each of us as individuals. Trade, travel, and capital used to be the dominant platform for connecting economies, culture and people.
It is noteworthy that this pandemic has united our focus globally and raised a common health and economic foe for the people of the world. We are most grateful to the servant leaders in the healthcare and first responder groups, as well as generous volunteers, waging the battle against COVID-19.
Many aspects of our daily lives and routines will change forever, bringing both new efficiencies and positive experiences, as well as fond memories of past cherished routines and practices. However, the coming months will be unprecedented in our lifetime as the global economy attempts to reboot and come back online with many small businesses and certain sectors being severely crippled.
Will we see an amazing V-shaped recovery in the second half of the year? Some economists are predicting an annualized decline in Q2 of – 17% to -24% GDP growth but a full year GDP estimate of flat to +2%. Other economists warn of a severe recession, particularly if we are unable to relaunch economic activity for another 6 weeks. Yet the U.S. equity market has technically rallied out of its recent bear market this week.
We do not have a crystal ball or insightful “house view” on how the pandemic or the economy play out for the remainder of the year. However, we take note of the following:
Our investment philosophy has worked well for these turbulent markets, and we are confident it will provide a solid basis for navigating the bumpy recovery ahead. We focus on allocating across asset classes and diversifying the investments based on a measured level of risk (i.e. volatility of returns or standard deviation). We believe return and drawdowns follow the level of risk, so we try to be disciplined about maintaining targeted levels of risk such that the return will follow over time.
The level of risk which we target is based upon interest rates, inflation – both dynamic variables – and a constant factor which represents return above and beyond the first two variables available in liquid public markets. This becomes our expected return target, and we try not to have more risk in the portfolio beyond the target because when markets go into an extreme drawdown, as we experienced in March, each additional level of risk matters a great deal.
As you will read in our Portfolio Holdings section below, the rising level of volatility and correlation across assets classes necessitated a more active management of risk in the model portfolios. However, we believe that we have positioned the client accounts in a manner which will weather future bouts of downward volatility as well as participate in both sharp and steady market appreciation.
While we see pockets of hope in both human and market terms, we are dealing with an unknown virus without a known cure and with extreme economic, social, and emotional pressures impacting both individuals and institutions. Therefore, volatility will remain with us for the foreseeable future. Our history as a nation and as the world’s leading economy is one of endurance and innovation supported by the many factors of production needed for economic flourishing. We see the likely scenario going forward being in the positive quintile of possible outcomes.
However, we expect to remain vigilant in monitoring the long-term impact of the massive debt monetization we are seeing. It will likely require adjustments to our model asset allocations, but our focus on measuring and monitoring risk will remain.
We are thankful to serve our many clients during these turbulent times and welcome your questions or concerns as we navigate forward together as a team.