Like a Lion

March was one of the most challenging months I’ve experienced as an investor.  As measured by the S&P 500 stock prices fell 12.35% for the month.  In ordinary times, a daily price move greater than 1% is worth paying attention to.  There were 22 trading days in March, and on all but one, prices moved up or down by more than 1%.   March 16th was the champion down day, with an eye popping 11.98% drop.  March 24th won the up-day trophy with a 9.38% positive move.  Year to date, stock prices are down 19.6%, the first time the S&P has been down three successive months since 2008.

The coronavirus is dominating the lives of most people around the world at this moment.  It is extremely difficult to estimate the scope of the virus’ impact and the immediate concern is its containment.  Social distancing clearly has a positive impact.  The virus is however putting immense pressure on the health care system across the globe.  We anticipate the day when our doctors and researchers will be able to accelerate a therapeutic or a vaccine.

A second lesser known crisis is the oil price war.  On its own, this would be wreaking havoc in the markets.  On March 10th, Saudi Aramco announced it would dramatically raise crude production, pushing Russia to take similar measures as the Russian Ruble tanked in value.  As seen in 2016, low oil prices imperil countries and businesses dependent on oil revenues.   With the global economy on idle, the resultant demand shock has forced prices to lows not seen in 20 years.  S&P 500 earnings from the energy sector will likely go to zero.

To stem the impact of the economic fallout, on the corporate level and on the individual level, both the Federal Reserve and Congress have acted with unprecedented speed and intensity.  Congress has approved $2.3 trillion in bills to enhance unemployment benefits, paid sick leave, and direct payments to families, in addition to payroll support for small businesses.  Separately, the Fed has slashed interest rates, flooded banks with liquidity, opened unlimited quantitative easing and opened U.S. dollar facilities for other central banks.

Our immediate work centers on several important matters.  Foremost, we have to make sure you have enough cash on hand to manage your household for roughly 9 months.  If we need to raise more cash, there will be opportunities along the way.  Patience at this point is imperative; this will not be an aspirin and a good night sleep event.  It’s going to take a good deal of time and focus to work through what is likely to be more challenging news.  The markets will continue to be volatile and driven more by fear than fundamentals.  Our main effort is to screen for any hidden risks or credit issues among the companies we own.  Our focus is on high quality stocks and bonds, ones that can continue to maintain a high level of earnings through the economic downturn.  These are the types of companies, and there are many of them, that have successfully come through prior economic crises.

When the virus is stabilized, we will be able to better assess earnings and the guidance companies put forward.  At that time, our fundamental analytical tools will regain focus.  This will help us establish a new baseline, and get a better sense for the potential returns for stocks for the remainder of 2020, and more importantly 2021.  We are expecting there to be some interesting changes to the economic fabric.

While stock and bond prices today represent far better values than they have over the prior 10 years, prudence has us putting money to work judiciously at this time.  We are seeing signs of a potential transition to more value stocks, stocks that perform best in a cyclical upturn.  In my opinion it is too early to make this move.  We will continue to own stocks that will emerge from the economic downturn earliest with strong profitability and liquidity.  These have been our bread and butter factors for some time now.

Finally, we want to talk with you, if we have not already, to review your asset allocation, your cash needs and to share our views on the unfolding health and economic crises.  We do not have all the answers but we do have a breadth of experience in traumatic points in time for the stock market.  Please feel free to reach out to us.  We are as busy as ever at work every day from our home offices.  Please be safe.


Bruce Hotaling, CFA

Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are as of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation. This note contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

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