April 2, 2020: Initial Thoughts for a New Quarter

Ann Miller |

The end of one quarter and beginning of another is a good guidepost to offer some initial perspective on the COVID-19 pandemic and its effect on the economy and our portfolios.   


As we prepare a broader update regarding the market activity of the first quarter, we want to share our thoughts now as we enter what may be a volatile start to the second quarter.  We strongly encourage you to review our March 24th Update: “10 Questions”, which is included in this e-mail string below. Also, please review our updates beginning with January 29th as we provide our clients with a level of continuity in our communications for the duration of the COVID-19 pandemic.


We just ended the first quarter of the year (Q1) – the worst Q1 in history for the Dow Jones Industrial Average.  What can we expect in the second quarter?


The Dow Jones Industrial Average may re-test the low points of the first quarter.  The Dow closed at 18,591 on March 23rd.  The second quarter began at 21,227 so there is a possibility for a decline of another 12.4 %.  If it does drop to roughly that level and holds, that would be   a good sign.  However, if “another shoe drops” and it declines further, we believe that the markets would recover back to these levels when the pandemic eases and a sense of normalcy returns to our economy; not if, but when.


While we began with the scenario for a retest of the market lows, keep in mind that the markets attempt to price-in future economic activity.  Certainly, short-term news has a daily effect but this is smoothed out over time.   The primary problem for Wall Street now is determining the earnings power of companies going forward.


The question is less the fact that first quarter earnings are essentially a lost cause – the markets have already priced this in - but what will the rest of the year bring?


We may reach a peak in Coronavirus cases in April, but this is an unknown at this point. It will likely be May 1st at the minimum before Wall Street can start to reasonably evaluate future earnings.  More about earnings and how they impact the markets in our next comment which will be specifically about earnings.


What are our investment themes as we enter April?


Much as we did in late February, as of last Monday we have rebalanced our portfolios for what we believe is the second phase of the COVID19 market: (see our Update from February 28th.)


  • We allocated 20% portfolio weight to higher quality bonds: long-term treasuries and investment grade corporate bonds or tax-exempt municipal bond funds
  • WE sold lower quality bonds and fixed income funds
    • We believe there is more to be concerned with in the credit markets, bonds/fixed income securities, than in the equity, stock, markets. 
  • REIT - Real Estate Investment Trust positions.  We sold half our position on Monday and half on Tuesday to exit this market segment.  While this is an excellent long-term compliment to a diversified portfolio, the nature of this event-driven coronavirus downturn causes us to reallocate this position.  While we had attempted to average down through rebalancing during March, it became apparent the volatility was increasing.  This security was down over 7% today alone.
  • We maintain our roughly 8% position in gold that we established in February.


If you think the markets will likely drop further – why not sell and get back in later?


From our February 28th Update:

  • … predicting a hard bottom is impractical, so we rebalance and add to some equity positions during a decline…  

During market declines, articles about missing the worst, and best, days of the market grow in popularity.  While accurate in the mathematics, the reality is that worst and best periods of the market typically occur within days of each other.  As long-term investors we try to avoid heroics.

We have received a large number of trade confirmations in March – is there an element of market timing involved?

No. We are active managers and will respond to market downturns and opportunities.  The core of our portfolios, roughly 60 to 70% of the positions, will generally remain steady as a percentage of the overall portfolio with some adjustments as we rebalance.  In some instances, we may replace a security with one that has lower expenses or a slightly different construction but remains in the same investment category.

From our March 9th Update:

… Example:  We desire a position to equal 5.00 % of our total portfolio.  The price decreases and it is now 4.00 % of our portfolio.  We will purchase an amount equal to 1.00 % to maintain our desired 5.00 % weighting.  Please see our Investment Update of February 28th included in this email string.  As our chosen custodian Charles Schwab was the first to introduce zero commission trading, rebalancing is very effectively achieved.


What are you watching as the 2nd quarter begins?


  • As experts say, we may reach a peak in Coronavirus cases in April but obviously we will not know until we are past it.
  • A concern is when social distancing relaxes and businesses start to reopen, a second outbreak may occur which will impact the economy once again.
    • Unfortunately, permanent business closures will continue in April and possibly May.
      • Many of our favorite small businesses, especially restaurants will close for good. We encourage you to safely enjoy some drive-through and take-out so we can support these businesses.
      • National businesses and especially retailers will file for bankruptcy protection
    • The recently passed $2 Trillion Care Act is a very strong response from government but it may not be enough for the very smallest of businesses that depend upon daily cash flow. 
    • Government will look to further economic stimulus to aid our economy
      • While these short-term measures will provide support, the longer-term impact on our national debt should not be overlooked.
    • The impact of incidental events such as terrorism or economic impasse in a particular sector that accelerates market movement
      • Example:  Russia walked out on talks with Saudi Arabia regarding a new agreement on oil pricing and production cuts which precipitated oil prices to plunge and with it energy stocks.  See our March 9th Market Update below.
  • While pent-up demand from stay-at-home rules and social distancing may create a burst of economic activity, it will be measured.  A lesson learned is the fact that there are many things in our consumer economy we can do without.  We hope this leads to higher savings and investing rates over the long-term.  Conversely, what about the long-term effect on our consumer-driven economy?  Will lessons learned be short-term or create a level of generational change?
  • Keep in mind that we are a global economy.  At the point where the USA sees a decrease in COVID-19 cases and our economy begins to open up, the question remains, where will our various trading partners be in the cycle?


While we have much more to share, we stop here and recommend reading War and Peace. Admittedly, I have tried three times over my lifetime to finish it without success.  We do recommend the movie with Henry Fonda and Audrey Hepburn.  A great way to further stress your internet bandwidth.


In our next update, we will devote time to portfolio management in the first quarter as well as strategies going forward.  As always, please feel free to call anytime.