July 15, 2020: A Mid-Year Update: When COVID19 Became Real
February 24, 2020 is when COVID19 became real for most Americans.
That was the day our markets began to show signs of serious stress. Until that day we had press conferences and news stories, but consistency and a clear understanding of the situation were difficult to ascertain. At that time, if we looked at recent health crisis history, we could reasonably surmise that a predictable market cycle would ensue, with the market reacting and then recovering from the news. On February 24th, outbreaks in Italy and South Korea as well as quarantined ships at sea told us that COVID19 was something more. In this age of 24-hour news, most events do not hit home until they affect one of two things, our friends and family, or our investments, and sometimes both.
In the modern era we have experienced epidemics of SARS, Severe Acute Respiratory Syndrome, in 2003, H1N1 Swine Flu in 2009 and MERS, Middle Eastern Respiratory Syndrome, in 2012. We have also experienced Avian Flu and Dengue Fever in 2006, Zika in 2016 and Measles and Rubella outbreaks in both 2014 and 2019.
In 1968, a pandemic was caused by an influenza A (H3N2) virus. The estimated number of deaths was one million worldwide with over 100,000 in the United States. Most deaths were in people 65 years and older. The H3N2 virus continues to circulate worldwide as a seasonal influenza A virus.
On February 24th, our markets began to understand both the scope of human life at risk as well as the risk to the workforce and the economy. In the ensuing weeks, the country began closing its doors and markets plunged.
Despite that market sell-off, the markets have significantly rebounded and now stands only 10% away from another new high. We believe significant volatility will remain and that major market advances will be tied to a COVID19 vaccine and the 2020 election as well.
Keep in mind that the Dow Jones Industrial Average, created in 1896, was at a historic high less than two weeks before, on February 12th. This means that despite every single negative historical event that has occurred in the entire 124-year history of the Dow, the American economy has always persevered.
Portfolio Strategies through COVID19
As previously mentioned, the market began to seriously decline on February 24th and by the 27th we had concerns that this would develop into something more serious. We then rebalanced our portfolios to lower our exposure to U.S. stocks, eliminated international stocks and almost all lower-rated bond funds. We increased exposure to higher quality U.S. bonds, U.S. treasuries or municipals, cash, and gold. We continued this pattern over the next few weeks going into March.
With a long-term viewpoint in mind, we selectively rebalanced our portfolios during numerous 5% to 10% market declines to take advantage of falling short-term prices amid the belief that the markets would rebound. This was an effective strategy with most positions although we eventually sold out of REITS and an income-producing oil related fund, which were underperforming.
We currently maintain positions in high quality U.S. corporate bonds, U.S. treasuries and high-quality municipals. We also established positions in gold and a convertible bond fund, both at opportune times. We have been rewarded by favoring U.S. stocks over international as well as favoring growth over value.
Portfolio Strategies Going Forward
We continue to have a guarded outlook on the equity markets and maintain heavier positions in bonds and gold as we believe significant market volatility is here to stay through the election and the continued COVID19 pandemic.
American determination and ingenuity are ever-present in the search for COVID19 treatments and a vaccine. Unfortunately, the strain on our economy, workforce and especially small business will continue to create market difficulty. There will be a significant number of bankruptcies for businesses of all sizes. The massive government infusion into our economy has had significant success but we are concerned about the unintended long-term consequences to our credit markets. This is one reason we are avoiding most lower quality bond funds.
As for the election, our main concern is the strength of your portfolios, your investments in the future. During presidential cycles and mid-terms elections as well, we have written that the markets are more fearful of uncertainty than bad news. The markets know the policies of the current administrations and base long-term strategies on what is known today. Any change in administration may spook the markets at first but they will, and have always, adapted. There will always be healthy areas of the market to invest whether it is recession or inflation, war or peace, Democrat or Republican. We will always maintain an even keeled and well-balanced asset allocation to best serve you.
As always, please feel free to call with any questions.
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Affinity Capital) or product will be profitable or equal the corresponding indicated performance level(s). Please remember to contact Affinity Capital if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings do or will correspond directly to any comparative indices.