“Never Waste a Crisis” - Paul Romer

April 19, 2020 | by morwebadmin

January 2020 the stock markets had just finished a surprisingly big year with the S&P 500 ending 2019 up 31.46%. The conversation was not about how stable the economy was, but that the frothiness in the stock market was being sustained by Federal Reserve interest rate actions, quantitative easing and a certain level of end-cycle greed, but not corporate earnings. We felt that the equity markets were only slightly over-valued and were not threatening a crash. Interest rates were low, unemployment was low and inflation remained low. With banks in very solid shape and corporate America, having tightened their balance sheets and accumulated cash over the previous 11 years, in good shape, none of the usual factors that act as a catalyst for recession were in play. It was expected that the year ahead would present the usual election year volatility and the threat of tipping into a recession had to come, if at all, from an outside source: political or something we hadn’t counted on yet.

At Willow Grove Advisors we started to take note of something happening in China. The Chinese had shut down their New Years celebration nation wide which is tantamount to the west cancelling Christmas, the season that can make or break most retailers. This was big and did not bode well for Chinese economic growth projections. It would hurt the Emerging Markets sector and was worth paying close attention to.

What a difference 6 weeks makes. By March, Coronavirus outbreaks were being reported world-wide. Italy was a COVID-19 hot-zone and infected cruise ships were anchored off the coast of Japan and California negotiating port and disembarking health protocols. March 16^th all counties around the San Francisco Bay were ordered to shut down and shelter-in-place, followed by the rest of California a few days later and most states within the following weeks. We hit the economic pause button.

Needless to say, the markets have been an emotional mess. The “outside source” has made itself known. We have seen both the worst trading days since 2008 as the Russians and Saudi’s fought over oil production and preserving their market share, AND the best trading week since the 1930s after congress passed the $2 trillion “Relief and Economic Security (CARES) Act”. For now, assume we are in a recession. It won’t be officially called for another quarter, but we can be pretty certain it will be called.

So what now? The best thing you or anyone can do now for their portfolios is to take care of yourself, your family and find ways to support your community. Stay healthy, continue social distancing and Do Not become a statistic.

If you are invested, stay invested. The S&P ended the 1^st Quarter down – 19.6%. (as compared to 2008 the S&P 500 was down -37.0%). The stock market has a ways to go before it reaches the 2008 decline. Additionally, in 2008 the foundational institutions, the banks, were broken, shattered, and had to be re-built in 2009. There was limited to no liquidity or lending in the system which made recovery hard. Referring back to earlier in this piece, the Banks today are in good shape, there is plenty of liquidity and the foundations of our economy are solid and ready to recover. We do not need to rebuild. By staying invested you will be ready to ride the wave of recovery as well as collect income and dividend distributions while you wait.

If you did go to cash, it’s not too late to get back in. There will be continued volatility for a while. Pick a down day in the market and reinvest (if you went to cash less than 30 days ago, do not reinvest in the same securities you sold.) You want to be in the market when those big trading days happen, or it will extend your recovery period substantially.

Now back to “Never Waste a Crisis”. For your portfolio: A market decline can offer the opportunity to do Tax Loss Harvesting. If there are holdings in your portfolio that you do not want or have been wanting to sell, now is the time. Tax loss harvesting and redeployment will take advantage of unrealized losses, locking them in, that can be used against gains over the years until they are used up and by immediately re-deploying the proceeds into a broadly diversified portfolio, you will be ready when those big trading days arrive and carry your portfolio up to recovery.

This is undoubtedly a dark moment. We will get through this, as anxiety laden and scary as it may be. And like any crisis, it is an opportunity to learn and grow. Crisis asks us all to change what we thought we knew. I predict we will see a change in the way we think about work and meetings. Video conferencing has kept people in touch and allowed work to be done efficiently at home. We now know we do not need to get into a car to have effective face-to-face meetings. Employers have also learned that work gets done remotely so perhaps not as much office space will be needed in the future. Not everyone needs to be in the same office at the same time to be productive and collaborative. To this, infrastructure and modes of communications (Wi-Fi, laptops, desk space etc.) will need to be built up across the country to support the new distributive way of working and learning.

While we are justifiably distracted for the moment with COVID 19 and need to place our immediate focus on people and communities, climate change will continue to be a priority. People with respiratory issues, exacerbated by poor air quality, are among the most vulnerable to COVID -19. As this crisis loomed there are glimmers of hope. Several major global companies, including AstraZeneca, British Petroleum, E&Y, Microsoft and even Delta Airlines, announced programs to become carbon neutral. This is the beginning of a significant shift. This moment has shown us how to start making the changes we need to combat climate change. Companies and industries across the globe involved in and committed to the reduction of carbon emissions will be the industry leaders taking us into the future.

COVID-19 will be with us until a vaccination can be found and widely applied. Life Science companies across the world have been making headway with a variety of accelerated product initiatives to combat and treat COVID -19. The global life science industry will be a bright spot in the coming months and years.

As we move past the apex of the COVID-19 epidemic and people can go back to work, though more likely in a different way, expect the market to bounce back with its usual resilience. In the long run, the markets are optimistic as is the American spirit.

Willow Grove Advisors, LLC

2040 Bancroft Way, Suite 201

Berkeley, CA 94704

Tel: +1 510- 705-1771

keley@willowgroveadvisors.com

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Willow Grove Advisors, LLC (WGA) in a wealth management firm registered with the SEC and a member of FINRA. WGA does not make individual security recommendations and no communication should be construed as an offer to sell or the solicitation of an offer to buy securities in any way.