Market Commentary – April 2020

Long Distance Runner

In our January report, we contrasted terrific investment results for 2019 with negative market conditions for 2018, a year that memorably climaxed with a major selloff in December. We wrote: “As Bartlett was not downcast after 2018, we are not unduly exalted by 2019. We are always mindful that investing is a marathon, not a sprint.”

Only ninety days later, the Bartlett marathoner is recovering from a fall, bruised and chagrined. But also steadfast and determined to continue the race, confident in eventual rewards for perseverance and knowing the huge opportunity costs of capitulation.

How Bad Could It Get?

Economists and policymakers have been busy forecasting the possible fallout of the Covid-19 pandemic. We offer just a few observations in describing the evolving challenge.

  • We believe at least 12% of U.S. economic output is produced by companies that are severely and perhaps permanently impaired by the crisis. These companies are in greatly stressed industries such as aviation, retail, restaurants, entertainment and hotels.
  • We estimate more than 21% of America’s labor force is (or was) employed by these companies.
  • These numbers give a cold realism to the near certainty of a recession. Unemployment in the United States, only 3.5% a month ago, could soon exceed the 10.2% peak reached early in 2010 amid fallout from the “Great Recession” of 2008-2009. Forecasts of 15% unemployment later in the spring do not seem far-fetched.
  • Very few companies will escape the pandemic’s impact. Consider that even venerable Coca-Cola, widely considered an almost recession-proof company, recently warned of lower revenues and profits due to the loss of sales to customers at sporting events, hotels and restaurants.

HELP: In Process and More Coming

Economic policymakers have been working overtime to alleviate the impact of containment measures necessitated by the pandemic. In summarizing a laundry list of actions, Barron’s opined that “The fiscal and monetary policy firehose is blasting with all its might!” Bartlett anticipated forceful initiatives in our March 16 email.

  • The CARES Act, more than $2 trillion in federal spending encompassing a wide variety of support programs for households and businesses, is believed to be the largest fiscal package since WWII. It will boost the U.S. federal budget deficit to 14% of gross domestic product (GDP), second only to the modern record of 27% reached in 1943 at the height of wartime spending.
  • The U.S. Federal Reserve Board has led a coordinated response by global central banks. Monetary policy is often described in unduly complicated terms. But the goal of recent strategies is simple: to keep interest rates very low and make loans broadly available for households and businesses. This means companies will have lower costs in financing inventory and capital projects while homeowners will have less costly mortgages.
  • Given the scale of the economic fallout, a few of our favorite analysts have described the policy efforts thus far as only “triage” rather than “stimulus.” It seems all but certain that fiscal policy will continue evolving, with new government programs both to alleviate suffering and to stimulate growth. More thoughtful health care spending seems necessary; only 8% of the aforementioned CARES Act is related to health care. Bartlett would also applaud a thoughtful infrastructure program, mindful of the productivity-enhancing potential and of the opportunity created by very low borrowing costs.

Gauging the Timeline

Unknown to most people only a month ago, 79-year old Dr. Anthony Fauci is now arguably the world’s most famous physician, and perhaps one of the most important economic policymakers! Recently asked about the outlook for easing containment measures, he memorably answered, “The virus sets the timeline.” So it is that the infection rate will be followed in 2020 even more assiduously than the interest rates or inflation rates of prior economic cycles. Based on everything we’ve read, a “best case” would be lower infection rates and economies returning to growth mode in the summer following a severe decline, while more cautious scenarios suggest a lengthier period of containment procedures and a longer recession. On an encouraging note, The Milken Institute reports there are 60 research programs underway to develop a treatment for Covid-19 and 40 programs aiming for a vaccine. While not a quick fix, we’ll bet on the ingenuity and resourcefulness of great scientists.

Portfolio Composition and Strategy

We believe the companies you own should be broadly resilient during this economic downturn, maintaining profitability and dividend payments. This is especially important when we consider very sobering recent news from many companies in severely weakened sectors of our economy. For investors, very tangible evidence of distress has come in the form of dividend suspensions or reductions by a variety of aviation, retail, restaurant, automotive and hotel companies. While many of Bartlett’s favored companies have revised profit forecasts, as of March 31 there have been no dividend reductions or suspensions, and we are not aware of any of our companies seeking to participate in government relief programs. Moreover, we expect many of our companies will emerge from this crisis with enhanced competitive advantages resulting from the decline of weaker companies in their industries. Just as important, in difficult times the lower-risk assets included in portfolios, especially bonds, have provided the relative stability we expected.

The market setback has us on the lookout for opportunities to improve holdings, but we are not yet making major changes to asset allocation. There will be a time for bigger adjustments and more risk-taking, i.e. selling lower-risk bonds and less volatile stocks in order to purchase companies poised to benefit from improving growth. But we aren’t there yet. We need to see clearer indications that economic expectations have bottomed out so that the next stage is one of improvement. At this time, the economic and business outlook is still in a “getting worse” trend. This means Bartlett’s more conservative biases of the last year – favoring less economically sensitive companies, emphasizing more balance and diversification with less volatile holdings, and very careful cash planning – will remain in place.

Concluding Comments

We are honored by your confidence and privileged to work for you, a responsibility we cherish at all times but especially now as we navigate through unprecedented challenges. We hope you will recommend Bartlett to family, friends, and colleagues who could benefit from our financial planning and investment management services. We are always pleased to add new clients.

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