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QPW Market Update 3.20.2020

March 20, 2020

Dear Clients,

As a follow up to last Friday’s communication, we have enacted our business continuity plan and we remain operational. In accordance with Pennsylvania’s closure of all non-life sustaining businesses, we are now operating 100% remotely. Our goal is to minimize disruption to clients, and we appreciate your understanding as subtle adjustments are made to accommodate the new circumstances. When possible, we recommend all clients to direct calls and emails directly to team members and avoid calling the “main” office number – this will ensure faster response times.

Please also find below my latest market commentary, a follow up to the critically acclaimed Chairman’s Letter from a few short weeks ago.

Even Methuselah Died, Part Two:  A COVID-19 Fatality

What an amazingly different world since I authored the prequel to this letter in early March. As in the days following 9/11, the world is a much different place. Most certainly, we will never forget this experience.

As you are aware, for years we have been developing and participating in risk-mitigating and risk-minimizing strategies and investments.  However, just as we learned during the years that bracketed the Great Financial Crisis, when markets are under stress, unanticipated dislocations do occur. Over the past several weeks, we have reached out almost daily to those same resources who have been a crucial part of the development of those risk-management strategies – companies like Blackstone, Goldman Sachs, The Carlyle Group and JP Morgan. These world-class partners of ours represent some of the smartest, most experienced and best informed investing and market minds in the world.  In summary, our collective feedback from digesting all of their perspectives follows below.

What we have recently experienced is without precedent.  After an economy that was producing some of its strongest results only three weeks ago, we are undoubtedly going into a recession within the next ninety days. This message was delivered by stock market performance that had been the longest bull run in history becoming the quickest onset ever of a bear market in history, in only ten days.

Such volatility has created some investment dislocations. Some investments that we considered to be safe havens, particularly in the fixed income market, have acted decidedly less so and provided temporary confusion and disappointment.

History tells us that there are three types of bear markets: cyclical, structural and event-driven. The first two are longer lasting with subsequent longer recovery periods. Event-driven bear markets tend to fall into an average dropdown (market peak to bottom) in the 30-35% range, with an average recovery period of seven-to-nine months. There is no doubt that this one was event-driven by COVID-19, coupled with shocks to the oil market. It is possible that the economic ramifications of the virus will morph this event-driven bear market into a cyclical one, which does not bode for a meaningfully different average drawdown, but does extend the recovery period.  Medical professionals working closely with the government are forecasting that from start to finish, we should expect a very challenging two-to-four months or longer of new lifestyle restrictions and economic slowdown while the coronavirus runs its course in the U.S.  We also know from history that markets tend to anticipate economic recovery with a lead time of approximately 6 months. As a result, the concept of a third and fourth quarter market recovery certainly remains possible.  Of course, all of this is dependent upon the effectiveness with which most Americans adhere to the recommended social distancing and, when needed, self-quarantining.

Regarding our strategies: we still are of the opinion that as the markets stabilize, most of those disappointments caused by severe dislocations and illiquidity will perform as expected when we emerge from the other side of this unpleasantness. The positive news: once out of this cycle, we believe we will be at the beginning of another constructive economic cycle because of the inherent strength exhibited by the economy of yesterday, pre COVID-19, and bolstered by fiscal and monetary stimulus.

As always, please feel welcome to reach out to any of us at Quadrant Private Wealth. We are working hard to operate effectively and efficiently to address all of your needs on a timely basis.

Stay safe and well,

Herm

 

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