History Rhymes, But It Does Not Repeat Itself

“It’s déjà vu all over again.” –Yogi Bera

Anyone who has been investing long enough has felt financial pain before. Given the humbling nature of the markets, it comes with the territory—but this is a different sensation. It’s an uneasiness not felt since the disorienting days of the 2008-09 money fund failures.

Emotionally, this feels more like the unsettling days after September 11th. The eerie uncertainty during the quiet “go home and search for answers” days is a lonely feeling, and this week, it came back. We are connected creatures, and being told to temporarily retreat and sever our connections is anathema to us. Here, living in North Carolina with ties to the coast, the calm before and after hurricanes tells us the event is more than a little sprinkle in the natural rhythm of things. That silence speaks volumes—but this is something different.

However, I am comforted knowing that, while different and infrequent, it is not without precedent. And with that precedent comes a history of overcoming adversity, of being forged by the periodic fire and growing stronger. A quick look at the most recent bull market, the longest in U.S. history dating back to the 1800s, shows a “wall of worry” and many reasons to sell that would have cost us growth, at least from an economic perspective.

With the advent of the coronavirus (COVID-19), we are grappling with a new element that we have not seen before. Being under a state of emergency at both a state and federal level is not the norm, but we’ve overcome other atypical situations. I remember watching Saturday Night Live after 9/11 when creator Lorne Michaels asked then-Mayor Rudy Giuliani if it was OK to be funny again, to which Giuliani famously quipped, “Why start now?” Growing up in the 1970s, I recall my parents talking about the oil embargo. During the 1960s, my parents’ generation was in college amidst riots, assassinations, curfews, and massive social upheaval. Back a generation further, my grandmother grew up during the Great Depression. The financial devastation of that era so impacted her that decades later, she still hung her laundry on the clothesline to save money.

I bring this up to reiterate that if each of us looks no further than our family tree, we will find that adversity and unusual circumstances are facts of life.

Through all of it, humanity has overcome—and for that, I have hope.

In the coming weeks, we will undoubtedly enter a new normal. Social distancing, quarantines, reduced travel, school cancellations, remote working, and a host of other new realities are unfolding. During this time, we will encounter things outside of our control—elements of the coronavirus, interest rates, elections, earnings, etc. But there are other things within our control where time is well spent. Given my background as a wealth manager, my counsel centers around ten things investors can do right now to
capitalize on the situation at hand:

1. Assess Your Liquidity Needs – We recommend each of our clients have two years’ worth of stated spending needs (net of portfolio yield) accounted for in cash and/or high-quality, short-duration bonds. This liquidity confidently accounts for all living expenses, tax obligations, and capital commitments. The average recession since the Great Depression has lasted an average of 13 months. As a discounting mechanism, the market will sell off ahead and rise before the recession is complete. Having double the cash needs brings peace of mind, and the ability to snap up asset prices at significant discounts as a sell-off occurs. This is our boring and unexciting, yet highly effective, risk management line of defense number one. If your liquidity needs are met, remain calm.
2. Walk the Walk – Are you kicking yourself for not owning Tesla, Amazon, Johnson & Johnson, Apple, etc., for the past couple of years? Well, those names are all a lot cheaper now. The stock market is the only place where assets go on sale 20-30%, and clients run for the door. If Target did this, you would have a minivan derby trying to get there in our town. How about putting cash to work in markets broadly? After fall 2018’s quick sell-off, almost all major indexes were trading below their ten-year averages, as seen below.
   

1. We are there again. It is time to put funds to work. If you are averaging cash in and have the appropriate time horizon, look at accelerating your plan.
2. See the Facts – As legendary Tar Heel basketball player Rasheed Wallace once said, “Ball don’t lie.” Numbers don’t either. There is always good news to accompany the bad. Looking at two data points in particular—the dramatic -66% sell-off in crude oil (WTI at $20.37 as of Thursday) and the collapse of the 10-Year Treasury to a low of 0.84% the week before—there are direct positive implications for consumers. I have seen some estimates quantify this as a de facto $750B stimulus package. In any other environment, this would be headline news—and this was before the $1T stimulus package was floated from D.C. There are silver linings out there if you look for them.
3. Refinance – This may be an incredible opportunity to refinance your house, business, existing line of credit, etc. Focus on improving your cash flow, and do it now!
4. Buy Low/Sell High – Kicking yourself for not selling equities in late 2019 or January of this year when things were humming along? Consider selling bonds at a profit now and either shortening their duration or rotating into any number of oversold asset classes across the spectrum.
5. Gut Check Your Risk Tolerance – You said you had a 20% drawdown tolerance, right? Having gone through this week, is that still the case? Are you more or less tolerant of volatility than you say you are? If you say you are OK being -20%, that means tolerating a -$200K loss in value on a representative $1MM portfolio. Do these percentages and real dollars jive? Research shows that the pain of losing money is at least two times stronger than the satisfaction of an equivalent gain. Psychologically, a 20% gain doesn’t feel as dramatic as a 20% loss. Simply put, people hate losing money more than they love making money.
6. Remember What the Money is For – Are you charitably inclined? If so, are you reaching out to help support the Red Cross, the United Way, Doctors Without Borders, your local faith-based organization, or any other number of worthy beneficiaries? Are you doing your part by donating blood, and making hard decisions by forgoing events that could potentially facilitate reception or transmission as the infection curve flattens?
7. Tax-Loss Harvest – Take advantage of this sell-off to incur tax losses without adjusting your portfolio goals by swapping out index funds. Alternatively, use separately managed accounts (SMAs) to lock in tax losses to net against existing or future gains. In today’s world, there are a host of tools that effectively mute 30-day wash sale restrictions, which once bound investors.
8. Gift Shares – For estate or wealth-transfer strategies, now is an ideal time to gift a large number of shares at temporarily depressed prices, especially hard-hit sectors or people with concentrated positions. With annual gifting at $15K individually ($30K collectively), this can add up.
9. Gifting 2.0
10. Grantor Retained Annuity Trusts (GRAT) – Gifts are “less expensive” to make in terms of using lifetime exemption, yet ultimately would get more out of one’s estate and to family members if the shares rebound.
11. Charitable Lead Unitrusts (CLUT) – If someone intends a multi-year pledge/capital campaign, fund it with hard-hit stock to pay the pledge annually, yet when stock rebounds, more will go out of the estate to kids/grandkids.
12. Hedge – Worried that the market is going to go down? Nervous you are too defensive and won’t participate in a rebound? Maybe you don’t want to incur a lot of capital costs either way? Consider some simple options-based strategies such as buying puts to profit if the markets decline or calls that will increase in value if the market rallies. If neither scenario unfolds, you are only out the money you incurred to buy the call or put.

Though the coming days and weeks will bring much uncertainty, that doesn’t mean there is nothing we can do.

As our Investment Strategy Team works swiftly and diligently to collect and assess new data points and analyze investment opportunities, we encourage investors to do their part as well. Control what you can control. What from the above list applies to you? While working remotely, staying plugged in day to day, there will be a lot more “around the house” moments as well and we hope you are able to find moments of enjoyment in the midst of this unique time of social distancing.