Coronavirus and Your Portfolio: What to Know - Adviser Investments

Coronavirus and Your Portfolio: What to Know

March 13, 2020

Episode Description
Featuring Jim Lowell, Jeff DeMaso and Steve Johnson

We are facing very uncertain times, with many questions about the investment environment and how the pandemic will affect our day-to-day lives. Given all of the unknowns, it’s understandable to be fearful. But we also know that panic is neither a plan nor an investment discipline.

In this timely podcast, Chief Investment Officer Jim Lowell, Director of Research Jeff DeMaso and Vice President Steve Johnson discuss what’s changed since the markets were trading at new highs less than a month ago. How are they seeing the coronavirus in the context of markets and the economy?

Topics include:

  • How bonds have been working as expected in diversified portfolios
  • The role of dividend-paying stocks when bond yields are low
  • The history of bear markets and the wealth-building opportunities that can follow
  • The economic impact of an oil-price shock on top of virus unknowns

Fear tends to fill the vacuum when information is scarce. But making radical portfolio changes based on fear can do more harm than good over the long-term. To learn more about how these seasoned professionals view investing during a crisis, click the player above to listen now.

And for additional insights on investing during times of volatility, click here for our exclusive special report, The 5 Steps to Thriving in Volatile Markets, or here to read our message to clients.

Episode Transcript

Jim Lowell:
Market crashes and market panics are not permanent states. We understand that this is a time where nerves are being tested, but our investment discipline is proving it has the right stuff to help us manage through very difficult times. We encourage those who are either panicked by the current market activity or looking for opportunity in it, to tune into this podcast.

Jeff DeMaso:
Hello, this is Jeff DeMaso and I’m the director of research here at Adviser Investments. We’re here with another The Adviser You Can Talk To podcast. Today, I’m joined by Adviser Investments Chief Investment Officer Jim Lowell, and Steve Johnson, a portfolio manager. Well guys, it’s been an unsettling few weeks, both from a world health perspective and an investment perspective, I don’t want to downplay the human suffering as over 125,000 people have been infected with the coronavirus and nearly 5,000 have died and those numbers are only going to increase from here.

Jeff DeMaso:
So the human toll of this pandemic is already high. But let’s try and come at this from an investment perspective. Now it wasn’t that long ago, only about three weeks that the markets were trading at new highs and then the coronavirus was known, but the consensus view seemed to be that it was China’s problem and it was going to be a short-lived disruption to economics across the world. But now, well, we’re in a bear market. The S&P is 20% below its high. Markets have been so volatile that trading was halted twice this week to give traders a timeout and Russia and Saudi Arabia have started an oil price war. As I said, it’s been a heck of a few weeks in the market. So Jim, tell me how you think about the coronavirus. Maybe try and put it in context of the markets and the economy.

Jim Lowell:
Thanks Jeff. No question about it. Panic, not just on Main Street, but Wall Street was the rule of several days as everyone is scrambling to try and figure out the scope, scale, duration and toll of the coronavirus in terms of not just human, not just economic, but also market as it relates to earnings situations. The panic that’s going viral we think is likely to become more, not less virulent, at least on the social scale. On the economic side of the fence, we know that the fed and central bank equivalents and policy makers around the globe are finally getting more proactive rather than reactive and in fact fairly passive over the last few weeks. So we think that will help create a sense of relative calm in the marketplace. But ultimately, given that we still do not know enough about the coronavirus tall, a lot of what’s being sold is being sold on conjecture and fear, certainly not based on any fundamental knowledge about the virus itself, let alone its toll on the economies and markets.

Jim Lowell:
In fact, we’re seeing that kind of moment that feels most uncomfortable, where panic goes viral and it means that everything tends to get thrown out with the bath water. So we have seen over the last few days, stocks, bonds, gold also off and indiscriminately in a way that for long-term investors like us and his discipline is to diversify across stellar managers, creates opportunities in the teeth of what feels like the most violent market moments. We also think that the panic is a normal trajectory and we think it’s akin to Kublar Ross’s stages of denial about one’s own pending death, in this case about the death of the decade long bull market. Those stages are denial, anger, bargaining, depression, acceptance. The velocity which we have already progressed through into what we think is the bargaining phase has been incredible. From my perspective, Jeff, I mean, we haven’t seen, I don’t think this kind of velocity in my money-management lifetime, although we’ve certainly seen significantly trying market times, but the velocity of the downside here has been exceptional.

Jim Lowell:
That means that we hope that there’ll be an upside of similar velocity down the road, but we think that road could be fairly long in coming, maybe three to six months or so, hopefully at the outside. We also know that unlike Kublar Ross’ stages of denial, we are closer to the kind of acceptance in this instance, which is not the acceptance of our own ultimate end, but as ultimately we think the first stage of new gains beginning. And so with that said, I’ll turn back to you.

Jeff DeMaso:
Yeah, I think the velocity is a great point. And even within the economy and we’ve gone from, it looked like an upturn in the economy to effectively recession-level activities if not worse. I mean just canceling sporting events and major tournaments outright. I mean during a recession you’d expect fewer people to attend March Madness maybe, not no March Madness.

Jim Lowell:
It is exceptional. And the scenes at the supermarkets, which I know you and I were talking about the bare shelves and the paper aisles and the cleaning aisles is something that even I live in Boston where snowmaggedons happen on a regular basis and long lines ahead of them in preparation occur. But we’ve never seen that. Of course, when I look at a completely empty shelf, I see the aftermath of a panic and the opportunity of restocking and hopefully that theme manifests itself as we move ourselves into the second and third quarter of this year. I mean, it’s as you always like to remind us Jeff, market corrections and even crashes are par for any long-term investors course. They’re, from our perspective, the tried and true long-term wealth-creation moments that are most rewarding to those who stay well diversified and least panicked. But we also understand it’s not easy to do.

Jeff DeMaso:
Yeah. And to that point to getting through those difficult market periods, at least in the stock market is bonds and often we think of them as offsetting a stock market risk and client portfolios. And the last few days with standing bonds have kind of been doing their job in that regard. Long-term Treasurys are up about 17% this year. The broader bond market’s up around 3% so investors with balanced portfolios, it’s not as bad as the headlines may make it out to be. Steve, I know while also portfolio manager, you’ve spent a lot of time working with clients. How are you talking to clients about their portfolios today?

Steve Johnson:
Very carefully. As this week has shown, obviously our advice to clients is to relax. I think investors tend to look at the broad market and immediately equate that performance to their portfolio. And as you mentioned, a balanced portfolio. So folks who have bonds in their portfolio have really seen the cushion that bonds can provide. And it’s really a great conversation to have with those clients because if you remember last year, what we saw was the market going straight up, everyone wanting to invest in the S&P 500 and really the benefits of diversification seemed lost. But now as we sit and have those conversations with clients, we really see the importance of diversification and making sure that they own really not only stocks but bonds and really bonds across different types, so that they own corporate bonds and treasuries.

Steve Johnson:
And it’s really been a benefit because as we’ve seen, the losses have been severe this week, but those bonds really have cushioned net loss and also provide us some powder, so that if we continue to see the market sell off, what we’re able to do with clients is to rebalance and take some of those winnings that we’ve seen in the bond market and maybe allocate those two areas that Jim mentioned where we see some opportunity here in the next weeks and months.

Jeff DeMaso:
Yeah. You mentioning last year actually rings true for me, if you think back last year, the issues we had to deal with were trade war and tariffs and Brexit and they were with us all year, but they were kind of issues that everyone expected and knew was going to be a problem and markets did really well last year, up 30% of the stock market. But then this year, the narrative coming in was that, markets were going to turn up or at least the economies were going to start picking up with the phase one trade deal between the US and China. And what knocks us off course is the unexpected global pandemic that at least if anyone saw coming, gave it a very small probability. For me at least, it’s a good reminder that you just really can’t predict the future.

Jim Lowell:
I think that’s an excellent point Jeff. I mean the… We always talk about how it’s typically the one risk that’s not on anyone’s radar screen that has the probability of really being most disruptive. And it’s why to Steve’s point, we run well-diversified disciplined risk-aware portfolios because we know the known risks, they are typically priced into the market. But what we certainly don’t know is that one unknown risk that could be disruptive. But I agree with you Jeff, that this feels like a once in a century event, hopefully so, from especially from a human toll standpoint and I don’t think anybody could have predicted this, let alone its toll, it’s sudden toll on the global economy of markets.

Jeff DeMaso:
Well one thing we haven’t seen and speaking of like once in a century is this price war between Russia and Saudi Arabia, and the massive impact it had on the oil market. I mean, oil prices felt 30% in a day coming in to this week. Steve, do you have any kind of thoughts on the oil market, energy stocks, maybe have that relates to financials as well?

Steve Johnson:
Yeah, Jeff, that’s really, as Jim mentioned, we have this pandemic and then on top of it over the weekend, we find out that these talks between Russia and the Saudis fail and then the Saudis flood the market with oil. So it’s really a pro and a con as we’ve seen. So there has been some worry this week about banks’ exposure to oil debt into the debt that those companies have, especially the fear with the sudden decline in price. Yet what we forget is that this also creates opportunities for the consumer because as we’ve seen, interest rates are now at historic all-time lows. We’ve got energy prices now at levels that we haven’t seen in years.

Steve Johnson:
And so that is clearly going to be a tax cut for the consumer. And as we see this, really the fear in the bond market too created by oil prices, lower oil prices has really created some opportunities, as we mentioned about bonds, because we’ve seen bonds sell off, especially in the high-yield market as there’s a fear that those companies may default. So I think there is this initial fear about what lower oil prices mean. But I think in the long run, clearly it’s going to be beneficial for the consumer acting as a tax cut here when we need it.

Jim Lowell:
Steve, to that point, let me just bring it down home and say that my son is a student in Denver, Colorado. He sent me a picture of the price of gas at his gas station, because he hadn’t ever seen it go as low as it suddenly had become. And I think you’re right, the misalignment, which was unfortunate given that panic levels were already escalated, was the assumption that the collapse in oil prices was reflective of a total collapse in the economy when really it was, it looks like it was a Saudi tactic to both thwart Russian competitors, but maybe even to take advantage of some market share opportunity by potentially bankrupting some small and mid-sized U.S. players. So I think that disconnect is now being sort of reviewed and I think that to your point of it being a silent boon to consumer’s wallets is real and material.

Jeff DeMaso:
So I like that you both already started talking about opportunities because I was going to be my next question for you, where if at all, you are seeing any opportunities?

Jim Lowell:
So I’ll jump in first and then I know Steve will do a phenomenal job, but the need for better and more technology across every industry doesn’t just remain strong today. It’s likely to strengthen through this crisis as every business will know the risks of not being able to go online at a moment’s notice. Our banks are exceptionally well-capitalized. Maybe Steve can talk a little bit more about that. Our health care companies are healthy in terms of their own bottom lines and obviously the ongoing demographic demand doesn’t dissipate in the face of a pandemic. And the pandemic presses, especially the best in our biotechnology sectors, to try and come up with efficacious solutions rapidly.

Jim Lowell:
The most downtrodden sectors, think of airlines, travel, leisure, hotels, casinos—they’ll eventually soar. Energy sector as we said is that Saudi wild card. But again it’s a boost to consumer’s wallets when I think they need it the most. And ultimately I think the thirst for yield, which is going to be harder to come by, a typical income ladder will likely move some investors if not most investors towards battleship balance sheet, blue-chip dividend-paying stocks of which I know Steve is an expert at. So Steve, I’ll pivot to you.

Steve Johnson:
Well thanks, Jim. Yeah, I mean for the first time in a while we are very excited about the dividend payers because this market tumbled over the last several weeks has created some real opportunities as you mentioned in some real quality blue-chip names that are really being sold partly because of the prevalence of ETFs. And what we’re seeing is high-quality names with dividend yields above 3 that have a tremendous amount of cash on their balance sheets, and whose businesses probably won’t be as impacted as others from the virus. And so it’s really creating some opportunities. And also we mentioned earlier we talked about bonds and we’ve seen just a huge move in the price of bonds. So we’ve seen yields come down to historic levels and so folks in the 60/40 type of portfolio with 60% stocks and 40% bonds, they’ve seen that 40% do incredibly well to the point now where if we’re looking at where bond yields are and what the expected returns are for bonds, we know that just mathematically they’re not going to be the same as they’ve been over the last 30 years.

Steve Johnson:
And so what it’s doing is creating opportunities for real high-quality names in all sectors. We talk about health care, we talk about consumer staples, the industrials as we talk about the rebuild in China, I mean a lot of these areas are going to be huge beneficiaries of stimulus. And the fact that they have sold off 20% to 30% over the last couple of weeks, we think creates great opportunity. There’s been a lot of selloff in the financials recently. Part of that is you mentioned cause the fear of their relationship with energy and the fact that they may hold some bad debt. But as we’ve studied and really looking at those companies, their exposure is minimal to the energy companies. Because of the financial crisis in 2008 and ’09, the banks now are actually overcapitalized. So they have a tremendous amount of cash on their balance sheets.

Steve Johnson:
They’ve been able to raise their dividends significantly, something that we look at. And also they’ve been buying back stock and they have just a very large cushion to increase their dividends, to increase buybacks and also to survive this period. So, really we are extremely excited that some of the opportunities that have been created over the last couple of weeks, and I know that we are creating a list of companies that we’re looking at to buy that we know we didn’t have the opportunity to six months ago because we thought they might’ve been too expensive. So during this sell-off we are actually getting more excited as the sell-off accelerated.

Jeff DeMaso:
That’s great. I mean we started talking about the risks. Nice to end there on a little bit more of an upbeat note and see an opportunity for long-term investors. Let me ask one final question here, which is what’s the one thing each of you would want an investor to take away from this conversation?

Jim Lowell:
Steve, you go first.

Steve Johnson:
All right, well for me it, this just reinforces having survived the 2000 to 2002 market decline as well as sitting here in ’07, ’09, the importance for every investor to have a plan in place so that you are not… That you don’t succumb to the emotions of the market. So understand what your goals are, understand what your objectives are, make sure you’ve done a financial plan and then take advantage of the market. So don’t let the market take advantage of you. Don’t sell because you’re emotionally charged about the market. Understand what your plan is and just calmly execute. And I think that is the most important part of this as we come out of this tunnel, we’re all going to be better off understanding that we adhered to our plan.

Jim Lowell:
So I’ll echo what Steve said and just underscore the fact that in good markets and bad, we at Adviser Investments are here for you, we’ve been here for 25 years. And while we think it’s likely going to become more and more difficult to withstand others’ panic, our investment view is crystal clear. To Steve’s point, panic is not a plan nor an investment discipline, and AI has been providing both personalized plans and an investment discipline for decades through the worst and best of times. It’s important to note that we invest right alongside you in the same managers and funds and that you can count on us through the thick and thin markets, and count on us being right by your investment side every step of the way every day. With that Jeff, I’ll dip it to you to close.

Jeff DeMaso:
All right. And since I’m closing, I’m going to toss in my own two cents, because none of you can stop me. One thing I like to remind people, and this is a little bit of just trying to keep your mindset on the long term, is that while each bear market is extremely difficult and painful in trying times for investors, in real time, just trying to remember that we look back at past bear markets as some of the best opportunities to grow your wealth.

Jeff DeMaso:
So with that, this has been Jeff DeMaso, Jim Lowell and Steve Johnson from Adviser Investments. Thank you for listening to The Adviser You Can Talk To podcast. If you enjoyed this conversation, please subscribe and review our show. You can also check us out at adviserinvestments.com/podcasts. Your feedback is always welcome. And if you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com. Thank you.

Podcast released on March 13, 2020. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

The Adviser You Can Talk To Podcast is a trademark of Adviser Investments, LLC. Registration pending.

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The losses have been severe this week, but bonds have helped cushion that loss and provide us [with] some powder, so we’re able to rebalance.


Steve Johnson, JD, CFP®

Vice President

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