M3's Take on the COVID Repercussions on Financial Markets

At M3 we're focused oninvesting in the market and having a long-term outlook. We are the gatekeepersof your wealth, and we want to ensure you can preserve it for your family’sfinancial future.

As the COVID 19Pandemic unfolds, we want to share our take on the recent developments infinancial markets and our strategic outlook. Our objective is that of achievingour clients’ long-term goals. That is easier said in rosier times, but it isespecially in challenging ones that long term strategy is of paramountimportance.

Our approach is to balance our clients’ risk levels with the expected duration of their investment plan. The active management of cash flows, the rebalancing of portfolios and the implementation of tax-saving strategies, in the context of big picture strategic planning, is how we articulate our value proposition in turbulent times.

M3’s Take

This global pandemicis scary, there is no doubt about it. For our sector and for the economy as awhole, this is as serious as a heart attack. Never before in economic historyhave wide swaths of the economies of countries all over the planet been shutdown suddenly and at the same time.

As the decade-old bull market crumbled at an astounding speed, the Federal Reserve cut interest rates to zero, reopening the 2008 Financial Crisis playbook and announcing unlimited asset purchases to keep money markets from freezing and to support the financial system as a whole. A few economists are announcing the arrival of a financial crisis that might be as severe as 2008.

The U.S. economy mostlikely has entered a recession and, according to a new projection from Goldman Sachs, US GDP could contract by an annualized 6% in the first quarterand an astonishing 24% in the second quarter. However, this is a globalpandemic and its repercussions can be seen all over the globe. Everywhere, fromChina to Europe, from South East Asia to Latin America, shutdowns andshelter-in-place orders are being enacted. It appears as though the only way toslow the spread of the virus is to stop economic activity almost altogether.

As social gatheringswere canceled, the stock markets fell and people stocked upon necessities. It is natural for our clients to feel anxious. And wherethere’s anxiety, there’s tunnel vision: It’s too easy to focus in on thethreats in this situation, but that can lead to short-termism, making mistakeslater to be regretted. 

BUT that is now. This virus will subside, the economic scars will heal, and a lot of analyst said that they expect a V shaped recovery (no matter how deep the bottom) when countries exit the COVID 19 crisis.

The COVID 19 response

While the situationremains extremely fluid, with updates by the hour, there is a consensus on ahuge fiscal stimulus to keep the economy going while businesses are shutdown.

The case for moral hazard is void in this scenario: Moral hazard is the risk that government intervention will lead to excessive risk-taking, as businesses end up counting on taxpayers to bail them out if they get into trouble in the end. This argument is always weighed against government stimulus packages, and it was in 2008, especially as banks (who were partly to blame for the subprime crisis) were being bailed out. In this case, however, the government is shutting down the economy for health reasons, and without fiscal support, people will lose jobs, businesses will go bankrupt and the recession will be prolonged. This has nothing to do with risk-taking behavior.

Nobody wants this. Thegovernment will step in as the “spender of last resort” as this is a textbookcase for government intervention. Now the discussion is on how to do so, but accordingto the latest reports, Congress and the White House have reached an agreement on a close to $2Trillion package to be delivered during the current quarter. Furthermore, thisconsensus is building internationally – given the global scope of the COVID 19contagion – making major fiscal spending in all the affected countriesextremely likely. 

Lastly, Central Banks understand the limited ammo they currently have and are hellbent are doing everything in their power to prevent a market meltdown. The measures announced by the Federal Reserve are unprecedented: the open-ended commitment to keep buying assets under its quantitative easing measures for as long as it takes means injections of capital into the economy as needed – a backstop. Furthermore, rates are at zero, which means the economy is set to benefit from access to credit when the situation stabilizes. While the government will act as a spender of last resort as necessary, the Central Bank is allowing for the possibility of becoming the investor of last resort.  

What does this meanfor your portfolio?

So, what are investorsto do? If we had a crystal ball, it would have been awesome to sell and go tocash at the first sign of this at the end of January. Sadly, that is not thecase, so the best thing to do is for investors not to panic sell, maintaintheir asset allocation and let their long-term portfolio ride the rollercoaster through this. The most likely scenario is that of a speedy recovery inasset prices once Coronavirus passes.

It is a naturalinstinct to want to limit losses when markets are down – just as when marketsare up, we wish we would have invested more. However, those who cave in to thepsychological pressure tend to buy high and sell low as they invest more in arising market and pull money out of a falling one. 

Research by Blackrockon Morningstar data shows that investors who have followed their emotions,joining the crowd of other emotional investors, have historically regretted it.Periods that followed investors cashing out of the market have providedabove-average returns, while periods that followed investors adding to themarket have provided below-average returns.

Asset allocation

M3 has blogged extensivelyabout letting financial planning and cash flow drive asset allocation. At thetop of the longest bull market in history, we advised our clients to look atthe cash they needed to take out of the market and to not do it in a 40%downturn, but out of low-risk fixed income. If they did that, then they don’tneed to sell their portfolio now, which gives it a number of years to recoverfrom this bruising sell-off.

If you are concernedabout your plan and cash flow, then our M3 Command center is an awesome tool toprovide you with the confidence of knowing now in detail your baseline and yourfuture.

A lot of investors maystill be in a gain, but in the case they have losses, they could tax-lossharvest. This works to reduce one’s tax liability by offsetting future gainsand/or other income. Selling at a loss and then buying in again means reducingtax liability and reinvesting at a lower cost. This strategy should bediscussed with your financial advisor to make sure it is appropriate for yoursituation, but nevertheless this could be an opportune time to implement it.  

Additionally, minimumvolatility funds could also be a good move given current market conditions. Theyprovide equity market exposure by sectors constrained to its parent index (sonot just anti-cyclical or all utilities) and they can be a great move forinvestors looking to de-risk without losing equity market exposure.

In conclusion

At M3, we invest inthe long haul and we are committed to be the gatekeepers of your wealth. Wecarefully assess the risks to our performance in accordance with the desiredlevel of risk of each of our clients, with an outlook that reflects plans for10, 20, 30 years into the future.

Coronavirus has without a doubt already had an impact on everyone’s portfolio, but the most realistic case is that of a quick recovery in the second part of 2020 and support (both fiscal and monetary) is being supplied to the macroeconomy as rapidly as possible. Our take is to not give in to panic and to continue to let cash flow needs and asset allocation drive investment decisions. Long-range planning and budgeting with asset allocation provide you with a strategy and possibly the peace of mind to ride through bear markets. Behavioral health specialist often suggest you should  turn off the scary news, and check out Netflix's or your old favorites on Disney

If you are concerned about your plan and cash flow,  our M3 Command center is a powerful tool that can provide you with the confidence to know your baseline and future.