April 27, 2020 Letter to Clients

I hope this letter finds you and your family staying well amidst the chaos caused by the novel coronavirus, COVID-19. There is no instruction manual for how to feel at a time such as this, and I know that my list of worries right now, like yours I’m sure, is long: from my own children, family and friends, to the safety of you, my clients,  and to the real harm being caused by the economic fallout across the globe.

When we wrote to you at the start of the year about 2020 having market pullbacks, we could not have anticipated what the quarter would bring as a result of COVID-19. Economists have theorized about the impact significant, unexpected events have on the economy, markets and societies at large, which are often referred to as black swan events. Black swans, once largely presumed a myth because only the white variety was ever observed in nature, have become symbols of events that are exceptionally rare in occurrence and severe in impact. Today, we’re confronted with a black swan event in the form of COVID-19.

Timeline of Events: A Sudden, Dramatic Transformation

January 2020 – The New Year saw the U.S. economy poised to continue the steady pace of growth displayed throughout 2019, bringing with it major developments that included the signing of a “phase-one” trade deal between the U.S. and China and the U.K.’s official divorce from the EU. With the emergence of COVID-19 in Wuhan, China, the possibility of a global economic impact wouldn’t become a reality for several weeks.

February / March 2020 – The world begins to realize that COVID-19 would not be contained to China despite quarantines, border closures and air-travel restrictions. The U.S. and Europe begin to contend with a possible widespread outbreak that would demand extreme containment measures. U.S. stocks climbed to all-time highs in February before registering one of the fastest descents in history. The sharp correction was the market pricing in “shutting in” the consumer, which makes up about 70% of the U.S. economy. Indiscriminate and haphazard selling subsequently caused widespread disorder in the markets amidst fears of a global economic fallout from COVID-19. Exchange-wide circuit breakers, designed to temporarily halt trading to reduce panic-selling and give traders time to reconsider their actions, were triggered multiple times during March.

And What About Oil? At the start of 2020, a barrel of West Texas Intermediate (WTI), a key American oil benchmark, cost around $60. But on Monday, April 20th, a barrel was trading negative for the first time in history. Why? As the world economy hits the brakes, the rapid drop in global demand has left oil producing countries and companies scrambling to reduce their output. With the massive oversupply, concerns have been raised about where buyers like oil refineries will be able to physically store it with their tanks nearly full already. The fluctuation in gas prices on the other hand, while impacted by the price of crude oil, have more to do with transportation and marketing costs, refining costs, profit margins and associated Federal and State taxes. Gas is certainly cheap, more than $1 less than a year ago, but this doesn’t mean gas stations will pay you to fill up your tank.

Policy Response: What have the Federal Reserve and the Federal Government done?

The economic impact due to COVID-19 is unprecedented. Economists are anticipating the economy to contract at least 25% with unemployment spiking to the mid-teens in the second quarter, but in an effort to cushion the blow we’ve seen meaningful policy response from both the Federal Reserve and the Federal Government.

Monetary and Fiscal Response:

  • The Fed cut interest rates in an emergency move to 0%, meant to make borrowing as cheap as possible
  • The Fed injected trillions into short-term lending markets in an effort to prevent the financial pipes from clogging up and provide credit directly to households and firms
  • The Fed also launched open-ended security purchases of treasury bonds, mortgage-backed securities, municipal bonds and U.S. investment-grade bonds
  • Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest economic rescue package in our history, providing $2.2 trillion to states, businesses and individuals

It’s too early to judge the impact monetary and fiscal response will have at mitigating the economic harm caused by the virus, especially seeing that the Fed continues to utilize its arsenal of supportive policy and the government is not yet finished with economic aid.

The markets are likely to remain volatile and the economic data will get worse before getting better. However, the markets are forward looking and they will start to correct before we begin hearing news of an economic recovery. This is very different from the somewhat synchronized movements we’ve seen between the markets and economy in years past. We’re seeing a market more reactive to investor sentiment and news headlines rather than a market driven by underlying fundamentals. Corporate earnings, that have historically driven market performance, are not playing a significant role as they have previously, and a number of companies have already withdrawn 2020 earnings guidance for the remainder of the calendar year. Until there are clear guidelines in place and the conditions on which the economy will reopen are met - such as health systems being able to deal with a rise in new infections, the rate of infections, hospitalizations and deaths begin to decline, and the testing capacity is strong enough to isolate potential carriers – it will be difficult to predict how the inevitable recovery will look and what sectors of the economy return more quickly than others.

New Normal: Where do we go from here?

It’s been a difficult start to the year to say the least. The number of coronavirus cases have continued to increase globally and unfortunately, new cases continue to be confirmed throughout the United States. Many countries are making progress with containment, but those efforts have also resulted in a reduction in economic activity spurring a global recession.

It’s too soon to forecast the slowdown’s length as the virus sets the timetable as to when economies can begin to come back to life. Ultimately, stability and consistency in the health crisis response will allow economies to recover over time and that recovery may look different depending upon where you live. It’s impossible to predict how many people will be affected, how containment efforts may impact the economy or what life will look like when the economy reopens. We could see restaurants reopen with fewer tables and face coverings becoming common in public until widespread testing and vaccines become available.

The COVID-19 pandemic has forced everyone to change their routines, lifestyles and habits; and many will be desperate for life to return to pre-coronavirus norms. We’re unlikely to see “business as usual” and a sudden return to normalcy when the economy begins to reopen, but if there’s one thing in this “new normal” that I hope does not change, it’s the acts of kindness and compassion showing our collective strength and resiliency.

Uncertainty drains our most precious resource: happiness. Limit your intake of news, take care of yourself and your family, use the time you are avoiding going out to reconnect and reengage with your loved ones, and turn to what brings you peace. If you have any thoughts, questions, or concerns, please reach out to us. Wishing you and your family good health and safety.


Steve LePage