July 24, 2020 Letter to Clients

I hope you and your family are remaining healthy during this time and finding ways to enjoy the summer amidst the continued social distancing. There seems to be a lot on the news surrounding things we don’t know from the economic environment to the current health scare, especially as the number of cases continue to rise across the country and states begin to rollback reopening plans. In my experience, the thing in this world that financial markets dislike most is uncertainty, and this year we have seen an unusual combination of unknowns. Unfortunately, we have no control over the uncertainty, but we can choose to focus on how we respond and what we can control.

Climbing the Wall of Worry

As we continue to try and put this unusual and stressful market and economic environment into perspective, we often lean on bits of Wall Street wisdom like the saying, “The Market Climbs a Wall of Worry,” which reminds us that the market can and does move higher in the face of challenging, and sometimes conflicting, news. Rising COVID-19 cases and progress towards a vaccine, inconsistent reopening of the U.S. economy and disagreements on additional economic relief, combined with souring U.S.-China relations and uncertainty surrounding the 2020 election all lay the bricks constructing this wall of worry.

Despite this seemingly insurmountable wall, the stock market has pressed on as investors look to the resolution of these issues at some point in the future. Remember, the market is forward looking, and the market is not the economy. We saw evidence of this yet again last quarter with the stock market posting a remarkable rally from the first quarter lows contrasted against dismal economic data.

Road to Recovery

The road to recovery is likely to remain bumpy with the virus having put strains on the entire U.S. economy. Even with the U.S. government’s unprecedented fiscal and monetary stimulus programs, there are still meaningful risks to the economy. The present challenges remain with a resurgence in infections, high unemployment, business and school closures and the unlikelihood of many companies rehiring all their employees. And with the recent rise in COVID-19 outbreaks, some states have put their reopening plans on hold, or dialed back their plans, thus likely slowing the momentum in economic recovery.   

The country will be particularly focused on the debate over how to safely reopen U.S. schools this fall given the nation’s 98,000 public “K-12” schools are key drivers of economic growth and are massive jobs engines. Before the pandemic, the total workforce of “K-12” public education was approximately eight million Americans, making it one of the largest U.S. employment sectors, exceeding construction, hospitals, finance and insurance, and transportation and warehousing. Education employment rebounded somewhat in June; however, according to the Bureau of Labor Statistics employment for the sector is still down from March when schools shifted largely to online instruction and many workers were laid off.

As state and local governments weigh whether to physically reopen schools or adopt a remote learning model, many parents will also be left considering leaving the workforce to supervise their young children as 16% of workers are dependent on childcare in order to work. While there is no “one-size-fits-all” model for reopening, one thing is certain, school will look quite different come autumn and there is little data to show the immediate impact of closures on U.S. jobs.

Despite what seems like a grim situation for the U.S. economy given the latest developments in select states, some companies are well-positioned to not just survive, but thrive during and after the pandemic. Consumers have shifted to remote work and are seeking ways to remain sane and healthy during this period of social distancing. The increased demand of items such as cleaning agents and protective equipment, board games and puzzles, sewing machines and office furniture, fitness equipment, electronic goods and streaming services are all proof of this. Many companies in the online retail and grocery space enjoyed strong sales growth last quarter as consumers flocked to already useful stay-at-home services that became almost essential. Consumers felt compelled to try the already established grocery delivery services offered by many grocers for the first time, for example, and subscriptions to video streaming services such as Netflix and Disney+ skyrocketed.

While many industries have benefited from this era of limited mobility, conversely others such as travel, leisure, aerospace and restaurants have seen sales evaporate. The pandemic experience may ultimately change U.S. consumer behavior and how businesses operate going forward as the demand for e-commerce is kicked into overdrive. That said, a full recovery in overall consumer demand is expected to be constrained until virus fears fade and social distancing rules are eased.

The devastating financial impact COVID-19 has had on Main Street and the uncertainty of a reopening timeline is leaving millions of small businesses fighting for survival and at great risk of closing permanently. The impact to the small business community is also vastly disproportionate in comparison to large retailers. Typically operating with an already limited cash flow situation, the average small business does not have the resources and reserves that their larger chain-store competitors have at their disposal. Couple that with a heavily flawed and quickly depleted Economic Injury Disaster Loan Program and Paycheck Protection Program (PPP), both intended to be earmarked for small business, and the outlook for many mom-and-pop shops is unfortunately precarious.

With Congress recently returning from recess, the debate over additional economic relief has resumed. Americans are awaiting a decision on the three big spending items- supplemental payments on unemployment insurance, another round of household stimulus checks and major aid to states and cities. Congress will likely vote on these items before their next recess in September. While stimulus alone will not solve the troubled economy, additional aid is necessary to restore consumer confidence and spending.  Truthfully, until we get the health crisis under control and enact smart public health polices, the economic recovery will remain stalled and uncertain.

Focus on the Good

While there is still a lot we don’t know about the coronavirus, there are fewer unknowns now than there were earlier this year. We know many companies have been able to shift employees to working remotely without a significant reduction in productivity. We know that the federal government continues to support consumer demand through stimulus and liquidity. We know that wearing a mask, social distancing and hand washing significantly reduces the risk of transmission. And we know that vaccine developers are working at an unprecedented speed and have shown promising initial results.

I have heard from many clients in the past few weeks and the one thing that is common among all is the fact that the current market, economic and social environments are unsettling and confusing.  With this in mind, please know that we are here for you. 

Your financial plan incorporates your goals and is crafted based on a number of factors, including your risk preferences and time horizon. It is a roadmap to your financial goals. It incorporates the inevitable market declines and keeps one from making rash decisions when markets turn volatile. Or, for that matter, when stocks surge ahead, and one may be tempted to take a more aggressive but riskier posture. However, we remain mindful of the course we’ve set for your financial plan and invest intelligently to meet the objectives for each client of our firm.

I recognize that these are trying times, not simply from the vantage point of the investment community. No one likes uncertainty, especially as it relates to our health and the health of our loved ones. We are committed to you and will continue to provide you essential updates. Until we speak again, I wish you an enjoyable remainder of the summer.

Best Wishes,

Steve LePage