I hope you and your families are keeping safe and healthy.
As we close the first quarter of 2020, we leave behind a tumultuous, highly volatile, and highly uncertain period. Covid-19 has not only impacted the markets and economies, but our lives and families as well. From the all-time highs set on the S&P 500 in the U.S market back in February 2020 to the March 23rd low, the index declined 53%. The S&P has since retraced back 27% at time of writing and is now down 26% year to date. In Toronto, the S&P/TSX has fared much worse retracing its value back to 2016. Thankfully our clients have retraced back to Q1-2019 which considering the events we fared much better.
Why did the market drop?
With the effective shutdown of the global economies due to lockdowns and state of emergencies, the stock market declined. As a reminder the stock markets are a leading indicator which means they price in what the economies will look like 6-12 months in advance – and regrettably it will not look good! The markets factored people will be unemployed, businesses will shut down, nobody will fly on an airplane, or stay in a hotel, or go to restaurants, or need gasoline for their cars, and the ripple effect goes on! As a result, the markets anticipated earnings for many publicly traded companies will decline, and thus their stock price should be based on new future earnings which are much lower – hence the drop in the overall stock market.
Why did we not decline as much as the stock markets?
Our diversification is simple, bonds to protect on the downside, and dividend paying stocks to pay us while we wait. In addition, we did not have exposure to airlines, hotels, restaurants, energy, and commodities such as oil and copper which were all contributors to the downside. In effect, our overall risk is much less than the overall stock market.
What will get us to the other side of this event?
I am of the opinion we require two solutions to overcome this event. The first solution has already been achieved, namely, unprecedented and historic fiscal and monetary stimulus (or Government bailouts in some cases). Record amounts of unemployment, personal bankruptcies, and corporate bankruptcies have occurred and will most probably continue. The stimulus measures will hopefully curb this outcome and in some cases reverse it, but there are no assurances. The argument for all these measures is Governments around the World have effectively inflated their balance sheets with more debt which unfortunately will have to be paid by taxpayers, and future generations of taxpayers. The second solution is in progress, namely the science. We need a medical solution in order to bring our lives and economies back to normal. There are suggestions a vaccine can be available by early 2021, but in the meantime if there is an anti-body, or plasma that can at least help people recover if they do contract the virus, then we can work towards going back to somewhat normalcy.
Where do we go from here?
As our portfolios are predominantly low-medium risk, the one opportunity available to us is raising our risk profile to medium risk. Effectively this allows us to participate in asset classes outside of bonds, that provide different exposures such as “work from home stocks”, and will allow a potentially more robust and rewarding recovery. If we don’t move that’s ok too. Our portfolio managers have accumulated cash leading up to the market decline and have aggressively purchased beaten down stocks since then. Therefore, even though you decide to hold the course, and not move your current mandates, rest assured you will also capitalize once the markets recover.
As you can appreciate, this event is forcing businesses to retool and adapt to the new realities. At Security Financial we have undergone a complete transformation of how we do business, how we process business, and how we deliver to clients. Our staff is remotely connected at home with their own IP phones, virtual desktops, and printer/scanner/fax solution. In effect they login every morning from home and are working as if they are in their chair in the office. Each one of us simply log into our internal server safely and securely without any interruption. We use Microsoft TEAMs for email, texting, conference calls, and video-conferencing. This technology allows us to communicate within the firm amongst co-workers, advisors, and now with clients. We have moved to a fully automated handling of money, namely, clients can send us wires, perform one time withdrawals from their bank accounts, or register their investments as “bill payees” to send money for deposit. No more cheques or money orders required! Internally, we can send these very same deposits to our investment partners via wire and therefore no longer need to print and courier cheques. We also moved our fax number to a digital solution which means we no longer rely on faxes being retrieved at the office, rather we receive them in an email and disburse them within the firm accordingly. We are close to launching DocuSign, a digital platform whereby clients receive paperwork to sign and return securely via email. We also have the ability to transact on client portfolios using limited trade authorizations provided and authorized by clients. In short, we can have clients transact without having to meet in person. Lastly, in the past the firm managed the entire internal operations and compliance process with physical paperwork that passed various desks to final approval and subsequent filing in the clients file. This process is now performed digitally beginning with the client submitting the paperwork, to processing, to compliance oversight, then finally being stored electronically under the respective client’s profile. No more filing paperwork in a clients physical file, it can be viewed by authorized personnel only within the firm on our secure and password protected servers.
I realize these are challenging and unprecedented times, but I am confident this too shall pass. Will we ever get back to an ordinary life? Not right away but eventually over time we will. It just may be different in terms of how we approach commerce, how we approach travel, how we approach social distancing, how schools educate, and how we embrace technology.
Perspective of Managing the Impact of a Pandemic
