First, I want to thank everyone for all the calls and emails. We are all doing great, and I hope all of you are safe and healthy. At the same time, I am humbled and embarrassed, for 99% of my industry now floats in a sea of red ink. But we are having our best year ever, THANKS to YOU!!! Holy Cow, who else can say that?  In the last 60 days we have brought in over $30 million of new Assets Under Management, all from referrals. Thank YOU, AGAIN!!!

Now for the details:  Here’s the latest on our moves and strategy. Since the virus erupted and started to do major damage to the markets, we used 3x leveraged ETFs both to profit from declines (SPXS) and from advances (SPXL). According to our best indicators, we have emerged from the “crisis mode,” which required us to be fast and furious with purchasing SPXS (to play a market decline) and SPXL (to play a market advance). These ETFs enabled us to make split-second moves.

Now we are back to what we call “best relative strength” sector and subsector investment selections. Sometime today the following trades will show in your account: we replaced SPXL with five, 18%, selections (the 18% allocation is relative to a 100% growth model, so you will have to adjust accordingly): VGT, XLG, XLY, XBI, IJK.  Additional details are provided below. Our goal is to avoid the really sick parts of the economy/stock market that may never return to January, 2020 levels, or, in the best case, in 3 to 5 years: autos, airlines, auto rentals, aerospace manufacturing, hotels, cruise lines, retail, restaurants, theme parks, etc. These are now the most suffering parts of our economy: most will never come back.

We have therefore had to surgically separate the stock market by purchasing sector and subsector winners and thus avoiding the losers. This approach is not 100% accurate: for example XLY is a top “RS”, relative strength,  performer, but it has DISNEY in it. That’s where it belongs, and we can’t do anything about it. The mouse is struggling at best, on life support for at least another 18 months.

That’s all for now.  As always, feel free to call me. We are here for you!!!

Jack  Reutemann
240 401 2355

Only read this if you like to understand the details or are a stock market nerd like me!

VGT, Analyst Report

VGT tracks a broad index of companies in the information technology sector which the company considers to be the following three areas; software, consulting, and hardware. As a result, this fund tracks some of the most crucial companies in the technology sector across a wide range of market cap levels. The fund focuses entirely on U.S. stocks, and is relatively top heavy; three securities make up 25% of the fund 54% of assets go to the top ten even though the fund holds over 425 securities in total. Investors should also note that this fund dedicates the majority of its assets to giant and large cap funds, meaning that it will be less volatile than some of the other products in the space that focus on relatively unproven companies and technologies. As a result, this fund will be more of a value play than one that presents strong growth opportunities. So while this is a decent fund for those looking to achieve broad exposure to the tech sector without the influence of semiconductors, most investors should look to broader fund which take into account all sectors of the technology industry instead for their portfolios.

XLG, Analyst Report

This ETF tracks the 50 largest securities, by market capitalization, in the Russell 3000 universe of U.S.-based equities. As a result, investors should think of this as a concentrated play on mega cap stocks in the American market. These securities are usually known as ‘Blue Chips’ and are some of the most famous and profitable companies in the country, including well known names such as ExxonMobil, Apple, IBM, and GE. The fund is probably one of the safest in the equity world as the companies on this list are very unlikely to go under unless there is an apocalyptic event in the economy. However, these securities are unlikely to grow very much either as they are already pretty large and have probably seen their quickest growing days in years past, but most do pay out solid dividends which should help to ease the pain of this realization. Overall, XLG is a decent choice for investors seeking broad mega cap exposure but most investors would probably be better served by investing in a broader fund that is a little more diversified.

XLY, Analyst Report

The ETF offers exposure to the consumer discretionary sector, making it an appealing option for investors looking to implement a sector rotation strategy or tilt exposure towards corners of the U.S. market that may perform well during a recovery. XLY offers impressive liquidity, cost efficiency, and depth of exposure, making it one of the best ETF options for playing the consumer discretionary sector.

XBI, Analyst Report

XBI is one of a handful of biotech ETFs available, offering exposure to a corner of the market that can perform well during periods of consolidation and is capable of big jumps in the event of major drug approvals. XBI focuses on a narrow sector of the health care sector, and as such is probably too precise for most investors seeking to construct a long-term portfolio. However, this ETF can be useful for those seeking to fine tune exposure or for those bullish on the sector over the long run. XBI focuses exclusively on American stocks, and primarily consists of mid cap and small cap securities. XBI’s portfolio is somewhat limited, though the equal-weighted methodology of the underlying index ensures that assets are balanced across all components. That feature can be particularly important in the biotech space, where specific companies are capable of turning in big gains over short periods of time.

IJK, Analyst Report

This ETF offers exposure to mid cap stocks that exhibit growth characteristics, making IJK a potentially useful tool for investors looking to fine tune their domestic equity exposure or implement a tilt towards a specific investment style.

TQQQ, we continue to hold this position, as it is a very efficient way to own 3X the QQQ: 
Analyst Report

This ETF offers exposure to one of the world’s most widely-followed equity benchmarks, the NASDAQ, and has become one of the most popular exchange-traded products. The significant average daily trading volumes reflect that QQQ is widely used as a trading vehicle, and less as a components of a balanced long-term strategy. Of course, this fund can certainly be useful as part of a buy-and-hold approach for investors looking to maintain a tilt towards the potentially volatile tech sector.

Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
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Investment advice offered through Research Financial Strategies, a registered investment advisor.

All,

We are still on a “technical buy” – meaning we are staying in the markets.  Please view the chart below.  Green is good, red is bad, and we have a 45 degree trend line in play.  Notice that today we have recovered the 50 day moving average, this is a good sign as it indicates a positive movement in the market. The farthest, right hand side green bar, crossing thru the thick Fuchsia line. Even though CV19 is still a major problem, and unemployment claims have gone up again this morning, many believe the worst may be behind us.  Everyone has an opinion.  Either way, the market is liking the prospects for a recovery, and partial state-by-state openings.  Also, unless the deal falls apart at the last minute, another $425 billion small business stimulus package should pass the House today, having already passed the Senate. 

I’m trying to not overload you with info, but just hit the high points.

As before, call me if you have any investment questions!!! ​

Jack 
240 401 2355

Breaking down the CARES Act
As you know, the coronavirus pandemic has created both a health crisis and an economic crisis.  As of this writing, there are over 160,000 known cases.¹ By the time you read this, there will certainly be more – and that number does not reflect those who have been infected but not tested.  The economic cost, meanwhile, has resulted in millions of Americans losing their jobs.  Some economists at the Federal Reserve estimate the unemployment rate could rise as high as 32%!² To help address both crises, Congress recently passed the Coronavirus Aid,

Relief, and Economic Security (CARES) Act.  It’s a massive, $2 trillion stimulus package designed to help everything from hospitals, to individuals, to businesses large and small.  Time will tell if it will be enough to blunt the impact of this pandemic, but the fact Congress was able to pass something so significant, so quickly, is a rare feat worth celebrating. Charles Darwin once said, “It is the long history of humankind that those who learned to collaborate and improvise most effectively have prevailed.”  For many years now, that is not a quote you could usually apply to the United States Congress.  Political partisanship has meant that gridlock usually prevails over collaboration. 

Thankfully, both sides of the aisle recently proved the institution still works when people put aside their differences and work together for the common good. This is major legislation, with benefits for almost every American.  Some of the bill’s provisions are especially important for retirees.  So, to help you understand what the CARES Act does, and how it will impact you, we have prepared a special breakdown.  As we are sending this to all our clients, some information may apply to you, and some may not.  Please read it carefully, and then let us know if you have any questions. As always, we hope you and your family are staying healthy and safe.  Please let us know if there is anything we can do for you! Sincerely, Jack Jack Reutemann, Jr Research Financial Strategies      

Important Provisions of the CARES Act
The CARES Act is designed “to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”³  Think of it as a kind of massive care package.  Just as an actual care package is meant to get somebody through a tough time, that’s what the CARES Act is designed to do.  Because so many people have either lost their job, seen their hours cut back, or experienced drastic changes to their daily lives, many Americans must now contend with potential cashflow problems.  The CARES Act contains a number of provisions to help individuals and businesses handle those problems, at least for the short-term. What follows is a brief overview of the provisions that could affect you and your finances. 

Let’s start with:

DIRECT PAYMENTS⁴
What’s the quickest way to ensure people get the money they need?  Pay them directly.  Perhaps the most newsworthy aspect of this bill is that many taxpayers will receive a one-time direct payment to help them cover expenses. Here’s a breakdown of how it will work. Individuals who made up to $75,000 in 2019 will receive $1,200.
Heads of Household (single parents, for example) who made up to $112,500 in 2019 will receive $1,200.
Married couples filing a joint tax return who made up to $150,000 in 2019 will receive $2,400.
On top of this, each taxpayer will receive up to $500 for each child they have under the age of 17.  So, for example, a married couple with two children would receive $3,400. Note that payments decrease for individuals and married couples with income above their respective thresholds.  Specifically, payments shrink by $5 for every $100 earned above the $75,000/$150,000 limits.  The payments disappear entirely for individuals who made $99,000 or more, and for married couples who made $198,000 or more.

So, when will this money actually arrive?  It’s unclear.  The IRS could start issuing payments sometime in April or May, but an official schedule has not been released.  (The CARES Act itself only mandates that payments be made “as rapidly as possible.”⁴)  It’s likely that those who filed their 2019 tax returns with direct-deposit information will receive payments first. If you haven’t filed your tax return for 2019 yet, please let us know.  We would be happy to work with your tax preparer to expedite the process.

Speaking of tax filing…
NEW TAX DEADLINES 
This isn’t technically part of the CARES Act, but I’m going to cover it anyway because it’s important.  Due to the pandemic, IRS has extended this year’s tax-filing and payment deadlines.  Now, taxpayers have until July 15 – up from the standard April 15 – to file their 2019 tax returns.  The deadline to make IRA and Roth IRA contributions is now July 15 as well. Note that this new deadline applies to everyone, not just those who are sick, under quarantine, or materially affected by the coronavirus in some way.  And if you’ve already filed your return, you should still receive your refund around the same time you would during a typical tax season.

UNEMPLOYMENT⁴
Let’s get back to the CARES Act. It was said a moment ago that direct payments were the most newsworthy aspect of the bill.  But for the overall economy, the bill’s unemployment provisions are probably the most important.  Unemployment claims rose by 3.28 million between March 15-21.  That’s the highest weekly surge in history.  The previous record?  695,000.⁶ To help combat this, the CARES Act provides approximately $260 billion in unemployment assistance for those who lose their jobs.  This includes freelancers, independent contractors, and other self-employed workers.  That’s a major change, because under normal circumstances, they can’t apply for unemployment benefits.

Generally, workers who lose their jobs will receive $600 per week for four months, in addition to what their state unemployment program pays.  The CARES Act also adds an additional thirteen months of federal unemployment insurance on top of a person’s state benefits. If any family members lose their job, please let us know.  We would be happy to answer their questions or provide any assistance we can.

BUSINESS SUPPORT⁴
Even those who don’t lose their jobs will still want to keep a close eye on our nation’s unemployment rate.  More people out of work means less people spending money on the economy – which can have a profound influence on the markets.  That’s why one of the most critical things the government can do right now is help businesses avoid laying people off. Roughly $350 billion of the legislation’s price tag is geared towards just that.  Companies with up to 500 employees can receive loans of up to $10 million.  Any portion of the loan used to maintain payroll or retain workers – at least through the end of June – will be forgiven. 

In addition, businesses can apply for grants of up to $10,000 to cover their operating costs. For larger businesses, the CARES Act sets aside around $500 billion in loans and grants, especially for hard-hit industries like airlines.  And for companies that are forced to close or furlough workers, the legislation “covers to 50% of payroll on the first $10,000 of compensation, including health benefits, for each employee.”⁷ These are all necessary steps to keep our economy going.  Will they be enough?  That’s an open question.  The answer largely depends on how long the pandemic lasts – and how well Americans commit to social distancing to stop the virus’ spread.  Watch this space.

RETIREMENT FUNDS⁴
We said at the beginning of this message that some of the CARES Act’s provisions are especially important for retirees.  Let’s cover those now.   First up, Required Minimum Distributions, or RMDs.  In a normal year, anyone 72 years or older would need to withdraw a minimum amount from their IRA or 401(k).  Not this year. Under the CARES Act, all RMDs are suspended in 2020.  That means you can leave that money in your retirement account for the year if you don’t need it now.  Note that this applies both to retirement account owners and beneficiaries.

People who have already taken their distribution for 2020 can potentially return the money to their account if they want.  This could be a slightly complicated process, so we won’t cover it here.  However, if you want further information about it, let us know. The CARES Act also waives the 10% early withdrawal penalty for retirement accounts.  Withdrawals will still be taxed, but spread over a three-year period.  Under most circumstances, our advice is to leave your retirement savings where they are, but it’s nice to know that early withdrawals are an option if you need them. Finally, the CARES Act increases the 401(k) loan-limit from $50,000 to $100,000.  

If you have questions about any of these provisions, or how they apply to you, let’s chat!

COMBATTING THE CORONAVIRUS⁴
Finally, it should come as a great comfort to know that the brave doctors, nurses, and scientists on the front lines are getting assistance, too.  Specifically, the CARES Act provides $100 billion for hospitals, $1.32 billion for community health centers, $11 billion for coronavirus treatments and vaccines, $16 billion for additional medical supplies, like ventilators and masks, and $20 billion for veterans’ health care. 

You should know, too, that the Act includes a telehealth program so that if you can’t leave home, you can still have a virtual appointment with your doctor. Our hearts goes out to all those giving their time, talents – and sometimes, lives – to keep the rest of us safe.  They are true heroes, and we are so grateful for them.

Let’s all do our part to make their jobs just a little easier by maintaining our distance, keeping clean, and staying home as much as possible.

CONCLUSION
As you can see, the CARES Act is a loaded piece of legislation.  Time will tell whether more measures are needed, but this is definitely a good start. Of course, our team will continue poring over these changes. 

If there is anything else we feel you need to know, we’ll reach out to you. 

In the meantime, if you have any questions about:
• Getting a direct payment
• Filing your taxes
• Protecting your paycheck and/or income
• Your retirement accounts

Please don’t hesitate to let us know.  Whether we’re in the office or working from our own homes, our team is always here for you.

Stay healthy, and stay safe!  

Sources

¹ “Cases in U.S.”, Centers for Disease Control and Prevention, March 31, 2020.  https://www.cdc.gov/coronavirus/2019ncov/cases-updates/cases-in-us.html
² “Coronavirus job losses could total 47 million, unemployment rate may hit 32%, Fed estimates,” CNBC, March 30, 2020.  https://www.cnbc.com/2020/03/30/coronavirus-job-losses-could-total-47-million-unemployment-rate-of-32percent-fed-says.html
³ “Text of S. 3548,” United States Senate, https://www.congress.gov/bill/116th-congress/senate-bill/3548/text
⁴ “Text of the Coronavirus Aid, Relief, and Economic Security Act,” United States Congress.  https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf
⁵ “New Details From the IRS on July 15 Tax Deadline, Audit Relief,” The Wall Street Journal, March 30, 2020.  https://www.wsj.com/articles/new-details-from-the-irs-on-july-15-tax-deadline-11585087948
⁶ “Unemployment claims soared to 3.3 million last week, most in history,” CNN Business, March 26, 2020.  https://www.cnn.com/2020/03/26/economy/unemployment-benefits-coronavirus/index.html
⁷ “What’s Inside the Senate’s $2 Trillion Coronavirus Aid Package,” NPR, March 26, 2020.  https://www.npr.org/2020/03/26/821457551/whats-inside-the-senate-s-2-trillion-coronavirus-aid-package    

Dear clients, family and friends,

As a follow-up to last Monday’s email, I want to thank the dozens of people who wrote back with praise and thanks. Last week saw a 15% drop in the S&P 500. Meanwhile, our SPXS position shot up almost 45% for the week. The position currently enjoys a profit of 63% in just 17 days. 

 Also, as I write this, it appears that the Administration and Congress will reach a trillion-dollar stimulus package before the end of the day. We have certainly been tricked and disappointed in the past, but this time let’s hope they have put politics aside and do the right thing for our country. 

I have made the difficult but prudent decision to exit our SPXS position and protect our epic profit of 63%. Remember the old saying, “Pigs get fat, hogs get slaughtered.’’ It’s in play right here, right now.

Tomorrow brings us another day, and our process will allow us to make the right decision. This may be just a few days of hiatus of green over red, and then back to more sell off.

Right now we need to be praying for the millions of Americans in the travel, hotel, restaurant, retail, manufacturing, and service sectors who have lost their jobs—many may be permanent. Most of them were living “paycheck to paycheck” before the Coronavirus reared its ugly head. Now I shudder to imagine the hardships they face.

All of my comments from last Monday remain in play. Federal money will help dislocated employees and small businesses in the short term. But the damage to GDP and consumer confidence will require months to repair. You know anybody looking to buy a restaurant or a hotel? I don’t think so.

Pray for our great country. Worst case scenario is this is a replay of the 1918/1919 Spanish flu. 

Please write back or call me to talk. I am sequestered at home as is most of our staff. I have nothing to do but send emails and speak with all of you!  

Seriously, don’t hesitate to call me. I am here for YOU.​

Jack  240 401 2355 

Jack Reutemann, Jr

Research Financial Strategies​

Emergency Special Market Update

Dear friends, family and clients,  

Wow! In my 45 years I have never seen this.  Prior bear markets (a decline of 20% or more from the last trailing high of the S&P 500 index—which was 2/19/2020) were caused by the collapse in fundamental economics, such as the banking and bad real-estate loan crisis of 2007-2009. Or the irrational tech bubble of 2000-2002. To the best of my knowledge, this is the first bear market caused by a disease, since the impact of both the Spanish flu of 1918-1919 combined with WWI. 

I am going to share my thoughts with you, and I have attached many of my reference points, not in chronological order, both above and below.  I apologize for that, for it is above my pay grade.  I am desperate to get this email out to you, and I apologize for any linguistic glitches. I normally have a brilliant staff to clean up these emails. I encourage you all to write me back with your candid comments and questions:

There are 7 major parts to the mess we are in:

1. The humanitarian cost to the economy of illness and deaths is enormous.  Our thoughts and prayers to all who have lost a family member or friend. Not to make light of that, but the economic destruction is epic.

2. Why is this impacting the economy and the stock markets? Here is where I go random on you.  The attached article on the “manufacturing supply chain” shows major global ramifications.  By example, the parts of an Apple iPhone come from 26 different countries.  You only need one part missing, and no iPhone shipped.  Extend this concept to everything that is manufactured globally:  TV’s, phones, computer gear, appliances, automobiles, tractors, medical supplies and big pharm, to name just a few.  A statistic I trust more than the Fed is a recent survey by Dunn & Bradstreet of their Fortune 1000 customers, which shows that 94% of transportation management executives in those companies reported supply change interruptions.  Even if you were motivated to buy something, the news is already reporting enormous lack of supply.  Think of Samsung TV’s and phones from South Korea, computer gear from Japan, cars and trucks, appliances from South Korea, Japan, Mexico, China, Germany, Italy, etc.  The math will make your head explode.

3. You need to listen to the following statistics  from our federal agencies.  71% of US Gross Domestic Product (GDP) comes from consumers and small businesses.  This spending is from the top 25% of US consumers and businesses.  Not a statistic that we should be proud of, but 50% of consumers have a negative net worth, meaning their liabilities are greater than their assets.  70% of Americans don’t have $500 in their checking account to fund an emergency car repair, etc.  The economy revolves around the 30% of the wealthiest Americans, who are responsible for this 71% of GDP.  In most cases, they have stopped spending money.

4. The Fed at about 3 PM on Sunday, today, as I write this, dropped overnight rates to banks to the 0.00 to 0.25% range.  Who will this help? More  random questions and thoughts:  Are you going to go out tomorrow and buy a new auto/truck because the interest  rate is 1% less? Book a cruise? (They are shut down for 60 days!) Buy airline tickets to Disneyland??  It’s closed.  Go to Home Depot or Lowes and buy a new $50,000 kitchen or bathroom renovation? The one bright spot is refinancing and new house purchases.  The Fed rate cut should trickle down to lower mortgage interest rates.  If you haven’t checked your home mortgage interest rate lately, do so right now.  Caution, I have dozens of mortgage and bank lending officers who are clients.  Their pipeline is 2 to 3 months out.  In many cases, they have closed their pipelines to new applications.

5. The combination of decreased consumer and small business spending, combined with simple human fear, has taken a toll on all stock markets.  A long time ago I learned the expression, “The trend is your friend.” Since 2/19/2020, the all-time high mentioned above, we have had 17 stock market days: 13 down, 4 up.  End of game.  Restaurants, retail, cruise lines and leisure travel have taken a huge hit.  I’m sure you have seen the pictures on the Internet of the empty shelves in all grocery stores, Costco, Wal-Mart, etc.  This is not going to be miraculously repaired over night because interest is cheaper.  And by the way, don’t expect those interest rate cuts to banks to trickle down overnight to your credit card balances.  The most credit worthy of the US citizens, about 25%, will get a better rate on an auto/truck loan or a mortgage.  Per above, 70% of Americans were frozen in poverty before 2/19/2020 and will continue to be so.

6. There are a couple of bright spots.  Student loan interest forgiveness, 2 weeks of unpaid wages to small business employees. And here is the big one (article attached). There are approximately 100 banks and lenders that have loaned billions to the small/medium oil patch producers, i.e., not Exxon Mobil.  These small producers, who mostly do shale fracking, have an average cost to produce and extract at $31/barrel.  Oil currently fetches about $30/barrel.  You can’t make money spending $31 to sell something for $30.  You don’t need to have a Ph.D. in Economics to figure that out.  Will the Fed’s interest rate cuts make oil go back to $60/barrel?  More than likely,  not!  Due to the supply chain disruptions above, in China, and most other countries that have manufacturing-based economies, are buying less oil. (Think G20, Group of 20, 19 nations and the European Union.)   Add to that consumers, airlines, cruise lines, etc.

7. Now for the scary,  gross part (references attached). 95% of the US consumption of 200+ varieties of fruits, nuts and vegetables come from California.  The major West coast cities from Seattle to San Diego are suffering from a pre-2/19/2020 epidemic of homeless street people living in tents.  Again, it doesn’t take much to realize that these people are not the healthiest, cleanest and best cared-for individuals to begin with.  COVID-19 will hit them hard.  In the attached reference, you’ll see that there are approximately 12 to 15 million migrant workers in CA responsible for the harvesting of those 200+ fruits, nuts and vegetables.  What happens to the food supply chain when COVID-19 hits the migrant workers in CA?  That might just explain all the empty shelves in grocery stores this past week. Consumers get it.

 I’m sorry if you think I am an alarmist.  My number one job is to protect you and your family’s investments.  We are doing that.  Many accounts went to 100% “cash” on 2/28/2020,  and other accounts have been substantially defensive, known as “short”,  since then.  We have the greatest scientists, MD’s, and Ph.D.’s working on this pandemic.  If you haven’t seen Dr. Anthony Fauci on TV, Google him.  His team is the best, and not a bunch of TV talking heads.

Please write me back with your questions and comments ASAP.  I am doing my best to protect you and your family.

Jack

Sources:
https://www.nytimes.com/2020/03/15/world/coronavirus-live.html?emc=edit_na_20200315&ref=cta&nl=breaking-news&campaign_id=60&instance_id=0&segment_id=22258&user_id=8ceee818e1df4b6e6a8576714a4f7c82&regi_id=67446251
https://markets.businessinsider.com/news/stocks/coronavirus-ray-dalio-not-solved-rate-cuts-stock-market-hedging-2020-3-1028964518?utm_campaign=browser_notification&utm_source=desktop
https://finance.yahoo.com/news/ackman-hedges-protect-against-coronavirus-225332704.html
https://markets.businessinsider.com/news/stocks/oecd-slashes-2020-global-growth-outlook-on-coronavirus-fears-2020-3-1028954418?utm_source=markets&utm_medium=ingest
https://slate.com/technology/2013/07/california-grows-all-of-our-fruits-and-vegetables-what-would-we-eat-without-the-state.html
https://www.farmprogress.com/tree-nuts/what-happens-if-us-loses-california-food-production
https://www.brookings.edu/wp-content/uploads/2020/03/20200302_COVID19.pdf
https://www.politico.com/news/2020/03/04/house-coronavirus-funding-121065
https://moneywise.com/a/these-restaurant-chains-are-closing-2020
https://www.dnb.com/content/dam/english/economic-and-industry-insight/DNB_Business_Impact_of_the_Coronavirus_US.pdf
https://www.axios.com/coronavirus-climate-change-risks-bc81ec96-ca03-4af7-867f-2aac2648b2d5.html
https://thehill.com/policy/healthcare/486645-cdc-americans-over-60-should-stock-up-on-supplies-avoid-crowds
https://www.marketwatch.com/story/pimco-its-just-going-to-get-worse-for-economy-2020-03-08?mod=hp_minor_pos20
https://www.niaid.nih.gov/about/director
https://morningconsult.com/form/consumer-confidence-tracking-us/

It started in China, then spread to South Korea and Japan. Cruise ships have carried it; tourists have transported it. Now it’s in Italy and Iran, Thailand and Taiwan, and more countries besides. It has infected almost 80,000 people and been fatal to over 2,600.1

We are referring, of course, to the coronavirus.

COVID-19, as scientists call it, is a new strain of respiratory virus that can cause severe pneumonia and even death.  What started as a local outbreak in the Chinese city of Wuhan has rapidly become much more, and the markets are beginning to take it seriously.  On February 24, the Dow dropped over 1,000 points, and the S&P 500 over 100, after news broke that cases have surged in Italy and South Korea.2

Obviously, the human cost of an epidemic is more important than anything else.  But in addition to being a health crisis, COVID-19 also has the potential to create an economic crisis.  Viruses are small but insidious, and they can infect more than just people.

They can also infect supply chains.

This fact is what has investors – and even some of the world’s most powerful corporations – spooked.  As your financial advisors, we believe that it’s our job to explain why that is, as well as what we should do about it.

The Global Economy

There’s nothing like a virus to remind us that we are all connected.

To show what we mean, look at your phone for a moment. In a sense, you’re holding a miniature version of the world.  The screen you’re looking at probably came from Japan.  Your phone’s accelerometer likely came from Germany; the gyroscope, from Belgium.  The wi-fi chip may have come from Mexico, or perhaps Brazil; the audio chip, from the United States.

And your phone’s battery? That probably came from China.3

For a company like Apple to sell you an iPhone, they rely on the work of millions of people based in dozens of countries.  That is a supply chain, one of thousands of arteries that keep the world’s economy beating. A chain is only as strong as its weakest link, though. Imagine an epidemic breaks out near one link – a factory that produces widgets, for example.  Suddenly, people can’t go to work.

Manufacturing stops.  Fewer widgets are produced.

Somewhere down the chain, another factory makes gizmos – but they need widgets to do it. What happens when there aren’t enough widgets?  Soon, there won’t be enough gizmos, either.

And at the end of the chain, the company that turns the widget-powered gizmos into gadgets has fewer of those to sell. Which means they can’t reach their quarterly estimates, which means their stock price falls. As do the stock prices of the widget and gizmo manufacturers.

The result is a black day for the markets.  Like the one we had on February 24.

This is exactly what’s happening right now.  With one of the world’s largest economies, China is at the center of many, many supply chains. From electronics to blue jeans, the world relies on China for its resources and manpower.  But China is also at the center of the current outbreak, with over 77,000 confirmed cases and 2,500 deaths.1   This is why even companies like Apple and Adidas have recently admitted that COVID-19 will probably affect their bottom line.4&5

But the story doesn’t end there.

From Asia to Europe

The markets have long known about how the coronavirus could hamper global supply chains. But as long as the virus seemed limited to China, investors largely shrugged it off. That all started to change last week.

Take South Korea – small in terms of size, but a giant in terms of industry. On February 17, South Korea had 30 confirmed cases.6   Just one week later, there were over 800.1

Even more unnerving, to some analysists, is what’s going on in Northern Italy.  Last week, there were only a few reported cases. As of this writing, there are over 200, mainly centered in Lombardy, where some of the world’s most important carmakers are located.1   Officials have closed schools and put multiple towns on lockdown to keep the virus from spreading, but the fact that COVID-19 is now established on an entirely different continent is what’s causing fear.

Another cause of fear is that it’s not just supply chains and manufacturing being affected. Tourism, airlines, energy –many industries have seen a drop in business due to the coronavirus. And of course, the sheer fact that people have died is enough to make anyone wonder, “Should I be afraid, too?”

Let’s answer that right now.

Fear and financial decisions

Fear is at the heart of every market drop.  Usually, it’s fear of the unknown.  In this case, there are several unknowns for investors to contend with.  Why exactly is this virus spreading so fast? How far will it spread?  How long will it last? These are questions that no financial advisor can answer.

But fear, as we know, is a bad reason to make decisions. Fear of missing out, for example, often makes us behave too rashly. On the other side of the coin, fear of not getting out leads us to toss away opportunities or abandon the progress we’ve made to our goals.

Fortunately, whenever we feel fear, there are two tools that we can use to steady ourselves.

The first tool is history. Past performance, as you’ve no doubt heard many times, is no guarantee of future results. But past is also prologue, which means history can give us a good idea of what to expect in the future.  For example, here is how the S&P 500 performed over a 6-month period after other recent epidemics.7

Now, these are all imperfect comparisons, as they dealt with different viruses, at different times, in different regions, in different contexts.  The point is that the markets, while occasionally impacted in the short term by epidemics, are rarely impacted over the long-term. And as we are investing to help you achieve your long-term goals, it’s the long-term that we care about.

The second tool, of course, is our own plan. You’ve probably heard us say this before, but we invest expecting volatility to happen. As your financial advisors, we can’t predict exactly when it will occur, nor always what will cause it. But we know that it will, so we are prepared for it.

This particular bout of volatility is coming after months of astonishing growth, and a correction has always been bound to happen at some point.  If it’s not coronavirus, it could be the trade war, or the U.S. presidential elections, or any of a dozen other things.

Over the coming weeks, we’ll probably see more scary-sounding headlines. It’s possible that COVID-19 could spread, and further disrupt the world economy.  It’s possible that should these things happen, the markets will drop – and then climb again when more positive headlines emerge the next day.  Coronavirus is unquestionably a serious issue of global importance, but it’s not worth panicking over. So, our advice is to not overreact to these day-to-day or even week-to- week swings.  To do that would be like playing whack-a-mole with your investments. Our team certainly won’t do that!

What we will do is continue to keep a very close eye on how the coronavirus is spreading, as well as how the world is handling it. If we ever feel that the long-term situation has changed, we may then make changes, too.  But in the meantime, let’s continue to be cautious, but never fearful, investors.

As always, please let us know if you have any questions or concerns.  We are always happy to help with both.  Have a great week!

SOURCES:

• “Tracking coronavirus,” BNO News, last updated February 24, https://bnonews.com/index.php/2020/02/the-latest-   coronavirus-cases/
• “Dow Industrials Close 1,000 Points Lower as Coronavirus Cases Mount,” The Wall Street Journal, February 24, https://www.wsj.com/articles/stocks-fall-as-coronavirus-spread-accelerates-outside-china-11582533308?mod=hp_lead_pos1
• “Where is the iPhone Made?” Lifewire, November 9, https://www.lifewire.com/where-is-the-iphone-made-1999503
• “Apple Signals Coronavirus’s Threat to Global Business,” The New York Times, February 17, https://www.nytimes.com/2020/02/17/technology/apple-coronavirus-economy.html
• “Adidas, Puma Warn of Coronavirus Blow,” The Wall Street Journal, February 19, https://www.wsj.com/articles/puma-   tops-hopes-but-warns-of-coronavirus-hit-11582106613
• “S. Korea reports 1 more case of novel coronavirus, total now at 30,” Yonhaps News Agency, February 17, https://en.yna.co.kr/view/AEN20200217002900320
• “How the stock market has performed during past viral outbreaks,” MarketWatch, February 24, https://www.marketwatch.com/story/heres-how-the-stock-market-has-performed-during-past-viral-outbreaks-as-chinas-    coronavirus-spreads-2020-01-22