After the extraordinary events of the past several weeks and the equally extraordinary market response, it seems appropriate to offer a few observations. Those of you in the Bay Area are experiencing, like us, the broad “shelter in place” order, which initially affected nearly 7 million people in six counties, and later expanded to three more. Those of you outside the Bay Area have likely read or seen news reports about the order. The need to stay close to home is inconvenient in some respects, but I perform the essential functions involved in managing client portfolios online in ordinary times, and so Tiemann Investment Advisors, LLC is fully functional while I am working at home. In addition, the order is not so draconian that I would not be able to go briefly to our office, which is just a mile and a half from our home, if necessary. I do ask that if you need to reach me by telephone while this order is in effect, currently announced to be until April 7, please call my mobile phone, 415-999-6030, rather than the office number. I will also check the voicemail on the office number regularly.
The disruption due to the novel coronavirus has manifested itself dramatically in the financial markets. Markets have been extremely volatile, with daily moves in excess of 5% (down or up) seeming to be the rule for the past three weeks. Last Thursday the market fell -10%, a daily percentage drop second only to the crash of October 19, 1987. Friday the market rose a similar amount. Then on Monday, the market fell -12%, eclipsing Thursday’s mark. Yesterday (Tuesday) the market rose again, and today it fell. The speed and sawtooth volatility of the market decline reflect a high degree of uncertainty regarding the evolution and economic consequences of the current public health emergency. The Dow Jones Industrial average closed today just about where it ended 2016.
Today for the first time professional investors seem to me to have shifted toward regarding the current market valuations as a buying opportunity. I remain cautious, but it’s encouraging to hear some voices counseling a constructive view. In any case, I’d counsel against panic selling. The underlying plumbing of the markets continues to function, and currently at least, signs are that the banking system continues to function as well. The Fed has also signaled its willingness to provide necessary liquidity to keep banking, financing and payment systems operating. Specifically, they have reduced their benchmark short-term interest rate to near zero and provided large facilities for providing liquidity to the banking system. Legislation offering some relief to firms and workers affected by social distancing shutdowns is also making its way through Congress.
In terms of public health, my general sense is that we will have some fairly large number of cases of COVID-19, including a number of severe cases large enough to strain, but not break, our healthcare system. We will also have too many fatalities. One important unknown, though, is whether all this unfolds over weeks or months. The necessary public health steps to date, including our own shelter-in-place order, will hopefully slow the virus, but they will certainly slow the US economy. It’s impossible for me to imagine that they will not trigger a recession. If they last for a short while and we can resume normal lives soon, then the economic disruption might be short-lived. But the longer we remain in this state, the greater the demand shock and the more people will find themselves out of work. That, in turn, could depress demand further, prolonging the recession.
My take is that the market has already priced the expectation of a recession, but probably not the worst-case, extended slowdown. That suggests that at these levels risks are actually pretty well balanced, but with an unusually wide range of possible outcomes. For investors not currently relying on your portfolios for current income, I wouldn’t recommend making radical portfolio changes. Investors in saving mode should be able to tolerate the risk of further downturns when investing fresh cash. For investors relying on fixed endowments, I have been reviewing, and will continue to review, risk exposures.
Please feel free to call if you have further questions or comments. Again, while I am working from home it’s best to call on my mobile, 415-999-6030, though I will also be checking my office voicemail. If you need to send physical documents, please let me know and we can make arrangements.
Tiemann Investment Advisors, LLC
750 Menlo Avenue, Suite 300
Menlo Park, California 94025