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Investment Commentary: March 31, 2020

Until recently, the idea of a pandemic seemed rather abstract. Maybe we imagined once or twice what one could look like, perhaps with glimpses from movies like Outbreak or Contagion, or through the reallife but short Ebola or SARS scares. Pandemic was a source of escapist fun, something you talked about when someone brought up the topic of preppers.

The coronavirus itself isn’t quite the stuff of Hollywood. Yet, the gravity of a pandemic is hitting home. People we know are getting sick, or at least people we recognize. There is the hoarding—toilet paper, Clorox products, bullets. And guns. The FBI reported a 41% surge in background checks last by individuals attempting to buy firearms in March. The 3.7 million background checks in March was the biggest month since the FBI’s National Instant Criminal Background Check System was launched in 1998.

The word “unprecedented” is thrown around a lot today, but it doesn’t make it any less true. This is all new. Never has so much economic activity come to a sudden halt. Take the weekly jobless claims: The week ending March 21 saw claims of 3.7 million, breaking the old record set in 1982—by quadruple. The record was smashed again the following week by more than double. This means out of a labor force of 164.6 million (as of February), some 10 million filed between March 14‐28. Of course, it isn’t over yet,
but already the numbers are historic and staggering.

The stock market fell some 35% between the all‐time high of February 19 to March 23, breaking records for the steepest drop in a month’s time. The tumult quickly spread to the credit markets (already a dangerous mess as we have often mentioned before) with bonds of all varieties falling in price— including corporates and even municipals, but not Treasurys—until the Federal Reserve stepped in with a new program of buying.

We shifted more defensive over the quarter in virtually all portfolios, from our typical and conservative Core portfolios to our all‐equity ones. This means a healthy weighting in Treasury bills and/or cash and a lower allocation in stocks. We think most, if not all, of our selling might be behind us, and we are spending most of our time curating potential buys, even though we might not yet be at the midway point in terms of the economic pain of the crisis.

What’s next

To state the obvious, the direction of markets and the economy are largely contingent on developments in the pandemic: how successful we all are at “bending the curve” and especially finding a successful therapy and vaccine. I’ll try to illustrate a generalized bull and bear case going forward with a disclaimer that any binary description may not adequately capture complexity, nuance, or timing issues. New developments and data will also shape possible scenarios.

The bull case includes a view that the worst of the virus news will come in the next week or two, that infected curve will flatten then decline in a matter of weeks thanks to shut downs, social distancing, and warmer weather. Beyond that, successful treatments will be identified and deployed, and ultimately a vaccine is discovered. The economic and market pain is sharp and quick, but so will the recovery be. This is the view of epidemiologists, the federal government, and arguably the market. At this writing, the market is down “just” 22.5% from the all‐time high and 18% for 2020.

The V‐shaped recovery is also fueled by “kitchen‐sink” monetary and fiscal measures. The Fed has already dropped short term interest rates to zero, initiated “Unlimited QE” to buy longer term Treasury and agency bonds, shored up the repo market (the world’s financial plumbing), and even extended credit lines to the world’s central banks (making it easier for them to accumulate dollars, among other effects). The Fed and U.S. Treasury have teamed up to create various new facilities to make loans and purchase massive amounts of credit securities.

The new CARES Act puts $2 trillion, or 10% of GDP, toward stabilization, buying time for individuals and businesses. (See highlights of the Act below.) It will not be the last fiscal package if the crisis runs longer than expected. Government will borrow, print and spend as much money as it takes. Government will change laws, extend moratoriums and forbearances, and generally spread the burden to help the greatest number.

Time will be bought, and a lot of smart people across the globe are digging into this singular problem, and they will succeed. Soon.

The bear case is a view that this is a big and complex problem, and the fallout will not be limited to weeks or a few months. Big changes and big numbers (especially compounding numbers) are not easy for humans to quickly comprehend. The drop in what was already a lengthy bull market should be more than 22.5%. There is more volatility and pain to bear before everything is humming again.

Western countries aren’t limiting the spread like in Asia. Asians have long worn facial masks to prevent others from getting sick¹ and are more compliant with rules and mandates from government. Perhaps more important was the drastic steps China took to limit the spread, instituting strict lockdowns, monitoring citizens’ movements, random and daily health checks, and collecting and sharing data—the kinds of measures not easily done in the West. The numbers of infected will continue to climb, perhaps longer than people expect (and no one is even putting forecasts about a second or third wave). The apex of the pandemic might be soon, but it will not go away.

A therapy and ultimately a vaccine will come, but that takes time, maybe two years at best. Meanwhile, every week of shutdown comes with greater cost. Government help can’t be big or fast enough for the millions out of work who were working paycheck to paycheck. How many millions won’t be paying their mortgage or rent? Even if payments are deferred, the obligations don’t go away. How is aggregatedemand supposed to snap back quickly even with a sudden victory in the virus when an individual or business still has to come up with back payments?

An absence of revenue for many businesses is like an absence of oxygen: all is lost if it doesn’t come back quickly. And not all impacted businesses will snap back to pre‐crisis sales, employment, and earnings. A recovery is more likely to be U‐shaped, if we are lucky.

Finally, it’s important to remember the coronavirus came during an era of cheap and abundant credit— perhaps a credit bubble—that propped up many shaky businesses, including large ones. Even with more government help today, the supply of credit could become more rational, more stringent. The troubles in the energy sector—a material part of the high‐yield debt market—add to the domino effect in credit. Near‐$20 oil prices have broken many sick balance sheets. Whiting Petroleum filed for bankruptcy last week, the first major U.S. fracking company to fall. Will it be the last? For what other companies have recent events brought a final blow?

We admit both bull and bear cases have their merits. Among other things, investing means constantly holding two or more contradictory ideas in the head. This is especially true with the kind of investing we do: conservative active asset allocation with multiple objectives.

Our allocation reflects our view on risk and reward right now, but we are also looking to invest more. Like every crisis and bear market before, this one will produce good investing opportunities for the medium to long run. We are still very confident in that.


Taxable investors saw a high tax bill for 2018 as we sold a number of longer‐term holdings with large capital gains accumulated since the financial crisis. Big capital gains years like that are few and far between, and we thought it might be quite some time before we saw something similar. The coronavirus has proven us wrong, and the 2020 tax year might look a lot like 2018 for many taxable portfolios.

We do not like paying taxes, either. Selling winners is not done lightly; we have to weigh the benefits of selling, which can’t be calculated exactly, with the cost of selling, which is known. Often, selling is a mistake in hindsight. Nonetheless, it’s a critical component toward our primary objective of preserving assets and maintaining liquidity.


There is a lot to the new Coronavirus Aid, Relief, and Economic Security (CARES) Act beyond expanded unemployment benefits and recovery rebates ($1,200 per individual and $500 per child, subject to adjusted gross income limits). A Google search will produce for you comprehensive summaries of the Act. Here are some provisions in the Act you might find useful:

  • Penalty‐free distributions from retirement accounts. Those under 59 ½ affected by COVID‐19 can elect to distribute up to $100,000 from their IRA and/or company retirement plans without penalty. The distribution will still count as ordinary taxable income, but it can be spread out over three years (2020, 2021, and 2022 tax years), if desired.
  • Loan increase from qualified plans. Loans limits from company plans like 401(k) and 403(b) go up from 50% of vested balanced (up to $50,000) to 100% (up to $100,000).
  • Required Minimum Distribution (RMD) waiver. Taxpayers can elect not to take their 2020 RMD. Those who turned 70 ½ in 2019 but delayed their distribution until 2020 can delay both 2019 and 2020 distributions. Those who have taken their 2020 RMDs already can do a reversal.
  • Charitable contributions. Qualified contributions can be deducted up to 100% of adjusted gross income (up from 60% for cash contributions). For those that can’t itemize deductions, a new provision allows for an “above‐the‐line” deduction of up to $300.
  • Relief for student loan borrowers. Students can defer paying through September 30, 2020 with no interest accrued. Payments made during the 60 days after March 20 will count toward loan principal, as the Department of Education has set student loan interest rates at 0% during that time frame.
  • Small Business Paycheck Protection Program. Small businesses under 500 employees can qualify for up to 2.5 times the average payroll cost in 2019 (up to $10 million). Though given as a loan, the full amount can be forgiven if certain conditions are met.
  • Payroll tax deferral. Employers may delay the payment of employer payroll taxes until December 31, 2021 when half of the payroll tax will be due with the rest due December 31, 2022.
  • Net operating loss (NOL) carry back. Businesses can use their 2018, 2019, or 2020 NOL to be carried back up to five years.
  • Employee retention credit. For those businesses fully or partially suspended due to government restrictions in COVID‐19 and suffering from a 50% drop in revenue versus the same quarter a year ago, a credit of up to $5,000 per employee may be obtained.


1 This is something the WHO, CDC, and the U.S. Surgeon General missed when they advised people against wearing masks in public. They approached mask wearing in terms of its effectiveness in not catching the virus instead of its aid in limiting the spread from someone infected. And since the virus is spread by people who don’t even know they have the virus, masks are clearly helpful. The CDC and White House just recently reversed their position.

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Neil Rose, CFA




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