March 26, 2020
As we are all aware, financial markets remain extremely volatile as investors continue to assess the medical and economic impact of COVID-19. As we have mentioned before, we are not epidemiologists, and are taking a very humble approach with our thoughts and views on the virus, and potential impacts and outcomes. With that said, we wanted to provide a quick overview of some of our observations and portfolio decisions.
First, here are several reasons for cautious optimism with regard to containing the outbreak:
- Last week we heard comments from the CEO of Quest Diagnostics stating his expectations that the nation’s testing demand will be met in the next few weeks.
- Earlier this week, a Silicon Valley firm received FDA approval for a test kit that provides results in 45 minutes. This would be a massive improvement over waiting days for results, and particularly important for our first responders.
- Late last week, the Milken Institute released a report summarizing the number of institutions working worldwide on therapies and vaccines. The current estimate is 58 treatment therapies and 43 vaccines. While no one knows the outcome here, the amount of talent and resources devoted to addressing both the virus and the disease is immense. We’re encouraged by the massive push for a solution, and we don’t discount the innovative capabilities of the global pharmaceutical community.
- Last week we discussed the dramatic decline in new daily COVID-19 cases in Asia – mainly China and South Korea. Now the focus turns to Europe and how quickly they can “bend the curve.” So far, we’ve seen the number of daily new infections peak in Italy on March 21st. We do not know if this is THE peak, but this is a positive development for now.
Thoughts on the economy and the policy response:
The initiatives put in place to slow the spread of COVID-19 will have profoundly negative effects on the U.S. and global economies. Economists are racing to outdo each other to estimate the extent of the declines in both first and second quarter GDP. The decline in second quarter GDP could be larger than the previous all-time record 10% contraction in 1958. We’re already seeing the economic impact, with today’s unemployment claim data spiking to a historic high of 3.28 million.
While the near-term economic picture remains grim, the fiscal and monetary response has also been historic. The following will act as important counterweights to the COVID-19 slowdown:
- The $2 trillion stimulus package currently working its way through Congress equates to almost 10% of annual U.S. GDP. Other countries such as Germany and Japan are following suit with stimulus packages of similar size. These packages will cushion the blow to economic activity while supporting workers and small businesses.
- The Federal Reserve has thrown the proverbial kitchen sink at the problem. The Fed has cut interest rates to zero, announced unlimited Quantitative Easing programs, and is buying assets such as municipal and corporate bonds. Again, we don’t expect these initiatives to spur demand, but they will help keep financial markets liquid and allow many corporations to access nearly free capital for the duration of the crisis.
We don’t know when the COVID-19 virus will peak, or when policymakers will reduce lockdown restrictions. But those things will happen, and when they do we’ll likely see a powerful economic rebound.
The S&P 500 declined by roughly 34% from February 19th through March 23rd. This decline is on par with historical peak-to-trough declines in previous recessions. We don’t know if the “bottom is in” but we have certainly priced in a lot of bad news and potential negative outcomes.
Our investment committee discussions and resulting investment decisions have focused on two main themes: 1) We need to align our investment decisions with our clients’ time horizons and 2) markets don’t wait. Both are explained in more detail below.
Yes, the economy will likely struggle for the next several months. Corporate earning power will be reduced, and consumers’ ability to spend will be impaired by stay-at-home orders and the resulting unemployment. However, your time horizons are not weeks or months. Instead, they are measured in decades. We’re not making investment decisions based on next quarter’s earnings. Our focus is on the long-term prospects of the businesses we own.
Also, viewed in the context of history, markets don’t wait for all the negatives to unfold before bottoming and moving higher. They price in the risks, uncertainties and potential negative outcomes, often overshoot to the downside – and then move on. The 2008-09 financial crisis is instructive in this regard. Bank stocks bottomed YEARS before bank failures during this period. We don’t believe this time will be any different. Markets don’t wait until all the bad news, negative headlines, and scary economic data are behind us.
We view 40%, 50% and 60% price declines in high-quality business as overdone in most cases. We continue to buy well run businesses at bargain prices. We do not anticipate “chasing” a market rally but intend to be patient buyers on weakness, and in sectors where we feel the negatives are overdone.
Please let us know if you have any questions, issues you would like to discuss or just want to talk.
March 20, 2020
Last evening, Pennsylvania Governor Tom Wolf ordered all non-life sustaining businesses to close their physical locations as of 8:00 p.m. on Thursday, March 19th. We agree with him that ensuring the health and safety of our clients and employees is critical.
As you may know, many of our employees have been working remotely this week, but effective immediately all Fort Pitt and Roof Advisory employees are working remotely. During this period, email is the most efficient means of communicating with us. You may also call the office if you need to, and your call will be returned as soon as possible. Please bear with us through this difficult time. We will respond to all of your questions and requests as rapidly and efficiently as possible.
Please be assured that Fort Pitt and Roof Advisory are fully functional and committed to providing you with uninterrupted service. We appreciate your continued confidence in us.
Stay safe, and we will provide updates to you as we navigate this challenging time together.
March 18, 2020
We hope this communication finds you and your loved ones safe and healthy. Your well-being is always our top priority, and we want to do everything we can to ensure your safety and security.
With this in mind, we’ve decided to cancel all IN PERSON meetings with Fort Pitt Capital Group and Roof Advisory Group representatives until further notice. If you have an in-person meeting scheduled, you will be contacted by our client service team to either reschedule to a later date or make arrangements to meet by a Go To Meeting (screen sharing) or conference call. We don’t know how long this policy will be in place, but in the interim, we will be taking direction from local, state and federal authorities, and will be sure to inform you when it changes.
Rest assured that Fort Pitt/Roof Advisory Group are equipped to remotely and seamlessly provide all aspects of portfolio management, financial planning and customer service that you’ve come to expect. Some employees will remain in our offices, and some will work remotely. We encourage you to communicate with us without hesitation – whether it be via email or telephone. Email is generally the most efficient, but feel free to call us if you have any questions or need assistance with anything.
As a reminder, if you anticipate needing to provide us personal information or paperwork, please either:
1. Send using traditional mail
2. Scan and submit via Sharefile
3. Request use of e-authorization
For your privacy, please do not email personal information.
As always, we appreciate being your trusted financial adviser. Stay vigilant, cautious and healthy!!