COVID-19 Update May 2020

By now you and your family have no doubt been impacted by the new coronavirus and the unprecedented response to mitigate the spread. At White Oak we have been closely monitoring the outbreak, and we continue to leverage a variety of sources to gauge the spread and impact on people and businesses. Given the uniqueness of this crisis, the value of historical comparisons is limited. We are monitoring global medical data and trends and the efficacy of fiscal and monetary policy responses.  We are frequently interfacing with portfolio managers to understand how we can best position strategies based on our market outlook for each of our clients’ investment strategies and financial planning opportunities.   

We want to emphasize that our focus has been on maintaining our ability to best serve our clients to preserve and grow their wealth. This includes ongoing communication with our custodian, Raymond James to ensure we continue to receive best execution on trades, liquidity and accurate reporting. We are pleased that we have been able to seamlessly continue serving our clients with no disruptions. Our systems continue to perform well and have enabled us to work remotely when necessary.

The past eight weeks have provided volumes of prognostications about the virus itself and the economic toll it will take on the global economy. We view this crisis in three phases. The first is a global health crisis, the second is a financial crisis and the third is a recovery. Each phase is foundational, meaning we can't accurately predict the recovery until we better understand the financial crisis, which we can't determine until we have clarity on the medical crisis. In our opinion, anyone who attempts to predict when our economy will recover is, at best, providing an educated guess and should probably be ignored. (This rule extends to television pundits, internet commentators and others yelling to be heard).

As of this writing, the number of daily new confirmed cases of COVID-19 appears to be declining, both globally and in the U.S. Increased availability of testing in the U.S. may cause a near term increase in confirmed cases, so we also focus on hospitalization and mortality data for context. While more cases may be reported, we expect many of those to be less severe, or asymptomatic, and the increased testing is essential to safely reopening state’s economies and getting people back to work.

It's important to remember that this crisis began as a medical crisis, not a financial one. Fears of a pandemic create more frightening thoughts than those from a financial crisis. While no one wants to lose money, we have a greater fear of harm to our health. The uncertainty and fear of COVID-19 and its fallout created panic in the markets. And when we say markets, we are not just referring to the stock market. Consider the run on dry foods and toilet paper in your local supermarket. The financial crisis of 2008/09 did not lead to toilet paper shortages!

The elevated uncertainty and fear drove investors to panic, triggered model driven actions and created liquidity issues which drove a widening in credit spreads. In short, investors sold everything, regardless of the underlying credit quality (bonds) or strength of the individual company (equities). As of this writing, the S&P 500 bottomed on March 23rd when it closed at 2237.40. It took just 23 business days to do so; the fastest decline since 1928. The S&P has since rebounded approximately 22.5% and recovered 44% of its decline.

Everyone wants to know how long it will take us to recover. No one knows the answer, but we have provided our vision of a path to more normal conditions. First, let's begin with our current circumstances. While the economic damage will likely be severe, we are encouraged by the timeliness and scope of government and central bank intervention. Additionally, we believe that the measures taken by federal, state and local governments have positioned the U.S. for a timely turnaround and have limited the spread of the virus. Governors across the country are beginning to unveil reopening’s on a gradual basis. Furthermore, the partnership between pharmaceutical companies, medical experts and government officials on the development and production of testing and treatment equipment, potential treatments, and a vaccine are unprecedented. We believe that these measures, taken collectively will expedite a reopening of the U.S. economy on a rolling basis. We expect to see gradual reopening’s begin in mid-May.

As businesses open and survey the damage, we will begin to get a clearer picture on the resulting economic damage.  We anticipate that the impacts will vary widely depending on industry and company. We know that the tourism and travel industries have been hugely impacted and will likely need several quarters or longer to recover. Other economic data will also become more readily available including rehiring data, business inventories, industrial production and GDP. We find it hard to imagine that the U.S. or the global economy will avoid a recession. We are not certain of the length and severity but believe we will encounter some level of recessionary economic activity in 2020. Many are forecasting that the scope of central bank and government intervention will shorten the length and severity but at this time, that is not determinable.

As we progress through the reopening process, we should be able to then develop a thesis for when and how the economic recovery will proceed.  Nonetheless, we believe that the economic damage will not be permanent or long-lasting.  Our general thesis has not changed - we believe that equities are the best investment for the long term and that the stock market will eventually recover and surpass its prior peaks, as it has always done. We also believe that, like most bear markets, this one has resulted in significant dislocations across industries, geographies, and market capitalization segments, and has created potential investment opportunities.

We use this time to reinforce our core investing principles to our clients:

·         Remain patient: as investors focused on long-term outcomes; patience is critical.  Patience also enables us to take advantage of brief periods of panic to add quality for long-term alpha.

·        Stay Invested: we can’t over-emphasize the importance of this principle.  Trying to time a market bottom or a market top is a fool’s errand.  Remaining invested and patient are critical elements for superior investment performance. 

·         Avoid Predictions: do not be swayed by the noise in the media.  Media’s job is to appeal to a wide-ranging audience.  Consult with your advisor on questions relating to your financial plan and investment strategy and work collaboratively to develop appropriate solutions for your needs.

·         Embrace Active Management: Periods of crisis present opportunities to add quality companies to a portfolio.  Effective active management seeks to identify such companies in order to position the fund for better returns AND better downside protection.  We conduct extensive due diligence on active managers, utilizing those that have a long-term record of consistently outperforming their respective benchmark.

We have used the recent volatility as an opportunity to tactically reduce positions we were seeking to exit and have deployed proceeds to new positions we believe are positioned to outperform going forward.  We have not fundamentally changed our strategies as we believe our investment thesis and resulting strategies remain well positioned to add value over the long-term. 

We encourage you to call or email us if you have questions or would like to discuss our views in greater detail.