At some point in the future, hopefully very soon, the worst of this will be over and we will better understand how serious it was/is/will be. As we work from home and stay safe, we want to stay in close touch with our clients and our friends and professional colleagues. Staying positive and focused is more important than ever at a time like this.
Our focus is as follows:
- First and most importantly, we want everyone to be safe. That is why we are all sheltering in place. Thank goodness for the technology we have today; we are running the business, supporting our clients and conducting video meetings all day every day, working harder than ever while staying safe.
- Second, we are closely monitoring the development of the disease. See below.
- Third, we monitor the capital markets very closely and communicate continuously with our clients and with each other, and we execute our plans with discipline. See below.
How bad will it be?
Nobody knows yet. The uncertainty and the broad range of projected outcomes is part of what fuels the fear. Bad news “sells newspapers,” and we are getting a lot of emphasis on the very bad possible outcomes in the media. Not to say that it can’t turn out as bad as that, but it could also be a lot less bad. We just don’t know yet.
Meanwhile, John Bussel, our CIO, found an interesting article, and so did I. Mine was by an Israeli Nobel Prize-winning biophysicist, his by a Senior Fellow at Hoover Institution. Both challenged the worst-case projections and made the case for a smaller number of infections and fatalities and a better outcome. These are both short and to the point; you may want to read them.
Market events and executing on our plans
This morning equity markets around the world were doing pretty well, after having a good day yesterday too (although US equities dropped in the mid-afternoon as we finished this). We are still on track for a bad week, month and year to date, and there is never any guarantee that we will not see another leg down, but I have to admit a few reasonably good or even boring days would come as welcome relief.
Meanwhile, we are executing on our plans. When markets move far enough, in either direction, we rebalance the portfolios. We sell equity and buy bonds when things are going really well, and we sell bonds and buy equities in the face of sharp equity downturns and fear. This week we have been doing a lot of the latter, as we seek to keep our asset allocations on target.
We have been here before, especially in 2000-2002 and 2007-2009. Sometimes we buy more equity only to see further declines, and we may even do that more than once, but in the end, we believe we are buying low. We always try to make sure we (i.e., you) are fully invested for the recovery.
We also have been doing a lot of tax loss harvesting. We track individual “tax lots” of stocks and mutual funds, and we can select the specific securities with losses to sell while minimizing the sale of securities with gains. These losses can have tax advantages into the future, starting with your 2020 return. As for 2019 tax returns, the IRS announced today that the tax filing deadline has been extended to July 15.
Aside from selling equities this time, we have been harvesting losses on high yield bond funds. You may have heard about some “issues” in credit markets, and the Fed and the Treasury have announced big steps to provide liquidity to the markets, including buying Treasury notes and even municipal bonds. In any case, weaker credits are at risk in a crisis like this, especially in places like the energy sector. And so, we harvest losses for you.
We understand that both of these actions may seem counter-intuitive and uncomfortable at times like this. It may not “feel” right to be taking losses in a down market or to be buying more of an asset class that has had big declines. All of this can be hard. But we want to make sure clients reap the tax benefits of capital losses and are positioned to benefit from an ultimate market recovery. That is why we have a disciplined process.
It appears we will all be sheltering in place for some indeterminant period of time, and a lot of businesses are going to close for a while. We will wait and see how the numbers turn out. I am sure we are all hoping that the two articles linked above are correct, and that the spread of the virus is dramatically less than feared. But either way, as we pointed out in an earlier letter, at some point it will be over, and we will do our best to recover and to assist those most harmed by this.
Team Hewins, LLC (“Team Hewins”) is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.