I have attached our most recent update to the Coronavirus response and economic outlook. Find the update here>>04082020-Q2-2020-COVID-19-Impact-Update.pdf
I thought you might find this update helpful to understand the government’s actions to stabilize the economy. Lawmakers finally came together on a bipartisan stimulus package that was signed into law on Friday, March 27th. The $2 trillion dollar stimulus package known as the CARES Act will act as a lifeline for businesses and employees while the government shutdown persists. The graphic below breaks down the different buckets of the package and how funds are being distributed.
On top of support for large and small businesses, the bill also provides support for hospitals and drug makers that are working to fight and contain the virus. Details are still being provided on the logistics and timing of payments and programs, but officials have been adamant about rolling these out as soon as possible...
Now is the time to look forward and stick to a plan of action. Virus pandemics have a lifecycle that they go through and just like every life cycle they are not exact but can be useful as a timing tool. This framework is important for us as we navigate this volatility and make tactical investment decisions. Our timing will never be exact but what is important is that we are not basing our investment decisions on panic rather than sticking to realities and our core investment philosophy.
The current coronavirus cycle is broken down into 5 stages. Right now, we are crossing over from stage 2 to 3. After the initial spotty cases across the country now we are seeing person to person transmission and the number of total cases to expand dramatically. Our transmission rates have been on par with other countries, but our mortality rate is significantly lower, and we think that will continue to be the case on account of our more robust health care system and better hygiene standards...
Peak in Global Infection Rate
Worldwide infection numbers continue to grow as most of the world remains in shutdown. The service sector has been especially badly affected, with consumer facing industries bearing the brunt of the social distancing measurements. Although domestic health centers are strained, they have not been overrun such as those in Italy or Wuhan, China...
Life Cycle of a Virus Pandemic
Now is the time to look forward and stick to a plan of action. Virus pandemics have a life cycle that they go through and just like every life cycle they are not exact but can be useful as a timing tool. This framework is important for us as we navigate this volatility and make tactical investment decisions. Our timing will never be exact but what is important is that we are not basing our investment decisions on panic rather than sticking to realities and our core investment philosophy.
How do we navigate this unprecedented market environment? While the circumstances of the Coronavirus/Oil War are extraordinary we are in the midst of a major crisis. Simply put, in a crisis there are certain actions we must adhere to as long-term investors until this crisis passes. We use historical precedents as a guideline, but every crisis is different. What isn’t different is how we approach them. This is not a time to be frequently trading long term positions locking in losses under irrational circumstances. Once the virus hysteria passes, events and gatherings return to normal, and fiscal stimulus is launched by the government the market will stabilize. The stock market rewards investors who are long term oriented. While others are selling their shares out of panic, it creates an opportunity for those who want to buy a stake in those companies with the mindset of a long-term part-owner. Stocks of great companies are selling off because the market is predicting that their earnings will be punished at least for this year, but their long-term business prospects remain the same. This is where mispricing occurs in the market. We do not know if this virus outbreak will worsen or accelerate before it subsides, but we do know it will subside.
It’s easy to be a long-term investor when the market is ratcheting higher with very little volatility which has been the case over the last few years (excluding December 2018). The difficult part comes when the markets begin to sell off for a public panic such as a virus outbreak. We are investors, not traders. We buy stakes in good companies, pay a reasonable price for our stake in said companies, and then let those businesses operate and compound our capital over time. This might seem simple but it’s important to understand what drives returns and why this is the most effective strategy for long term investors.
Equities are one of the best long-term investment vehicles, because they are the only asset class that continuously re-invests a portion of your capital. When you buy real estate or commodities such as gold and silver your capital is not automatically reinvested (assuming its value appreciates, or you earn rent, royalties, etc.). But rather a new opportunity must manually be found. Historically, this can be difficult over long periods of time as the competition of capitalism works its magic. When you own a high-quality company, this capital is typically being reinvested by experienced management teams who have expertise in their field with a history of operating businesses at the highest level. This capital reinvestment creates a ‘compounding’ effect over time which is the way that wealth is created...
I’d like to share with you yesterday’s insights from Schwab Chief Investment Strategist Liz Ann Sonders in response to the economic implications of the COVID-19 and the recent crash in oil prices.
The current scene of volatility in the markets is one that we do not take lightly or underestimate the degree to which financial markets can work themselves into a panic. We understand that the current selloff this past week is difficult to endure. Based on our financial planning and investment management approach our client portfolios have been designed for every possible environment, good or bad. Fortunately, our portfolios are designed to prepare for such circumstances as we are currently experiencing. You have a financial plan that has incorporated an emergency fund of cash representing 6-12 months of cash needs so that you would not be forced to sell assets at the wrong time. Our yield bias of dividend paying stocks provides ongoing cash flow support and our focus on large capitalized proven enterprises has proved to be protective in these environments as well. Our total avoidance of international and emerging market funds has also served to protect our client’s assets.
Under these circumstances, it is important to keep things in perspective. An over accommodating Federal Reserve has given us 10 years of rising markets without much volatility. The market typically falls by 5% or more three times a year. It falls 10% or more about once a year. And it falls 20% or more about once every seven years. We are just not used to this volatility. This increased risk and uncertainty, however, is why the equity market over long periods of time return almost double that of the bond market which has much more predictability. This market selloff has been abrupt which raises concern and makes it psychologically more damaging but still the worst thing you can do in the middle of a selloff like this is to panic and let your emotions dictate investment strategy.
When you look over long periods of time like in the chart below you clearly see we have these 10% corrections at some regular intervals. What is important to notice is that they happen fast, and they are followed by longer bull markets. Looking at the chart, the worst thing to do is sell when we are in these red bear markets...
The recent outbreak of the Wuhan Coronavirus is a topic that is at the forefront of all investors’ minds, particularly since information out of China is spotty and the numbers that are supplied by the Chinese government need to be met with high scrutiny. Many would wonder how the world’s second largest economy seemingly grinding to a halt would not cause a market sell off. The market reaction thus far has been relatively muted for several reasons:
The first reason is the derivative effects of the virus that the market is currently pricing in. The market is confident that China will be able to relatively contain the virus before it becomes a full-on Global Pandemic. From what we know now, the mortality rate from Coronavirus is relatively low. Figure 1, located below, plots the Coronavirus mortality statistics against similar outbreaks. As this is being written, only two deaths have been confirmed due to the virus outside of China. In the last few days several Chinese factories have announced that they are resuming operation and workers are returning to facilities. A minor detail that may soften the impact to U.S. companies’ inventories is that the virus outbreak has taken place over the Chinese New Year which is a period where factory output is predicted to be depressed. What the market is then pricing in is that once economic production resumes, economies will undergo a sharp increase in activity to make up for lost production due to the virus. Think of this as a “V-Shape” bounce on a graph.
Another derivative effect that the market is looking forward at is Central Bank stimulus. Just in the last few days the Peoples Bank of China injected 900 billion yuan (about 129 billion U.S. dollars) into the Chinese financial system. U.S. investors are predicting that the impact from the virus, and subsequent impact to GDP, will cause the Federal Reserve to continue to be accommodative via their own repurchase operations and possibly another rate cut. Many companies that have reported numbers in the last month have also given wide forward-guidance due to uncertainty from their supply chain status. This should dampen the shock that investors will get if subsequent numbers are materially impacted from their production or inventory drawdown...
The Charles Schwab Corporation and TD Ameritrade Holding Corporation announced yesterday that they have entered into a definitive agreement for Schwab to acquire TD Ameritrade in an all-stock transaction valued at approximately $26 billion. The combination brings together two leading firms with proud and similar histories of making investing more accessible to all. Please see below some important highlights of the press release. Click here to see the full press release.
This transaction creates strategic benefits for the combined organization and will further improve the investing and trading experience to both Schwab and TD Ameritrade clients. It allows Schwab to continue to add further scale on top of its organic growth, helping to drive sustainable, profitable growth and long-term value creation. Clients of both firms should benefit from the broader and deeper array of services. The resulting combined firm is expected to serve 24 million client accounts with more than $5 trillion in client assets. The acquisition will add to Schwab approximately $5 billion more in annual revenue with approximately $1.8 to $2 billion in expense synergies.
The parties expect the transaction to close in the second half of 2020 and will begin the integration process immediately thereafter. The integration process is expected to take between 18-36 months, following the close of the transaction...
Recently Federal Reserve Chairman, Jerome Powell, said he sees the economy as being “in a good place”.
So, what’s good about the economy? The Bull Market Powers On!
So what’s bad about the economy?..
I am pleased to announce that Hannah Patton, Client Services Administrator at Covington Investment Advisors, was recently awarded the Certified Trust & Financial Advisor (CTFA) certification from the American Bankers Association (ABA).
The CTFA certification is awarded to individuals who demonstrate excellence in the field of wealth management and trust. To qualify for the CTFA certification, individuals must have certain levels of experience and education in the trust profession, pass an exam, and agree to abide by a code of ethics.
The CTFA exam covers many areas, including fiduciary and trust activities, financial planning, tax law and planning, investment management and ethics. In addition to the CTFA designation, Hannah has also received Certificate in Trusts for her completion of the ABA Trust Schools in the Foundational, Intermediate, and Advanced levels over the past three years. This expansion of Hannah’s knowledge base will be a great asset to Covington and our clients. ..
Who doesn’t love FREE? Let’s face it, we all love a good bargain or free item. “Discount Chuck” is looking out for individual investors again, slashing online equity and ETF trading commissions from $4.95 to ZERO, making it even more affordable to invest. Schwab will continue to charge a commission for trading of foreign stocks, fixed-income investments, transaction-fee mutual funds, options, and large block trades that require special handling.
Since 2006, Charles Schwab has been disrupting the brokerage industry by periodically reducing their trading commissions. Revenue will be derived from Schwab’s other business lines like its US Bank (Schwab Bank) and from net interest income. Charles Schwab continues to be a leading provider of financial services with more than $3.72 trillion in client assets as of August 31, 2019. Covington has utilized Charles Schwab as our Custodian of client assets since our inception. We continue to choose Schwab because they are economical and have best in class service, industry leading technology, broad range of investment solutions, and account security safeguards; all of which allow us to best serve the needs of our clients. See below the historical milestones of the Charles Schwab Corporation.
In the spirit of Cyber Security Awareness Month, I wanted to highlight two growing trends and share some tips to help you stay safe when using your cell phone and home phone. Beware of a new variation of phishing called SMiShing and the other tactics which spoof local phone numbers to entice you to answer the call.
SMiShing uses SMS (for “short message service”) to commit fraud by texting your phone. Text messages are very popular and usually opened and responded to immediately making it a successful practice used by fraudsters. SMiShing attempts are also popping up on messaging apps such as Facebook Messenger and WhatsApp. The text message may include a link to click on or a message urging you to respond quickly similar to the way phishing e-mails are handled. The fraudster’s goal is to steal your money by getting your personal information.
If you receive an unsolicited text, simply pause. Any reply – even to opt-out – to a text message makes your phone number legitimate for the fraudster and susceptible to more scamming attempts. If you receive a text from a “5000” number, it is most likely sent from an e-mail. It is recommended to block the sender of a text message by forwarding the text to “7726” which spells “SPAM.” This number works for most major carriers. Your phone may also allow you to block numbers from the “settings” application. Or, simply delete the text...
Last year, the Securities and Exchange Commission (“SEC”) identified a trend in their examinations that investment advisory firms were not adequately disclosing that a conflict of interest existed. In general, the investment advisors may have had compensation related incentives to place clients in the higher-cost mutual fund share classes when lower-cost share classes of the same fund were available. Investment advisors have a fiduciary duty to place your interests ahead of theirs and disclose conflicts of interest. In an effort to correct the situation, the SEC launched the “Mutual Fund Share Class Initiative” which allowed investment advisory firms to voluntarily report a violation of the Investment Advisors Act of 1940 resulting in 79 firms returning $125 million to harmed investors.
The SEC is dedicated to protecting main street investors, but investors must also take steps to protect themselves. I think it’s safe to assume that we are very resourceful when researching medical conditions or making a purchase by consulting with family, friends, and the internet. We would encourage you to check the background of your investment advisor, registered representative, or insurance broker with as much scrutiny. Professionals providing financial products or services should be registered. One way you can review the professional’s background is the investment advisor repository database website at www.iard.com or FINRA broker check at www.brokercheck.finra.org. For insurance brokers, you can check their license with the state insurance commission. A complete listing of each state insurance commission is available at www.naic.org. The professional you are working with may be registered with one or more of the examples listed. We would also encourage you to read the investment professional’s disclosure documents, such as Form ADV or the terms and conditions of the contract, before signing a contract in order to make an informed decision.
Additionally, you may wish to obtain a second opinion from another professional. It’s your retirement, college savings, wedding fund, or rainy-day fund that could be jeopardized unnecessarily. Be sure to ask questions about fees involved with the investment or any compensation the individual may receive from your investment. If you are considering a rollover from an employer sponsored retirement plan, we would recommend asking about the pros and cons of keeping it at your previous employer versus rolling it over into an IRA...
The Dow posted its largest decline of 2019 Wednesday as the bond market signaled a warning of a potential pending recession. With weak economic data coming out of China and Germany, the second and fourth largest economies, respectively, there are worries that we are in the midst of a broad global economic slowdown. As stated in the Wall Street Journal, the good news is that unlike the 1990’s with the Tech boom or the mid 2000’s with a housing boom, the US is not confronted with severe excesses to unwind. As such, any downturn might be mild.
When market volatility picks up, it is reasonable for investors to get antsy about their investments and lose confidence in the market. We believe volatility provides a perfect opportunity to calibrate our investment philosophy and not get sucked into media headlines or brash reactions. Although we identify where we are in economic and market cycles and position portfolios to benefit from these cycles, we do not try to time the market. We are long term investors, not traders. By identifying that we are in the beginning stages of a downward cycle, we are able to make changes in a portfolio to be more defensive and try to safeguard our investments. For example, recently we have taken several steps to shield the portfolios from risks that we currently identify by selling positions, raising cash, and taking a more cautious approach to investing new monies.
Our investment process comes from more of a bottom up approach. Meaning we try to analyze specific companies who can perform well in all market cycles. Instead of trying to predict what will happen in the next week, quarter, or year and basing our investment choices off of a prediction, we try to invest in good companies. When we pick companies, we strive to choose companies that we think of as “recession resistant”. This does not necessarily mean that its stock price will not be negatively impacted during a market sell-off. Our definition of recession resistant means that the companies’ long-term value will not be materially affected and the business will not be forced to change its financial situation or market position during a downturn in the cycle. Quite the contrary, we believe that many of our companies’ competitive positions would become stronger through a recession and are in a position to take market share from competitors...