Q1 2020 Firm
Update & Commentary

At the beginning of 2020, we discussed a theme of “cautious optimism” as we headed into the new year. Markets were at all-time highs as stocks and bonds both rallied sharply to end Q4 2019. However, at that time, economic growth was notably slowing as GDP fell from 3.1 to 2.1, although still progressing along at a pace to support record expansion. Consumer sentiment and spending remained strong. We noted that 2020, an election year, could bring considerable political uncertainty surrounding various fiscal and social policies. How would investment markets react to the speculation of policy changes? How much longer will the bull market and expansion continue? If volatility strikes, will it be a result of geopolitical tensions? Those are the questions that were at the forefront of our investment committee discussions, and the driving catalysts to shifting more toward value and conservative sectors to start the year. Additionally, we often discuss “tail risk” events. In general, investment tail risk is a market event occurring that is far outside a normal distribution curve of possible outcomes. What no one anticipated as an imminent threat was a global pandemic. Q1 2020 is one we will never forget, as Covid-19 has caused volatility and panic of historic proportions. This quarter more than ever, has reinforced that diligent financial planning and proper diversification are critical long-term components to help mitigate risk, something we strive to provide for all our clients.

While we did not have the exact answers to the questions above, nobody could have, we did make a point to put our theme of “cautious optimism” to practice the last six consecutive quarters. We believe by doing so we were able to reduce exposure in riskier assets from realizing additional losses. Our team has been diligent in trimming profits with sensitivity to tax, rotating from growth to value sectors, shortening duration on fixed income, and adding non-correlated alternative assets to portfolios. What we are dealing with now is an economy that looks significantly different than three months ago. Unemployment is going to reach record levels, industrial production has all but frozen, and consumer confidence is going to dive. Markets will inevitably go up and down over time, but in the long-run, we believe the trend is upward growth supported by a growing global workforce, technological advances, and effective central bank policies. At CHPW, we know that in markets where wealth preservation is the goal, it is crucial not to overreact. We advise and advocate to be prudent and to thoughtfully rebalance toward quality assets when the opportunity arises.

At CHPW, we build thoughtful and customized portfolios to meet each client’s individual objectives and risk tolerances, and throughout the recent turmoil, we have made tactical moves to increase liquidity. In equities, we trimmed positions that we believe will take the longest to recover, including allocations to developed European equity, U.S. small-cap and micro-cap equities, and energy. With a portion of that cash, we increased our allocation to Gold as a safe haven investment. In fixed income, we circulated a piece recently about our firm’s methodology on managing individual bond portfolios. A fixed income portfolio is designed to provide a predictable income stream with visibility into risk and duration. In addition to owning individual bonds, we have taken action for several months in reducing duration (interest rate risk) to focus on the short end of the yield curve. Finally, we have had many conversations with clients about alternative assets and the vital role they may play in a diversified portfolio, especially in a time like this. As you see allocations to commodities, real estate, and private funds in your portfolio, know that these positions may help combat volatility, and add some additional income streams.

Moving ahead, we believe there will be continued volatility through Q2 2020. Earning reports will be broadly down, and will likely contain muted guidance on future earnings. Economic numbers such as jobs reports, unemployment, consumer confidence, and GDP will be substantially lower than previous reports. We are officially going to be in bear market territory and potentially a recession for the first time since the 08-09 financial crisis. Typically, the beginning of a bear market will work through phases of panic selling, followed by buying “the dip,” and then a third segment of a prolonged period of choppy downward trading. We believe we have reached a point here in this crisis where panic selling seems to have settled down, and companies and industries built to prevail in this type of environment are establishing themselves. Equities such as consumer products, technology, e-commerce, delivery services, cloud computing and biotech are areas we are focused on. On the contrary, we are seeing sectors that will take much longer to recover such as energy. This week we saw the first bankruptcy in this sector, with more likely to come. In today’s market, we are seeing dislocation that is providing opportunities not only in equities but in fixed income especially. Bond prices are much lower than they were the past several months due to the downward selling pressure from investors selling bond funds. This has opened the door to higher-yielding investment opportunities for owners of individual bonds. We have been capitalizing on this and broadly adding to clients’ bond holdings.

This is clearly a tumultuous time for our nation, but we won’t let that slow down our commitment to our clients. Whether it is watching the news, checking social media, or having affected family members and friends, there is plenty to create fear and emotion. We firmly believe that together we will endure the current crisis and have a more resilient economy and social structure because of it. This resolve is a pillar of the American way. We welcome the spring season and believe we will soon begin to see the light at the end of a long tunnel. This will not be easy, and we at CHPW are here for you to discuss your investment portfolios, our economic outlook, your financial plan, or just to listen in general. Please do not hesitate to reach out for anything. Stay safe and be well.

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This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services.  Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice. There is a risk of loss of principal when investing in securities.   Bonds and bond funds are subject to credit risk, default risk, and interest rate risk and may decline in value as interest rates rise.

Securities and Variable Insurance Products offered through National Securities Corporation www.nationalsecurities.com , Member FINRA/SIPC. www.finra.org / www.sipc.com Advisory services provided through National Asset Management, Inc. (NAM)http://namadvisorguide.com/, a SEC Registered Investment Advisor. Insurance products offered through National Insurance Corporation (NIC). Accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments® Company. Clapboard Hill Private Wealth is not an affiliate of NSC, NAM, NIC or NFS