News - Longwave Financial

As summer quickly turns to fall, this is a good time to reflect on what was a tumultuous season and consider what comes next. In this newsletter for Fall 2020, we’d like to share with you our latest thinking and planned portfolio changes. Wherever this message finds you, I hope you and those you love are well and your life is starting to feel like it’s getting back to normal.

This summer was unlike any we have seen in our lifetimes. The early part of this year was especially scary when a lot of people felt like our economy was on the brink of collapse. Unlike the recessions in 2001 and 2008 when it felt like our financial lives were at risk, this year, our actual lives were at risk! We personally know dozens of people that had COVID and many had a tough go of it. There were also friends that we lost way too early and we will continue to think about them for years to come.

Today, with kids going back to school, it feels like we have finally stopped holding our collective breath. Not because we have a cure for COVID but because we are learning to live with COVID. My kids have now started to attend school on a part-time and socially distanced basis. I have been really impressed by the precautions the schools have taken to keep the children at a distance from each other. So far, so good. There are no perfect solutions but they will help avoid the large gatherings that have fueled major outbreaks this year. Of course, not every school district will implement these policies but at least the tools will exist. In more positive news, vulnerable people continue to socially distance. Rapid testing that has recently been developed will help slow down a possible second wave. Finally, the medical community has gotten better at identifying and treating those with the most severe symptoms. We are seeing this in Europe this September where cases have spiked but mortality has been stable.

That’s not to say we’re out of the woods. Historically speaking, pandemics and their economic consequences tend to last years (not weeks, as some were claiming in the spring). We wonder how long it will be before the average grandparent is comfortable going to a live baseball game or a person with a pre-existing condition will be able to see a movie. Even with a possible vaccine on the horizon, it will be at least a year and maybe more before things look and feel normal again.

At Longwave, we aim to do two things: protect our clients’ financial future from risk while also helping our clients participate in the long-term upside on the stock market. This year, it’s been a challenge to do both at the same time.

In the spring, as we looked at the risks, we felt that the pandemic would be with us for some time and that the economy would struggle. We also expected the stock market would continue to have swings both up and down throughout the year. Today, we have seen the first two expectations come true: we’re still seeing almost 1 million new unemployment claims each week. Everyday hundreds of Americans are still losing their lives due to COVID.

What we did not expect however is the complete lack of volatility since April. Through the end of August, the market had gone only up. Over the summer we speculated that the reason this was happening was due to extraordinary government stimulus and the fact that the worst fears of the crisis did not come true. Although the economy today is in similar shape as 2008, Americans are still spending and investing, in part because of this government cash. This year, a lot of that cash found its way into the stock market.

With the stock market climbing and climbing, it’s not to say that people are investing in bad companies. It’s just that people may be overpaying for good ones. A good example is Apple which makes my mobile phone and is a very successful and profitable company. Over the last year, Apple actually improved their profitability by 6% which is terrific. However, the stock has been up over 157% in a year. This appreciation means that investors are expecting much more upside in Apple than they were a year ago. Yet the company is still basically the same, and so is my phone.

History has shown that when stocks, bonds, gold and real estate all go up at the same time, there is often a correction. However, because of government support, that correction may not happen for a long time or it could happen tomorrow. Because of this uncertainty, our aim is to get portfolios fully invested.

So far in September uncertainty about the near future is finally starting to show up in stock market volatility. We are hoping to take advantage of this volatility by investing the small bit of cash some portfolios have on the sidelines back into stocks. However, we are also well aware that today stocks may be ‘expensive’ due to government support. This is a challenge, but we feel we have a solution. We have selected a mutual fund that screens for companies with the highest profitability. By utilizing this fund, if the market struggles in 2021, we seek to avoid the more speculative or economically sensitive companies. Additionally, our plan is to shift cash into this fund over a 6 month period to further avoid the risk of bad timing.

But what about the election? During the 2000 Bush-Gore election, we had the Florida recounts and the stock market fell 5%. This election could be even more contentious given that mail in-balloting could cause uncertainty long past election day. Should there be a significant market drop, we will consider accelerating our 6 month reinvestment plan.

So that’s our perspective at this stage. We don’t think we are out of the woods yet but we are hopeful and resilient. People want to travel again, see their grandkids, and get back with their colleagues. People want to start celebrating milestones like weddings and graduations again. I want to take Meg dancing and my kids to Disney World. We are still all waiting to get our lives back but if we can close our eyes, and look beyond the next year or two, I know that we will be OK. Please continue to stay safe and strong.

Why We Remain Defensive

“*Offense sells tickets. Defense wins championships.”*
Legendary football coach Paul “Bear” Bryant

I sometimes joke that I should have named my kids Fomo and Yolo. If you don’t have a tween or slang dictionary nearby, FOMO stands for fear of missing out and YOLO stands for you only live once.

For folks keeping an eye on the stock market, there has a been a lot of FOMO. We have seen a powerful rebound in stocks over the past several months off their March lows. While it’s certainly a relief to see portfolios recover, many of the clients we speak to are frankly baffled. How is it possible that there is a party on Wall Street while there is so much pain on Main Street? It’s been a part of every conversation we have had with clients and the topic of recent articles by many professional investors.

One possible explanation for the inconsistency has been that the stock market is forward looking and tends to anticipate economic rebounds before they actually occur. Today, millions of people have already gone back to work and New York, perhaps as a bellwether, has nearly eliminated covid deaths. The market may also be rising on the expectation an early COVID vaccine will be followed by a quick rebound to pre-pandemic levels. After all, unlike the Great Recession, this recession was not caused by an economic shock.

Another theory is that the stimulus unleashed on the economy, to date at least $3 trillion, is propping up both businesses and the stock market. There is certainly something to this. By avoiding mass layoffs and putting money into people’s pockets for spending, the stimulus has allowed us to avoid a true depression scenario. The possibility of even more stimulus from Washington in 2020 means that the band could play on for even longer.

While it’s hard to resist FOMO, we are doing our best. As we’ve said in previous letters, it seems like the cost of the coronavirus lockdown has not been fully reckoned yet.

One risk to the best-case Wall Street scenario is the timing and efficacy of a vaccine. According to the World Health Organization (WHO) there are currently 21 candidate vaccines in various states of clinical trial, which is great news. Dr. Anthony Fauci, the U.S. government’s top infectious disease expert, cautions however that a COVID-19 vaccine may only become available for widespread adoption, at best, towards the end of this year.

Regardless of when we see a vaccine, with cases of coronavirus still increasing in the US and many parts of the world, we will continue to be under some form of restriction, voluntary or involuntary, that will limit our behavior and spending patterns. It’s hard to say how much of a drag this will be on the economy but it won’t be insignificant.

For Wall Street to continue to be right on the fundamentals and justify this stock market, we would have to be able to return to 100% of our old economy rather quickly. For that to happen, industries hit hardest by the pandemic would have to experience an almost miraculous and accelerated rebound. Pre-COVID, the leisure, retail and travel industries employed millions of Americans and depended on spending not just by domestic customers but overseas visitors as well. Achieving a vaccine this year probably still means an unemployment hangover that lasts into 2021. It seems unlikely that we get back to a 100% economy without these industries (not to mention many others) getting their pre-Covid health back.

As we see it, the stock market today is supported by improving fundamentals, vaccine optimism and government cash. Nothing to sneeze at but as Fed Governor Lael Brainard said this week, “a thick fog of uncertainty still surrounds us, and downside risks predominate.” If it ends up that we are positioned for a recession that doesn’t fully materialize, we may have missed out on some gains but protected our foundation. However, we believe the potential risk associated with this current, ongoing and still unfolding threat supports Longwave’s current cautious positioning.

So we are choosing to sit tight and make the most of this summer lull. Human contact is critical to our physical and mental health too. Personally, we are enjoying opening up our social circle to family and select friends. Small BBQ’s and one-on-one play dates are back on the calendar. We hope that your focus continues to be not on Wall Street or Main Street but your street. After all…YOLO.

The Changing of the Seasons: Longwave’s Perspective on The Economy, The Market & Portfolios

Halftime Thoughts from Longwave

Why We Remain Defensive