At Longwave, we have no doubt that the world will emerge from the Covid-19 pandemic astronger and better society. Today, there are green shoots pointing to recovery – ‘the curve’ has been flattened and we are now starting to relax social lockdowns. However, we share the feelings of many of you that there are consequences to the coronavirus pandemic that have not yet been factored in or dealt with.

While as a society we are already thinking about recovery, the health crisis of this pandemic must still be tackled. Beyond that, we will have to deal with the economic consequence of the global effort to contain the virus.

From a health perspective, the good news is Covid-19 does not appear to be nearly as severe as the Spanish Flu. Treatments are in the pipeline and care for the most severe cases has improved.  Historically however, pandemics tend to last 18 months to 2 years and we simply do not know if the virus will rebound as soon as quarantine ends or flu season begins.  To truly feel safe we will need to find a vaccine or achieve ‘population level immunity’ but we simply don’t know when those will occur.

Then there is the record-breaking economic cost of the pandemic.  According to the Chicago School of Business, through April alone, 30 million jobs had been shed and spending in the US had fallen by 30%.  Some of those jobs could quickly return but it’s also likely many people will continue to self-quarantine even once government restrictions are lifted.  Already, some company closures are becoming permanent. Leisure, travel and entertainment industries could be impacted for months and maybe longer. The loss of income and revenue will mean that consumers, companies and governments will not be able to return to their previous levels of spending right away.  

While your portfolio is a key aspect of your financial life, we all know we can’t control the stock market.  As we’ve often discussed, the most important aspect of your financial health is living within your means.  This pandemic taught us how to quarantine ourselves, but for perhaps the next 6 to 12 months, we should also think about a quarantine for our money. Here are some suggestions:Recall that after the 2008 recession, it took 6 years just to get back the jobs that were lost. That recession lasted 18 months – we are only in month three of this event. While no one knows what might happen next, based on that comparison, Longwave believes that the short term holds more downside risk than upside potential. We are therefore positioned more defensively by increasing the cash allocation in client portfolios. Also, we continue to over-allocate to underpriced assets, known as ‘value’ stocks, which have been shown to outperform overpriced assets over time.

• If you are drawing retirement income from your portfolio, we suggest you take less if you can, to preserve assets for future investment and recovery.  
• If you are contemplating a large purchase, continue to focus on your accumulation goal and building your savings.  
• If you have a little more time on your hands, now may be a good time to start creating a household budget. Start by looking at your last 12 months of bank statements and use a spreadsheet to write down each month’s total spending.  Compare what you are spending now each month to what you were spending in 2019.  Set a monthly spending goal for yourself for the rest of the year and track your progress toward that goal on a weekly basis.
• If you have not taken a pay cut, this could be a great opportunity to add to savings and investment accounts.
• If you have lost wages, it’s more important than ever to be conscious of core versus discretionary spending.

As we contemplate being a bit more budget conscious, our time under quarantine will show us the way.  Today people are making changes to their spending that would have seemed impossible a few months ago. We’ve discovered the joy of meal prep with the family as an alternative to eating out 3 or 4 times a week.  Walks in the park have replaced more elaborate weekend entertainment. Volunteering has replaced late hours at work. The concept of stillness has begun to be appreciated and practiced in our society in a way that could not have been accomplished without this seismic disruption.

At Longwave, although we are cautious about the next 18 months, we are long-term optimists. We believe in human ingenuity, the power of capitalism and entrepreneurism to find ever more efficient ways of organizing the economy.  In the last century, this resilience has propelled the US economy like no other and we expect to continue on this historical arc, once we’ve recovered our health and financial well-being as a nation. 

In August 1974, a French street artist stepped on to a high wire strung illegally between the two towers of the World Trade Center.   New Yorkers looked up in awe as Philippe Petit appeared to dance back and forth across the wire for 30 minutes, a quarter mile up in the air.    

In 2008, a curious interviewer for the New York Post asked Petit “Is it true wire walkers aren’t supposed to look down?”   Surprisingly he answered: “It’s a legend… it doesn’t bother me. But, it is treacherous on a high wire to change your focus point and suddenly look down.”

For the last 10 years or so, investors have been on solid ground.  Apart from a few brief moments of volatility, the stock market had gone nearly straight up, supported by low interest rates and low taxes.  

Now, with the coronavirus coming out of nowhere to seize up the world economy, the ground has shifted.   In the last few weeks, world stock markets have experienced unprecedented swoons. If you look down suddenly – vertigo!   

For the past few years we have been observing that we are likely overdue for a recession given that they tend to come around every 7-9 years.   This has helped mitigate the shock of the recent market decline. However, as we sit at home watching the news, and in a few days open our March statements, we will again be tempted to “change our focus point and suddenly look down”.  Based on our many conversations with you, we know you are fighting to keep your balance and resist that temptation.

In moments like this, when we are passing over a particularly scary bit of ground, how do we avoid the temptation of looking down suddenly?   It’s deploying the good habits that experience has taught us from past crisis. Your financial outlook is not based on how your portfolio performs over one month, quarter or even year.  As we said in our note earlier this month, financial planning exists in order to defend against the “what ifs” caused by unpredictable, unprecedented events.  Your probability of success and the achievement of your goals is based on staying consistent with your savings, investment plan and spending.  

Yet, as Mr. Petit said, it’s a myth that we should not look down altogether.  To be prepared for the turbulence likely still ahead we (and the White House) need to be realistic.  This week, there seems to be a light at the end of the tunnel with the coronavirus as we hear news reports of significantly more testing and possibly new drug therapies to protect the people most at risk.   However, there are 2^nd and 3^rd order consequences to this event that will surely follow.  Business has ground to a halt, unemployment will spike, bills will go unpaid, tax revenue will fall.   These are the things we can expect to hear about for the next 6-12 months even after the immediate challenge of the coronavirus subsides.  

What is Longwave doing?

Honoring the principal of staying the course, we don’t take portfolio changes lightly.  However, volatility does present opportunity. First, we are taking advantage of the market drop to sell out of legacy portfolio positions in a tax efficient way.  This will help position Longwave portfolios be more consistent, and nimble to best participate in the market when it improves. To do this we are keeping an eye on potential market drops to rebalance back into stocks.  During previous recessions we also saw temporary upward spikes as occurred last week. We are also watching for these as potential opportunities to get defensive while we dig in for the turbulence ahead. You can expect to see trade confirmations and the corresponding activity in your accounts.

What can you do? 

Many of you are saying that staying at home is having the unexpected effect of helping your bottom line and have been asking about reducing your monthly withdrawal or increasing your month contributions.  With travel and other lifestyle expenses out of the equation for the time being, you’re likely finding yourself with extra funds at month end and we can take advantage of the increase savings/decreased spending by adjusting your monthly distributions.  This allows us to stretch out your savings for longer which is a lemons into lemonade benefit we’re happy to take advantage of.

While we know that this will pass, this knowledge doesn’t always help in the moment.  What does help is remembering that we’re all the same people we were a month ago and will be a month from now, except that we’re now drawing on our reserves of patience, kindness and community.  While we don’t know when, we know that recovery is inevitable.  One day soon, we’ll go to our favorite restaurant again, book our next fabulous vacation and most importantly, return to our daily lives and habits. Longwave is here for you and will continue to be.