By Mitchell Anthony

April 10, 2020

The S&P500 fell 19.6% in Q1 2020 compared to a loss of 11.1% for MACM’s Dynamic Growth Non-Qualified portfolio.

The US Economy has deflated after orders from Washington and the States as the coronavirus rips its way across America and the globe. The US economy was unplugged just as stronger growth was beginning to emerge after a long period of modest growth since the great recession.  Indeed pre-virus economic trends in the US economy were quite good.  Housing was experiencing some of the best data it had seen in many quarters. Consumer spending on housing, digital devices, and experiences was accelerating. Energy prices were stable and the Fed’s balance sheet was declining. Employment was at all-time highs and mortgage delinquencies at all-time lows. Consumer confidence was near all-time highs and consumer balance sheets were strong. The banking system was solid and corporate America had healthy balance sheets. There was no overcapacity in the economy and asset prices were higher across almost all asset classes. So in other words a very bad time opportunistically to have shut down the economy.

However the Fed has made it clear that good times will return and has pledged to print money and use whatever tools are necessary to inflate our way out of this crisis. The crisis is real and the US economy is now in a freefall. Consumer services and retail are virtually shut down. There are more areas of the economy that are locked up than are open for business. The businesses that are shut down are generally operating at partial capacity and low productivity. Unfortunately the consumption engines of our economy have been turned off and all current momentum lost.

We have had to ask ourselves as investors to assess things that we have no previous experience in doing and that involves forecasting when the fear of the virus will be manageable. Will it only be achieved after a vaccine has been produced or will somehow the virus become extinct without vaccine and within the next 6 to 12 months…

Given all of this it was not surprising to see the equity market investor panic and as a result equity markets fell 35% within a few weeks of the first ordered lockdown.  Equities across the globe encountered a sudden meltdown unseen before as recession was discounted into prices of all assets.  The hardest hit areas of the equity market involved consumer services, retail, and entertainment with 40 to 70% declines as bankruptcy became a real threat to many of these industries and small businesses. Timely businesses fell for a bit but then quickly recovered and stabilized as whispers of fed intervention began to work through the marketplace. There was a sudden rally in treasuries that was briefly interrupted by liquidity problems until the Fed stepped in with bold actions. There was stability in gold but surprisingly no rally despite tremendous fear in the marketplace.

The central bank and the treasury quickly came to the rescue before severe damage was done in the financial markets or to the banking system. Fed funds was cut to zero almost immediately and credit facilities to provide liquidity to fear driven markets were set up at lightning speed. Another round of quantitative easing began in all forms of fixed income with over 4 trillion of planned purchases anticipated by the central bank.  Congress passed a 2 trillion fiscal program aimed at providing loans and grants for payroll expenses to small businesses, one-time cash for individuals, enhanced unemployment benefits, tax deferrals and tax cuts and corporate relief, lending to distressed industries and support to hospitals and healthcare providers and states and local governments.

After investors caught their breath and had a chance to assess the actions of the central bank and U.S. Treasury, a rally in equities began.  This rally was a product of the belief that the Fed was going to backstop the economy and provide whatever relief was needed to make sure this crisis does not critically injure consumers or corporate America.  The Fed made it clear that he was going to inflate our way out of this crisis and print whatever money was needed to backstop the problems.  The Fed even did an end around providing capital to highly distressed industries that Congress would not provide without strings. Given this unprecedented action equity markets have retraced almost half of their correction despite the unknowns that remain about the damage that will be incurred economically from this shut down.

It is clear that we are in a recession and the globe will be in a recession through the end of this year.  It is also clear that this era of highly valued assets will continue and that anyone not owning real estate or stocks will not ride the train that the Fed is going to fuel with printed money that will take us out of this crisis. The path forward for the economy in the near term is still unknown, as well as whether we will get back to work in July of this year or in January of 2021.  Retail and consumer services are unlikely to restart in any significant manner pre-vaccine.  Construction and manufacturing are likely to restart with cautious and measured applications in a pre-vaccine world.  We see negative growth of 20 to 40% for 2020 as most of the economy will be shut down or unproductive.  2021, however is an entirely different story.  The damage to business is still unknown and the speed of the recovery and return to growth will be dependent upon the extent of the damage that is done and the Fed’s ability to backstop it all.

We are optimistic that the Fed will achieve his goal but it will be done with a substantial price that will be paid by anyone not able to ride the train.

We have trimmed our 50% cash position to 35% as we are cautiously optimistic and look to return to a fully invested position over the next few months if things play out as we foresee today.