Good Morning,

As the quarter has come to a close, we would like to lay out some facts and thoughts as we navigate this crisis.

What We Know

Unemployment Rate¹
4.4% (4/3/20)

Jobless Claims²
3/14/20 – 282,000
3/21/20 – 3,307,000
3/28/20 – 6,648,000

Real Gross Domestic Product³
2.1% – 10-30% contraction expected on April 30^th

Coronavirus in the US⁴
9,654 deaths (4/6/20)
337,971 confirmed cases (4/6/20)

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Forward-Looking

I’ll start with the obvious… there is a lot of uncertainty in front of us. That is not a word we like to hear. Even though we have passed the initial shock and trepidation of the COVID-19 virus being present in our lives, the news over the next few days/weeks will likely get worse. For those of you that have been, or know someone who has been, directly affected by this virus, please know we are continually praying for you and your family.

While the breadth of the virus’ impact on the global economy remains to be seen, there are several market fundamentals currently at play.

• There will be a liquidity crisis in the private sector. There are businesses with a combination of too little cash and limited access to debt. They will be forced to shut down. The question is how long this will go on and how many small businesses will we lose.

• Is the stimulus enough and how much will it actually benefit the economy in the long run? The Federal Reserve did what they needed to do. They acted quickly and said take whatever you need. How they manage and unwind their balance sheet in the long term is a major question mark. Their actions will send ripples throughout the global economy.

• Oil production and supply – Oil prices took a major hit two weeks ago when Saudi Arabia, member of OPEC+, indicated they were going to ramp up oil production. Basic supply and demand economics took effect meaning the more you have of anything, the cheaper it gets. This is great for the consumer at the pump, but energy companies employ a lot of people and contribute to GDP. Low oil prices could lead to mergers and acquisitions and layoffs even without the virus.

What should your investment portfolio look like?

In our opinion, the companies you own must have ample cash and the ability to easily access debt in the short term. They should also have a product or service that will remain somewhat relevant throughout this period of uncertainty. As far as public companies go, this translates to large cap companies that have been through this before and a management team with experience. Speaking broadly, if you look at the worst performing companies over the last 12 months, small and mid-cap’s have had the poorest price performance within the equity space (see equity style chart below). This is because they tend to have less access to resources to keep them afloat and would be considered the highest risk within a basic asset allocation. In layman’s terms, that is what you sell first in a crisis.

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Many of you have been asking about the travel industry and if we should we be buying airlines, cruise lines, theme parks, casinos, etc. We do not disagree with this prospect. However, we are in the early innings and the uncertainty is too high. Don’t buy something just because the it’s down 60%. Do the work, check the fundamentals.

Stay Safe!

1.https://fred.stlouisfed.org/series/UNRATE
2.https://fred.stlouisfed.org/series/ICSA
3.https://fred.stlouisfed.org/series/A191RL1Q225SBEA
4.https://coronavirus.jhu.edu/map.html
5.https://research.stlouisfed.org/resources/covid-19/preliminary/daily-data-projections
6.https://www.morningstar.com/