Q1 2020 – “Coronavirus Dominates Global Discussion”

April 9, 2020

During these trying times, we are reminded of an old movie called “Mrs. Miniver” that was set in World War II-era London. The sacrifices and challenges the world faced, as seen in the movie, is very reminiscent of what we are experiencing today. Thankfully, more often than not, troubling times bring out the best in people. America and our fellow human beings around the world will show up to fight, endure, and overcome the coronavirus. These are adverse circumstances in which we find ourselves in. No government was prepared for this unfortunate outbreak. Even though we are a democracy with freedom for all, we know 100% observance of shelter-from-home orders is not easy.

However, we must all do our part if we want this outbreak to pass. We believe the recently approved coronavirus stimulus package combined with the Federal Reserve’s ability and willingness to print trillions of dollars should help cushion a longer and steeper downturn. Roughly half the money will benefit individuals directly (checks in the mail and greater unemployment benefits) and indirectly (forgivable loans to small businesses who keep their workers on the payroll). To gain proper perspective, the $2.2 trillion package (if it is all spent) would roughly offset a 10% drop in annual GDP. Will this be enough? No one knows for certain.

The impact on the financial markets has been dramatic. The stock market declined 34% from its peak to its recent trough, making it the third worst decline in the past 45 years. In a flight to safety the ten-year Treasury yield dipped below 0.5%, but corporate bond yields rose sharply due to concerns over rating downgrades, possible bankruptcies and reduced liquidity. The stock market gained back some ground in recent weeks as the economic stimulus bill was passed. Also, the Federal Reserve dropped their lending rate to 0% and pledged trillions for open market purchases. These included investment grade corporate bonds, Treasury bonds, asset and mortgage backed securities, commercial paper, municipal securities, bond ETFs — and they guaranteed the safety of money market funds.

Finally, as part of the stimulus package, the Federal Reserve will provide funds for low interest loans to large corporations in financial distress. These actions greatly improved confidence and liquidity and allowed numerous large corporations to issue a record number of bonds at reasonable interest rates. This is very good news. However, nobody knows the extent of damage to small businesses or the speed at which they will recover, or what percent of these business will recover.

What should we expect in the coming weeks and months? In our earlier communications we suggested a steep but short-lived recession was most likely. We also hinted that no one could predict the stock market bottom but the recovery would be V-shaped and prices would be marked up very quickly. We still expect a full recovery but getting there may take a bit longer.

During this difficult period, it is important to put things in proper perspective. Beating the coronavirus outbreak requires some personal sacrifice, as we are all in this together. Most people in the U.S. will remain healthy, and we expect individuals will resume their normal lives in a matter of months, or up to one year for elderly individuals.

We expect a national lockdown will work and new case growth will slow and eventually peak. This expectation will be reinforced by a clear peak in Europe. The market will then begin a slow but steady rise with reduced volatility.

Our investment strategy with your money is to gradually buy more shares of great companies on down days. During any period of weakness, we will also upgrade the quality of existing holdings when it makes sense to do so. We want no impediments to the upside when the recovery takes hold. We will continue to research each company we own to verify its safety and ability to pay dividends, if needed.

We welcome your questions and comments and we will continue to keep you apprised of our thoughts in future communications as needed.

KCM Portfolio Management Team