Unprecedented Times

March 19, 2020

These are times no one has ever experienced. Having been through many crises over the past decades, our investment team is confident we will recover once again. However, the daily and hourly turmoil is certainly testing all of us. Today was a relief to see the S&P 500 ONLY oscillate between plus or minus 2%!

We strongly believe we are experiencing a crisis in confidence, not a systemic financial crisis – central banks are intervening in the markets to stabilize them, and the private banking sector is well-capitalized. Finally, we see more governments using fiscal stimulus to make sure families, and small businesses can survive this intended recession. All discretionary activity has come to a stop to mitigate the spread of the virus. News will get worse in the U.S. as the virus spreads, and we ratchet up testing. No one knows what is next, but we may need to shutter even more of the economy to stop COVID-19.

Besides cash, short-term government bonds, and a few select industries, there has been no place to hide. The Fed is taking monetary measures to “unstick” the market. Still, disorderly price action remains in bonds and stocks as institutional and overextended investors scramble for liquidity/cash to reduce risk. In this extreme market period, we have seen “undifferentiated” selling, when the best quality companies are down significantly because they had previously been strong performers and are liquid. In fixed income, we have also seen credit spreads gap to recession levels in a matter of days, and many funds (including exchange traded funds or ETFs) are trading at record discounts to their net asset values. When there are signs of stability, the markets will rebound, and these pricing dislocations will recover.

The current losses on “paper” from recent highs are ugly, and we own investments in some of the hardest-hit sectors, including Energy, Financials, and Hospitality. However, when we review our portfolios, we like what we own and see many high-quality investments that will emerge healthy from the recession. We have sold a few “lower conviction” holdings to raise cash, and we are looking to replace with great companies that are unusually depressed and will re-emerge from a position of strength. Our investment list is growing, and we believe this be a great buying opportunity for investors with a long-term perspective – possibly short-term.

We will provide more investment details in our quarterly investor letter in a few weeks. In the meantime, we wanted to share some good news “facts” that are being overshadowed by the current amount of pessimism:
  • China has closed its last coronavirus hospital, and there were no new cases in China today.
  • Apple reopens all 42 China stores, and Starbucks opens 90% of its stores.
  • A 79-year-old Italian man with the virus was successfully treated with an experimental drug developed to treat Ebola.
  • Biopharma companies and universities are accelerating their vaccine research, and some are already testing on humans.
  • The Cleveland Clinic has come out with a very accurate test kit that gives results in hours.
  • The numerous random acts of kindness across individuals, corporations, community, and religious organizations.