The Mid Year Update
We can now all say that we’ve never seen anything like this before…from our personal, business and political experiences of the past. In the process, we are seeing a massive paradigm shift that is accelerating new trends with enormous impact and change on our daily lives and investments. It is amazing how much we have adjusted in a short period of time, but there is hope for light at the end of the tunnel. Here are some of the major trends being caused by the Coronavirus pandemic:
- A remote work from home trend that will increase the number of companies that allow employees to work online from their homes.
- In the process, commercial real estate will be redesigned as costly office space needs will inevitably change.
- Video conferencing and virtual meetings will replace office meetings and some corporate travel.
- Online shopping has accelerated, and retail stores will reduce their need for shopping malls and strip centers.
- Airlines will rethink their business models as air travel has been cut way back.
- Health care is changing and adapting to new ways they treat patients, the FDA’s approval process for new drugs, remote health care, etc.
- Entertainment and sporting events are creating new ways to get to their audience.
- Restaurants are rethinking how to survive during social distancing requirements and delivering food to their customers.
- New companies are being developed to take advantage of all these changes.
Every business is reshaping and rethinking their business model. They are all trying to be compliant with new regulations imposed by states and local governments and our U.S. Government, while trying to be profitable, compassionate and customer centric.
The U.S. Treasury, the Federal Reserve and Congress are infusing liquidity into the markets at breakneck speeds to keep the economy afloat while our scientific community works on advanced treatments and a vaccine to combat the spread of the virus. The investment markets are forward looking, and it is our opinion that the markets take all this into consideration and are betting on a brighter future in the economy. The stock market seems to believe that we are seeing a short technical recession with a recovery in the first quarter of 2021. There is a binary ending to all of this, so there are many perspectives being communicated by our news agencies and politicians.
As an example, Warren Buffett’s Berkshire Hathaway has increased its cash holding to a record $137 Billion as of March 2020 (1), which some refer to this as Buffett’s pandemic piggy bank. Common sense says that cash is not a good investment when interest rates are nearly zero, and cash is better strategically invested over the long-term. But there are a lot of unknowns today with the Coronavirus pandemic onslaught and it is always a good idea to have a reserve, no matter how large or small you are. There are more risks today simply due to the many economic unknowns, although the U.S. Treasury, the Federal Reserve and Congress have pledged approximately $4.2 Trillion (2) to create as much liquidity in the market as necessary…and another stimulus package is in the wings. So why is Berkshire Hathaway holding so much cash? Simply, there is a flight-to-safety and they are prepared for future opportunities. Over the years, Berkshire Hathaway has often bought companies when there was fear in the markets, as it is believed to be the best time to invest.
According to the U.S. Government’s National Bureau of Economic Research (3), we are in a recession that started around the first of March 2020. There is a clear distinction that in the past, economic contractions are what caused past recessions. This recession was caused by a total shutdown of the U.S. economy, which is truly a natural disaster type of anomaly. The U.S. Government has never shut down the economy like it did, but nonetheless it has caused some concerns and fears. This event has caused investors to question the risk in their portfolios. After the 2008 to 2009 Great Recession, people’s risk tolerances have been greatly diminished, and there is a great migration or a Flight-to-Safety going on today, as investor’s appetite for risk is worn down.
It is like being on a flight across the country when the pilot comes on the PA system and says, “ladies and gentlemen, we have a mechanical problem with one of our engines and we have had to shut it down”. Can you imagine what the passengers are feeling? When the government and the individual states cut off the economy and asked Americans to stay home for a month and more, that pretty much shut off one the economic engines of our economy. There are many businesses that shut down and, in the process, created massive “temporary” unemployment, in our opinion. Our economy prior to the virus pandemic was nothing like the 2008 to 2009 Great Recession, but it will still take time to get back to normal.
All the money that is being printed and sent to individuals, businesses and municipalities to boost the economy does potentially have some long-term consequences. As our national debt has significantly increased, so does the prospect for devaluation of our currency, and even though there is currently no inflation, that could change in two to three years due to our rising national debt. But for now, all the indicators we look at show an extended low interest rate environment, no current inflationary worries, good corporate earnings and many companies are rethinking their businesses in the wake of our new online world and driving new revenue.
The ”Flight-To-Quality” has always been the hallmark of the Schmolke Investment Team’s core strategy. We customize all our client’s portfolios to your risk tolerance, while utilizing the appropriate risk/reward scenarios for the long-term. Also, with the addition of Brian Schmolke’s new CERTIFIED FINANCIAL PLANNER™ (CFP®) designation, we are upping our game and are able to offer comprehensive planning. You’re getting decades of experience and knowledge in a time where you need it most. After the dust settles, Experience Matters and now with Brian’s CFP® experience, we are truly grateful and excited about what we can do for you and your family! We appreciate your business and thank you for referring us to someone you know who needs our help. Call us today at (318) 448-3201 to learn more or if we can address any questions.
Brian Schmolke, CFP®
Bart Schmolke
The Schmolke Investment Team