We’re in another financial crisis. In 1999-2000 it was a valuation of tech stocks bubble; in 2008-2009 it was a financial and banking solvency crisis; and beginning in March 2020 it is a medical/financial crisis where, as with an aggravated human immune system response, our reaction to the pandemic will cause great financial harm.
Market Performance
The first quarter of 2020 was a painful reminder that markets don’t always go up. After a near eleven-year bull market run that began March 9, 2009, the S&P 500 Index plunged 33.9% between the market peak on February 19 to the most recent price bottom on March 23.[1] Over this four-and-a-half-week stretch, we saw two of the worst single-day declines since the Great Depression began in 1929, selling off -9.5% on March 12 and -12.0% on March 16.[2] The COVID-19-related uncertainty led to the swiftest market meltdown on record at 22 days.[3] However, the final returns for the quarter weren’t as bad as one might think, due to the positive market returns running up to the peak and the significant 15.7% rebound off the bottom. The S&P 500 Index ended the quarter down -19.5 percent. The tech-heavy Nasdaq Composite Index was off a comparatively better -13.9% and the blue-chip, 30-stock Dow Jones Industrial Average was down slightly worse at -22.6 percent.[4]
Woodstock makes its own unique blend of sausage. It may not surprise you that each manager has his or her own opinions about the stocks that go into your portfolio. The stocks in your portfolio are drawn from a list of stocks that we collectively agree meet our standards for what constitutes high-quality growth stocks, and we commit to following fundamental developments at these companies closely. This list of companies comprises our Monitor List. We assign a manager to provide research coverage of each Monitor List stock, and as portfolio managers we are all free to draw from the entire list to determine the right holdings for your particular portfolio.
At Woodstock, 85% of our assets under management are in portfolios for which the benchmark is an 80% equity and 20% intermediate bond portfolio. We concentrate our attention on high-quality US equities. The process we go through with every client to assess their comfort with their asset allocation strategy partially involves determining their cash needs over the next twelve to twenty-four months. Does the client have enough liquid resources (cash or cash equivalents) to avoid selling stocks in a down market, if not desired for other reasons? On an individual client basis, it is making sure that liquidity is adequate to avoid making a bad long-term investment decision.
Understanding how safely or precariously one is perched financially is helpful in determining whether to remain calm or panic in a crisis. For those working Americans who expect to receive social security payments at retirement, it is calming to understand the magnitude of the commitment that you are making and will make to yourself under government direction. One example is a husband and wife, both age 45, expecting to receive $2,000 per month at retirement. An insurance company would have to set aside approximately $770,000 to provide the couple with that benefit, as the present value of those delayed payments. You will provide that funding over your working life. It is a substantial achievement.
Relief To our Valued Client:
We hope that this letter finds you safe and in good health during these unprecedented times. Rest assured, all of us at Woodstock Services Company believe that the services we provide to you are essential, and we are committed to continuing to serve you throughout this challenging time.
We want to make sure you are aware of some recent legislation that we feel may be of interest to you.
To our Clients:
First and foremost, we at Woodstock hope you and your family are healthy and safe at home. The Covid-19 pandemic has brought new challenges to many of us. In these uncertain times, our thoughts and sympathies go out to all of those whose lives have been impacted. We are particularly grateful for all the brave men and women who are working on the front lines facing the disease directly.
Our Winter 2020 Quarterly Newsletter was written before Covid-19 became a major issue for the market. We realize market conditions have changed since we wrote the articles, but the sound principles of long-term investing have not changed. Regardless of market conditions, we believe our clients are best served by holding a portfolio of high-quality stocks for the long-term.
One of the great desktop admonitions is “eschew obfuscation”. We interpret that to be a message both to cut needless or unhelpful complexity and to keep it simple. In that spirit, a recent address caught our eye. As described in a December 2019 address by the director of the division of investment management at the SEC[1], the regulatory battlefield includes, as general categories, let alone specific sub-groups: finalized rulings, proposed rulings, exemptive orders, and outreach initiatives.
The S&P 500 Index returned 31.5% in 2019, its best year since 2013, whereas the FTSE All-World Index returned 27.2%, its best year since 2009. The market began 2019 beset by concerns the Fed was tightening monetary policy too aggressively, anticipating additional rate hikes. As the Fed leaned towards incrementally easier policy throughout the year, ultimately cutting interest rates three times, the market went on to make new highs. All eleven sectors of the S&P 500 generated double digit returns, and almost every asset class did well.