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Q2 2020 Quarterly Letter – Managing Through The Uncertainty

Q2 2020 Quarterly Letter – Managing Through the Uncertainty

We are living in times of unprecedented uncertainty caused by the COVID-19 pandemic. How and when the pandemic ends, allowing us to get back to our typical routines, is still completely unknown. There are lots of opinions and very few hard facts. Months into this crisis we are only slowly gaining knowledge in trading off reopening with containment strategies. Slowly we make progress on testing, treatments, and vaccines. Uncertainty is the only certainty.

Humans generally don’t deal well with uncertainty. Our brains are wired to make up theories or cling to any plausible explanation for things we don’t know or understand. Instead of engaging executive function, we use emotions and feelings to make decisions. This can be dangerous when making investment decisions.

During difficult times like these, we all need a guide, someone to help us discern facts from feelings. We need to make decisions based on what we know and not on wishful thinking. I’ve often made the analogy that having a financial advisor is like using a Mount Everest guide. A guide helps us make decisions based on facts, weigh risks appropriately, and avoid being misdirected by emotions. The role of the guide is to keep us safe and get us to our destination.

During the Onset of COVID-19

Initial awareness of the COVID-19 virus was slow. In areas where the infection rate was low, the threat may not have seemed serious. Although the country was not prepared for containment and testing on the scale needed, fortunately the government is one step ahead of the virus on the economic side. Massive economic stimulus was applied early, reapplied when needed, and government is ready to apply more aid.

The initial impact of the virus was a sharp decline in the economic activity, employment, and the markets. The markets began to rebound first in response to stimulus actions taken by the Federal Reserve and Congress. Employment rebounded quickly from its low of 21 million lost jobs, however the unemployment rate remains extremely high at 11%. Economic growth is a lagging indicator and it will be a while before we are likely to see improvement.

To help our clients manage the uncertainty, RegentAtlantic developed a plan to help guide our clients through the crisis and a pandemic scorecard to determine where we are in the recovery.

Our Plan for Navigating the COVID-19 Crisis

Our plan for dealing with the current market environment has four steps:

  1. Realign portfolios to emphasize high-quality growth companies and
    longer duration bonds. These should perform better or reduce risk in
    rough markets. This step was enacted during the past quarter.
  2. Exercise patience and attention to detail. This is where we are now.
    We have positioned portfolios conservatively in the current environment.
  3. Rebalance portfolios back to target. We are waiting on this step until we see risk decline or return prospects increase.
  4. Monitor and adjust. This is an ongoing process to identify potential
    opportunities or reduce risk. Our investment committee has identified
    several investment opportunities depending on the course the market
    takes.

Portfolio Realignment

We chose to emphasize high-quality growth companies because we believed their businesses were more likely to be able to weather the pandemic better. Many other investors had the same belief in high quality growth companies. The five largest stocks in the S&P 500 (Microsoft, Apple, Amazon, Google and Facebook) are all high-quality growth companies. As investors clamored for these stocks to keep them safe, they bid up the price of these stocks 24% over the first half of the year.

This rush to the safety of these stocks has created a huge disparity between these five stocks and most of the rest of the global stock markets. The equal weighted S&P 500 index, which weights all stocks equally and is a measure of how the average stock in the index has done, is down 10.7% on the year. US small stocks are down 13%, International large stocks are down 11%, Emerging Markets are negative 10%. This is an enormous difference between the largest five stocks and just about everything else.

Imagine that we are mountain climbers ready to make our ascent on Everest. There are 10 Sherpas there to help get our gear up the mountain. One of those 10 Sherpas is clearly the strongest, has the best track record and in the best shape to get the gear to the next station. Everyone in our expedition sees this star Sherpa and gives him their gear to take to the top. Now this Sherpa is carrying three times the amount of gear as the other nine Sherpas. Would you still think he is your best choice to get your gear to the top? What if you split your gear up among multiple Sherpas, wouldn’t that be a better strategy?

Indeed, this is where we find ourselves in this market. While we are happy to have some of our allocation in U.S. growth stocks, we don’t have all of our portfolio there. We like the resilience of their businesses during the pandemic and we are concerned the amount of money flowing into their shares.

We believe, during periods of uncertainty, that the best thing we can do is diversify, make cool unemotional decisions, and be humble enough to acknowledge what we don’t know.

We wish you a safe summer as we journey through the COVID-19 crisis together. Please contact your wealth advisor or me if you have any questions or concerns.

Best regards,
Christopher Cordaro

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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