Investing Rationally in a Chaotic and Irrational Market

Greetings from Parrish Capital.  We pray that your families are well and staying safe in the current health crisis brought on by the Covid-19 virus.  As your steward to reaching your financial goals, we at Parrish Capital are committed to seeing you through these tumultuous times.  We wanted to let you know that we are on the job! 

The sudden halt in economic activity due to the Covid-19 virus by all means is an outlier and exogenous event which has caused great uncertainty in the near-term fundamentals that underlie the premise of all that we value.  One thing is for sure: the Covid-19 recession is unprecedented in both its speed and magnitude, and there is still huge uncertainty over how the pandemic itself will play out.  As the destruction of economic activity is just getting underway, one might feel that the ensuing fallout is permanent because we are currently in the moment.    

We are convinced that “this too shall pass”.  It is important to note that the economic halt was forced via government order due to the virus.  As we have said in the past, economic expansions do not die of old age.   While it is not immediately obvious how transitory the economic effects of the Covid-19 virus are, what seems pretty clear is that the size of the fiscal package and response is overwhelmingly large and will most likely more than offset direct GDP losses.  This is unprecedented in the peacetime history of financial bailouts and economic rescues.  Most importantly, the Fed is underwriting financial stability by effectively functioning as a giant commercial bank, but with an unlimited ability to expand its balance sheet.  Authorities will do whatever it takes to preserve the integrity of the financial and banking systems allowing for an ensuing recovery.  This is a key reason why the markets while still volatile, have recouped some of the losses.

Our message today is primarily to reinforce that our rational and time-tested approach to investing has prepared your portfolios for this environment.  Keeping that in mind for all of the noise and malaise that the future may hold, we recommend that you stay the course.  The basic tenants to our investment philosophy revolves around time horizon management and high quality investing.  As you know, we only buy growth assets i.e. equities with funds that are not needed for five years or one normal business cycle.  Investing in growth assets with a longer-term time horizon reduces the need to sell in adverse environments like today.  For funds that are needed for consumption, we have set aside liquidity which is invested in high quality fixed income investments that mature when you need it.

The other strict covenant to our investment philosophy is to only buy high quality equity securities with strong fundamentals and high financial strength. This has always been a non-negotiable requirement of our investment process.  In today’s environment, it is paramount to own companies that have the financial wherewithal to survive the downturn intact. Our best of breed companies may very well benefit during these perilous times by acquiring weaker rivals and potentially emerge in a better position.  Furthermore, the majority of our companies have maintained their dividend payouts due to pristine balance sheets which is also important in building your asset base. 

In the end, we have very high conviction in the structure and strength of the portfolios we have constructed on your behalf.  We do not have a crystal ball projection as to when the current tumult will end.  However, we are very confident that the federal response has been appropriate and conducive to getting the economy back on the right track.       

We continue to focus on ensuring our clients are informed and as opportunities develop in these trying times, that we help our clients benefit from opportunities suited to each client’s unique needs.  To that end, remember that both the pandemic and its economic impacts will pass, and that investors are not best served by waiting for the all clear before being opportunistic.  Here is a bullet point synopsis of our current thoughts and actions:

  • The first quarter was the fastest decline into a bear market; however, following the fiscal stimulus, the market rallied in late March to also make this the shortest bear market in history. 
  • Volatility has been historic during this period with two of the worst one-day declines in history followed by two of the best one-day increases in history.  While most of the economic damage is yet to come, we are confident more and more each day that we have seen a near term bottom.
  • The virus impact was compounded by the oil price war between Saudi Arabia and Russia; however, the current oil prices are not sustainable for oil producing nations.  We believe, oil prices will stabilize and move higher as economic visibility returns.
  • Jobless claims are at an all time high of 6.6 million and may continue to rise over the short term.  As the unemployment rate follows suite, more government stimulus may be forthcoming.
  • GDP is estimated to decline epically for the 2nd quarter.  Consensus and our opinion is that it will rebound in the 3rd and 4th Quarters, and markets tend to bottom before good news arrives.
  • We continue to invest rationally in irrational times:
    • We have maintained or increased dollar cost averaging into the market during these times for those at that stage within their invest plan. 
    • For fully invested portfolios, we are currently rebalancing where necessary to align with your long-term investment goals.  This is accomplished by selectively reallocating from positions that have fared relatively well in this adverse environment.
    • We have been buying when others are selling depending on your current allocations.  There are many great opportunities priced for long term accumulation.
    • Investing in the future- the pandemic has positioned sectors such as technology and biopharma for future growth.  We have recently added cyber-security stocks to portfolios and shored up already solid exposure to health stocks.
    • We are continuously looking to add high quality positions to our value centric portfolios including energy, industrials, and financials to name a few.
    • We are finding attractive bond opportunities to add to fixed income portfolios.  Over the last month for fixed income allocations, we have purchased high quality corporates which were improperly priced given the recent liquidity crunch.  

Financial House Keeping Items to Ponder:

  • For clients with 401K or pension portfolios outside of Parrish Capital, we have recommended adjustments where necessary.  Please reach out for us to review your allocation if you have not done so.  
  • While we are in shelter in place, please consider taking this opportunity to gather all your important financial and estate documents for completion of a holistic financial plan, if you have not already done so. 

In closing, it is a privilege to serve each and every one of you.  We are tirelessly working to master this moment of chaos.  If your life circumstances have changed and we need to make adjustments to your plan or you just want to have a conversation about the current market environment, please don’t hesitate to schedule a call with us (in the top right of this page). We promise to remain vigilant and provide updates to Parrish Capital’s strategy and investment focus as we work our way through these trying times.      

As always. Ignore the noise, stay focused, and prosperity be unto you.

Sincerely,
 

Theodore L. Parrish, CFA 

President & Chief Investment Officer 

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