THE AB&E BLOG
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There Is Change in the Nature of Change
March 13, 2020

We just wanted to take a few moments of your day to share our perspective on the current economic and market conditions. In general, we have believed the economy and the equity markets were stretched in their recent 10-year moves. Corrections in both seemed inevitable. What causes them to ultimately start a decline is always a question.

The coronavirus is a human tragedy for the at-risk people in our global world. Unfortunately, these have been a part of human existence for a very long-time.

We have said in the last couple of years that there is a change in the nature of change. The changes are the speed of change and the breadth of change. Today’s coronavirus is exemplary of this. What has brought this instance of coronavirus to the consciousness of the globe so quickly is the internet, cell phones (the iPhone was introduced in 2007) and the media (social and traditional). Twenty or thirty years ago, this virus would have been discovered over a longer period of time. Because it has been discovered and communicated quicker, reaction and corrective measures are being put in place more expediently and on a global scale.

Behaviors are being modified and their consequences being felt faster. From an economic supply standpoint it is more immediate and shocking; both psychologically and economically. This is particularly true in travel, entertainment and industries. From a health standpoint, corrective measures are being implemented and hopefully the coronavirus consequences will be contained better than previous episodes.

The speed and breadth of change applies to the global markets as well. Computerized trading, passive investing and algorithmic programs have increased market volatility. Economic globalization and technology have changed how far and wide markets are intertwined.

The coronavirus is the proverbial ‘straw that broke the camel’s back’ in this current market decline. OPEC’s weekend meeting where Saudi Arabia announced an intention to increase oil supply sent oil prices down. Issues like this will only exacerbate already heightened market fears. Though lower oil prices will make it more difficult for financially weak energy companies, lower prices will reduce input costs to other producers of goods and services and the general consumer.

Warren Buffet has been quoted as saying, “It’s only when the tide goes out that you know who is swimming naked.”

The coronavirus and oil price declines will not be the only weaknesses exposed in this market decline and potential economic decline. There will be others. Those that are not economically viable will suffer more and there will be investment opportunities in those companies that are stronger and yet are punished by significant price declines.

In sell-offs like this both good companies and bad companies are affected. Remember that ultimately what portfolio managers are buying is companies. If the market goes down 25% does that mean revenues or profits for all business are down 25%? That may not always be the case. Picking good companies to invest in is difficult. It is wise to rely on a professional to take advantage of the dislocations and opportunities in individual securities and their corresponding businesses.

How do you position to take advantage of opportunities? Warren Buffet has been said there are two great derivatives in investing; cash and time. Cash is one constructive asset class that can be used to add equities to the portfolio. And if you don’t have to sell depressed equity prices, don’t.

Further, one of the simple but timeless attributes of investing is to buy low and sell high. Rebalancing portfolios is one of the disciplined strategies utilized to enact this truism. For the last several years as markets have risen, one could have been selling equities to provide distributions where needed or to restore portfolios back to lower risk-adjusted targets. In a period of stock market declines, rebalancing may direct investors to reduce income allocations and buy equities, restoring portfolios back to risk-adjusted targets.

Rebalancing in a rising market may entail realizing stock gains and paying taxes. Rebalancing in a declining stock market, comes at a time of pessimism and fear. Neither paying taxes nor investing when all around you is gloomy are favorites of average investors. Yet, staying disciplined is a benchmark to long-term investing success and it can prove most valuable at market extremes.

Best wishes to you and your families for good health and peace throughout the coming months.

*Views expressed herein are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author’s opinions and forward looking statements expressed are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material, and is not a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This information does not constitute a solicitation or an offer to buy or sell any security. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital. Past performance may not be indicative of future results.

*Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

*Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

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