1Q 2020 Quarterly Letter

January – March, 2020

The news is impossible to ignore.  Like you, we are watching the rising number of people worldwide impacted by the coronavirus (COVID-19) each day.  There is still a lot we don’t know about the virus.  Reports of rapid transmission around the globe have created an understandable sense of panic, and unfortunately, the numbers are expected to get worse over the next few weeks.
However, as troubling as all of this has been, we would point out that the response has been historic.  The U.S. government recently passed 3 bills aimed at mitigating the economic impact of COVID-19 and putting money into the economy.  Together, these programs total more than $2 trillion in economic stimulus.  In addition, the Federal Reserve has lowered short-term interest rates to basically 0% and has pledged to purchase an unlimited amount of securities to keep our financial markets functioning.  Many other governments around the globe are implementing similar policies.
There has also been an amazing response from the private sector.  Companies are quickly ramping up production of ventilators, masks and other medical equipment necessary to provide the care needed to those affected and to protect our healthcare workers.  Scientists worldwide are working on therapeutics and vaccines to provide a longer-term solution to this crisis.  And on a personal level, social distancing and shelter-in-place orders in much of the world are helping to slow the transmission of this disease.  These are amazing examples of how we can come together quickly during a crisis to work towards a solution.
Unfortunately, despite all the efforts by governments and private companies around the world, the economic impact will be severe.  Never in recent history has the economic system shut down to this degree.  The current situation is unique as the economic slowdown is “self-imposed”.  Governments around the globe are understandably making the decision to save lives at the expense of the economy.  How and when we decide to reengage as a society will be crucial to the timing of a recovery.
How is one supposed to invest and plan for the future in such an environment?  McRae Capital Management has been managing accounts for almost 40 years.  We have been through many periods of volatility and financial stress: the savings and loan crisis in the 1980’s, the dot-com bubble in the late 1990’s, the 9/11 attacks, the credit crisis near the end of the last decade, and now the coronavirus.  Our philosophy worked well for our clients in past times of crisis, and we believe it will again during this crisis.
There are three scenarios where we often see investors make mistakes that cause long-term damage to their portfolios:

  • They are forced to sell during a market downturn due to a lack of liquidity therefore locking in losses, paying unnecessary taxes, and losing long-term positions in quality companies.
  • They are not properly diversified, so one bad investment has an undue negative impact on the portfolio.
  • They sell based on emotion. This usually happens because the portfolio was not properly balanced entering the downturn.

Times like these show the power of personalized portfolio management.  We always maintain a conservative asset allocation in your portfolio.  Therefore, for any clients needing to cover expenses or for their normal income distributions, we have ensured that we will not have to sell stocks at depressed prices by utilizing the fixed income investments in the accounts.
We are also analyzing each individual company that we own to determine the viability of the business in this environment.  Due to the uncertainty of the situation this is not an exact science, but one where diversification and “knowing what you own” can make a huge impact on the long-term health of a portfolio.  We often see the best managed companies weather these economic storms and come out stronger as conditions improve.  We expect the same to happen this time.
And finally, we are always available to answer any questions or concerns you may have about the portfolio.  We understand how emotional this has been and we are here to help.  Please never hesitate to give us a call.

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