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6/2020 TCFP Macro Brief + Half Year Client Letter

The first six months of 2020 saw the worst global health crisis since the 1918 influenza pandemic. In response, the world locked down, putting its economy into a medically induced coma.

Around the world, the immediate effects were (1) a savage and instantaneous economic recession, and (2) the fastest, deepest collapse in stockmarkets in living memory, if not ever.
The drama has been such that we are writing to cover two points.

First, a statement of general principles, especially those most relevant in the current crisis. Second, a review of what little can be known at this point, and how we continue to deal with current uncertainties.

General Principles:

  • We believe that all successful investing is goal-focused and planning-driven. All failed investing is market-focused and event-driven.
  • Stated another way: every truly successful investor acts continuously on a long-term plan. Every failed investor continually reacts to sudden and terrifying market shocks.
  •  Thus, we have found that long-term investing success is only incidentally a function of the economy and the markets. It is a direct function of how you react—or, more accurately, how you refuse to react.
  • You and we are long-term, goal-focused equity investors, acting on our plan with patience and discipline. The smaller part of what we do for clients is the crafting of that plan. The much larger part is helping you not to react in stressful times like this.
  • We continue to believe that stockmarkets cannot be forecast, much less timed, and that the only certain way of capturing their superior long-term returns is to sit through their occasionally steep but historically temporary declines.

Review & Outlook

  • At midyear, the best that can be said is that the first great wave of the pandemic appears to be abating, and the economy is slowly reopening. As it continues to reopen, there will inevitably be some flareup in new infections. The interaction between the pandemic and the economy in the short to intermediate term is therefore impossible to forecast, as is the timing of a vaccine.
  • Stockmarkets crashed all-time highs in February to bear market lows (so far) in March by about 35% over about 33 days. There is no historical precedent for such a decline in so little time.
  • Confoundingly, stockmarkets then posted some of their best returns ever over the following 50 days or so.
  • It is not possible to forecast the near-term course of corporate earnings or dividends, as they—like the economy they reflect— are still largely hostage to the pandemic. That said, please note the current yield on the 10-year UK Gilt is about 0.2% and the 10-year U.S. Treasury about 0.68%.
  • These interest rates are such that none of you can achieve your long-term financial goals by investing in bonds at today’s yields. This is just another reason why we have advised you to stay the course in equities.
  • Even if the pandemic continues to subside and the economy to recover, we will have to continue to deal with civil unrest and political uncertainty. Emotions seem likely remain high, with unpredictable short-term market consequences.
  • We are convinced of the unknowability of the short to intermediate economic and market outlook. We remind you that none of you is investing for the next one to twelve months. You and we are long-term, goal-focused, planning-driven, patient, disciplined investors.
  • Think back to 1 January this year. Have your most cherished lifetime financial goals changed since then? If not, we see no compelling reason to change your plan—and no reason at all to change your investment strategy.

Be of good cheer. This too shall pass. Optimism remains, to us at least, the only long-term realism.

Here’s the latest “Macro Brief” in association with our investment consultants, Cormorant Capital Strategies: MB June 2020

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Town Close are expert financial planners. Our goal is the same as yours – to help you do the things that are important to you in the time you have remaining.

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