News & Views
Market liquidity is like oxygen: you take it for granted when it is plentiful, but you absolutely notice it when it disappears. For the past twelve years, liquidity (except during a few occasions) has been ample – liquidity, by the way, represents an asset’s ability to be transformed into another (i.e. cash) without a loss. However, in moments of extreme panic, liquidity dries up quickly causing losses for market participants that have no other choice but to accept a lower price than fair value for an asset sale (namely, stocks and bonds).
A common analogy used for this concept is a theater – we might think there’s a lot of “liquidity” because the number of people that can fit into the general seating area, thus a lot of participants with whom to trade; however, what actually matters is the size of the exit when someone yells “fire.” And this is exactly what we just went through in the financial markets as panic-selling ensued, forcing participants quickly through that singular, narrow doorway to redeem assets for cash in an almost instantaneous fashion.
Exacerbating this problem is the fact that even high-quality, safe haven assets weren’t able to make it through the exit door unscathed (i.e. treasuries, gold, municipal bonds). We cannot overstate how disastrous this can be, and frankly was akin to the financial system plumbing stress that occurred in 2008 and 2009 during the Global Financial Crisis (“GFC”). The good news is that the Fed was able to come to the rescue in a massive scale, yet again, and this time used its full arsenal in a matter of weeks, compared to months during the GFC. This included setting overnight rates back to essentially 0% and quickly adding massive amounts of asset purchases on the balance sheet as the Fed stepped in as the buyer of last resort for many assets that lacked liquidity. It seems to be working…for now.
The good news is that the Fed was able to come to the rescue in a massive scale, yet again, and this time used its full arsenal in a matter of weeks, compared to months during the GFC.
Additional restoration will be provided by the soon-to-be-approved $2 trillion+ fiscal stimulus. By supporting and backstopping workers and businesses, this policy can help stem the panic and the cash-grab that was occurring to keep businesses alive. Now we can breathe a little easier about solvency issues. We should also note that at this point, it would seem that low rates are here again and will be sticking around for a while.
What this means for you as investors is that essentially no asset was immune to this market shock, which is why you will see even the bond and preferred stock portion of your portfolio show value decreases (albeit, recovering somewhat at this point). While improved, this problem will not completely go away overnight – we are seeing some of the liquidity challenges calm down, but now uncertainty about the future has meant that the “clearing prices” on most recent bond sales are still lower as a marginal buyer requires a discount to compensate for the higher perceived risk until we get through this crisis.
We suggest paying little attention to what prices the most recent buyers and sellers are agreeing to – this is akin to the real estate crisis where houses in your neighborhood sold at alarmingly low levels as either the seller was distressed and/or the lack of active buyers gave large pricing advantages to a willing purchaser. When you plan to stay in your house long-term (same with bonds), these paper losses (and even gains) are really just a distraction for the investment strategy. Normal behavior will return, and what matters is that the safety of the asset and that the income streams continue as expected (i.e. a rental real estate property where the tenant continues to pay rent is similar to a bond issuer continuing to make interest payments).
We may not be out of the woods yet, but we will continue to monitor risk and take appropriate actions as necessary. While we couldn’t predict what was going to cause this crisis, we understand that crises do happen somewhat regularly – that is why we continue to stay diligent about our exposure to risk and recognize when we aren’t getting sufficiently compensated to take risk in the investment markets. Even if there are some bonds and preferred stocks that are short-term causalities during the liquidity challenges (i.e. price discounts), the important thing is that we feel comfortable knowing that the underlying issuers are sound and can fulfill their interest and repayment commitments. Furthermore, it is also important to remember that bonds and preferred stocks are senior to common stocks as it relates to a claim on the assets of the business.
While we couldn’t predict what was going to cause this crisis, we understand that crises do happen somewhat regularly – that is why we continue to stay diligent about our exposure to risk and recognize when we aren’t getting sufficiently compensated to take risk in the investment markets.
We hope all of you continue to stay safe and healthy. It is an honor to be able to serve you through the challenges of the market cycles, and we are grateful for your continued trust and confidence. As always, call or email anytime.
Norris, Perné & French
First and foremost, our thoughts and prayers go out to anyone that is being directly impacted by COVID-19. This situation has increased to a level of critical significance in just a matter of weeks. Even if you or a loved one are not infected by the actual illness, you may likely be affected in another way – economically or emotionally. As followers of the market, history shows us that it’s times like these where humans step up and have their finest moments.
As followers of the market, history shows us that it's times like these where humans step up and have their finest moments.
We must balance reality and optimism, such that we neither fall into despair or naivety. What has developed even in the most recent days is that containment of COVID-19 is no longer possible and now we move forward with mitigation techniques to slow or level the spread in an effort not to overburden our healthcare system. The trade-off, of course, is accepting an immediate crippling of our economy as a sacrifice such that everyone can do what is right to minimize transmission.
As for the markets, in the coming weeks we will experience continued volatility and uncertainty. We are now, collectively, accepting that a recession is most likely in the cards – with possible negative economic growth in the first quarter of 2020 and a near certain negative growth in the second quarter of 2020.
A decreasing rate of new daily confirmed infections might be one leading indicator (among others) for when the stock market begins its recovery. We may even experience economic impacts for several months thereafter, but until the market knows how to price in a most likely scenario for a return to normal life, the market will continue to be in a state of constant flux.
A decreasing rate of new daily confirmed infections might be one leading indicator (among others) for when the stock market begins its recovery.
What this means for your investment strategy is that you should be prepared for more downside in case the uncertainty continues for longer than expected. During this time, however, some of the best companies will go “on sale”. Given the “plumbing” of the financial system right now, we are seeing indiscriminate selling as certain investors are desperate to get out. For the patient, opportunistic investor, that means quality businesses will be selling at low prices that give an investor a high probability of above-average investment returns for the next 3-5 years as the world recovers.
Remember, as the chart below indicates, when we have corrections of significant magnitudes such as this, the opportunity in stocks increases. Let’s put it this way, if the value of a stock reflects the present worth of a claim on all the future years of profits into perpetuity, a year’s worth of near-term profit impairment shouldn’t affect the value this much. Statistically speaking, after a correction like this we have a high comfort level that the forward return in stocks over the next 5 years will be higher, possibly significantly so. But patience is key, and that will be an investor’s best friend.
Source: @ TMFHousel
Patience is afforded to many of our clients because of the allocation to bonds and cash in the strategic asset allocation of the portfolio – particularly for clients that take regular distributions. Having high quality bonds that hold up in distressed environments can give you several years’ worth of assets to sell at firmer prices to continue maintaining your needed distributions and not sell stocks. This is important because you never want to be a forced seller of stocks in a weak market environment (i.e. be the homeowner that gets foreclosed).
Again, the work was done prior to this crisis by setting the right asset allocation, and having a bias to buy quality securities (not over-levered, or over-optimistic businesses). The work that needs to be done going forward is to have the fortitude to be buyers while others are selling, as Warren Buffett reminds us “Be fearful when others are greedy and greedy when others are fearful”.
"Be fearful when others are greedy and greedy when others are fearful."
~ Warren Buffet ~
We understand that the anxiety will linger as long as the markets are volatile. Please call or email us anytime – we are prepared to go remote (as we had to do during the brutal winter of ’19), but are committed to continue providing the same level of client support and service.
Norris, Perné & French
As investors, we must accept that the financial markets can occasionally be a dangerous place. The only certainty we have is that the future will surprise us, as it is unpredictable. If it were predictable, you would not be rewarded for putting your hard-earned savings to use in investment assets.
Willingness to tolerate risk = Opportunity to be rewarded for investment
The current environment we face contains high uncertainty – no one knows for sure how far the coronavirus will spread and how threatening it will be to many human lives, especially the most vulnerable. On top of this uncertainty is unprecedented moves in interest rates paired with the untimely moves in oil prices as a result of an OPEC price war. Most challenging, perhaps, is how to estimate the impact that these variables will have on the global economy. However, we think it is safe to say at this point that most businesses will be lowering their expectations for profits this year, and this is meaningful because the expectations were already high. Perhaps even too high for a non-coronavirus-impacted-world.
Our perception that the “expectations pendulum” had swung too far to the right resulted in us making investment decisions to avoid the most over-promising businesses. The upward move on the stock prices of some of these companies weren’t sustainable. The coronavirus breakout was not expected, but we know that when prices are too high relative to the profits earned, then it won’t take a lot to cause a correction.
In fact, corrections are regularly occurring events for the stock market – remember, we have pointed out in the past that on average a 10% correction happens once a year, a 20% correction happens every 4-5 years, and a 30% correction (or more) happens once a decade. Only after the fact will you know which type of correction it is and what actually caused it. At this point in time, it appears likely that the correction is mostly due to the coronavirus, but again, that’s not the only factor at play.
What matters the most, in our opinion, is that we’ll get through this. Historically, when we suffer a 20% or greater correction, the market essentially breaks even again in about 24 months (on average). Another thing to keep in mind is that the snap back in stock prices can happen very quickly – 24 of the 25 best days in the market occurred within one month of one of the 25 worst days. So, when the drops seem unbearable, remember that the upside can happen just as quickly (a dose of optimism here). This is the reason we don’t want to sell into this fear – in fact, we’d rather be buyers. Selling needs to be done when all the other investors are still very greedy and not in panic mode.
So when the drops seem unbearable, remember that the upside can happen just as quickly. This is the reason we don't want to sell into this fear – in fact, we'd rather be buyers.
Lastly, and we say this constantly, the two most important factors for surviving these storms are: 1) asset allocation; and 2) security selection. We have customized the former to the level of risk you can sustain balanced with the return needed to achieve your stated objectives. And the latter is why we work hard every day to make sure we pick high-quality businesses that have conservative balance sheets (limited risk of having a cash crunch or debt problem) and are durable businesses that can survive the regularly occurring cycles. Between these two things, you have a strategy that will help you ride the rough waters until calmer seas prevail. And they will, but patience is key.
We understand that the anxiety will linger as long as the markets are volatile. Please call us or email anytime – we want to be available to help you through this, as this too, shall pass.
Norris, Perné & French
Kids' Food Basket Volunteer Team 2020
On March 4th, Norris, Perne & French sent a team of their finest bean & cheese tortilla manufacturers to Kids' Food Basket!
Kids' Food Basket relies on volunteers to prepare sack suppers for 8,800 students at 52 schools across West Michigan. The team this year included (picture left to right) Jarred Copeman, Jason Strockis, Elizabeth Poole, Heather Elve, Dave Hodge, Jenna White, Tyler Bosgraaf, Jay Wisentaner, and Dan Lupo.
To learn more about Kids' Food Basket, please visit their website.
Junior Achievement Titan Business Challenge
On February 25th, Norris, Perne & French helped sponsor the 2020 Junior Achievement Titan Business Challenge, which is a business strategy tournament for local students.
In the tournament, students strive to make informed, intelligent decisions while running a virtual business. The team that has the most successful business wins the competition.
The Business Challenge is followed by the JA Titan Trivia Night. The NPF team, known as Lets Get Fiscal, was made up of (picture left to right) Jarred Copeman, Elizabeth Poole, Jenna White, and Tyler Bosgraaf. Although they didn't win the trivia competition, they certainly had the best team name!
Our Holiday Photo Shoot
This year, we bet on good weather for our holiday photos, and it paid off!
Out of hundreds of pictures taken, these were the best.
Season's Greetings from everyone at Norris, Perne & French. We hope your holidays will be filled with joy and laughter through the New Year.
June 27, 2019 – Norris, Perné & French (NPF) is pleased to announce it has been named to the 2019 edition of the Financial Times 300 Top Registered Investment Advisers (RIAs). The list recognizes top independent RIA firms from across the U.S.
This is the sixth annual FT 300 list, produced independently by the Financial Times in collaboration with Ignites Research, a subsidiary of the Financial Times that provides business intelligence on the asset management industry. The Financial Times is an international business newspaper headquartered in London with over five million readers.
On June 17, NPF team members gathered with 751 other volunteers at Van Andel Arena for Heart of West Michigan United Way’s fourth-annual Food From the Heart. In two hours, volunteers packed more than 150,000 nutritious meals that got distributed to food pantries and other hunger-relief agencies throughout Kent County.
Norris, Perné & French (NPF) is pleased to announce the appointment of two new partners: Strategy Lead/Portfolio Manager Marilee K. Bartl and Portfolio Manager Daniel J. Lupo were welcomed into the firm’s partnership on January 1, 2019.
“I’m excited to be a part of the incredible legacy here,” says Dan, who joined NPF as a Research Analyst in 2012, eager to delve into the traditional, long-term investment philosophy that has guided the firm since 1933. As his responsibilities expanded and evolved, he came to appreciate the role of local ownership in perpetuating this approach.