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Thursday, Jul 18, 2024

Bear Markets Have Three Phases

Client Reaction to Pandemic: Emails and calls increased in March and early April. We have a tracking system in place that we started in 2008 and we have since integrated it into our CRM to monitor the increase during periods of market turmoil. It lets me see in real time the number of calls across the firm that relate to market activity so I can follow up with my team and fine-tune our response. Our hours did increase dramatically during that same time but have settled back down to more normal since then. Client Questions/Your Reponses: Initially, in early March the discussions were more about how this virus would likely play out similar to those of the past few decades. Our best advice to clients was to not touch their face or their stocks. As time wore on and new data became available about the virus, the quarantine and the economic damage, we felt that new risks would continue to present over the next several months as well as opportunities and we wanted to adjust portfolios to be ready for this next phase. Memorable Moments: We quickly shifted most of our advisors and staff to work from home. Our phone system allows us to take our desk phone home and it operates just as if we’re in the office with complete connectivity. Our computers have been on a virtual system for many years, so we have all our software and desktop configuration as if we’re in the office and we can share desktops with each other and with clients. It was all so quick and seamless, but it’s getting a bit lonely as I miss hanging out with my great team. Changes to Portfolios: Bear markets have three phases: the drop, the rally and the retest. The initial bear market drop is behind us and we’re in the bear market rally phase now. We have yet to begin the process of the retest, which can take months to play out and the retest can be above, at or even below the initial low. With the market now trading only 13 percent below its prior high, given the broad economic damage of the quarantine, a “V” recovery in the stock market and moving on to new highs, with no “W” retest of the bear market drop, does not seem the most likely outcome. Changes we’ve made: (1) We sold some bond exposure in late March and rotated into closed-end bond funds trading at deep discounts near the market bottom, which have since rallied much more than the bonds we sold, adding value to portfolios. (2) We reduced our foreign developed and emerging markets exposure during the bear market rally with the expectation to rotate into U.S. large caps at lower market levels in the next few months. While we don’t believe this bear market cycle is complete, we do believe the U.S. will recover better and faster than the global economy over the next few years. 2020 Economic Disruption Compared to Others: To date, not as dangerous or destructive as 2008-2009 because (1) the Fed moved quicker to provide liquidity and assurances that calmed the bond and stock markets, and (2) the government moved quicker to put cash in the hands of many individuals and businesses. Both helped stem a financial panic, but neither are free of unintended consequences to be realized over the years ahead. Advice to Clients Now: The quarantine damaged the economy. Thousands of businesses will never reopen and millions of unemployed will not get jobs back quickly. However, over the next five years stocks should do better than bonds, and high-quality real estate in select regions could do better than stocks. Financial Management Business: Financial planning and integrated wealth management continues to be our growing segment because it is always a value-add for clients. Whether markets are up, down or flat, our clients face critical financial decisions several times a year and our experienced advice guides and comforts them. Biggest Trends in Financial Management: Robo-advisors were the recent trend. Many advisors formed smaller firms that use robo-tools to cut costs. However, when times get tough and decisions need to be made, a client wants to talk to a seasoned advisor. … A cheap robo doesn’t work so well then.

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