Hello Darkness My Old Friend

There will be no charts or graphs in this post.

Yesterday the bear market became official, with the S&P 500 crossing below the 20% threshold where market observers typically draw the line. We dropped 21% in the fourth quarter of 2018 but the recovery was V-shaped. This time, it’s not done going down and a V seems increasingly unlikely given what we all know is coming in terms of headlines.

Some thoughts that occur to me…

The policy response is uncertain. The media is breathlessly reporting every trial balloon they hear of, but we still can’t be sure of what will happen. The White House seems to want to do a payroll tax cut, which, as a business owner, would be nice for me – but I don’t see how much that really does for those who will be hardest hit. The Democrats in the House are going to be more focused on sick leave pay and increased funds for testing. Let’s see if they can come together and pass something quickly.

The Fed now has to go to zero. Read Tim Duy.

Ben wrote about the bear markets that came along with recessions throughout history. They can be broken down into three tiers of severity. Read this too.

The events of 2007-2009 changed me. Forever. That period turned me into a rules-based investor. So when people ask me what I’m doing or what we’re doing for clients, I don’t have to think very hard. We are communicating for clients, not speculating or making bets with their money. Our rules-based strategic asset allocation portfolios had us rebalancing. Our rules-based tactical portfolios only react to changes in trend and take down risk accordingly. So we are not trying to anticipate “the next shoe to drop” or “looking for buying opportunities” or any of that. You set the rules in advance at a time of no emotions, so that you’re not succumbing to emotions and trying to guess at what to do in an environment like this. My gut instincts or Barry’s biases or our clients’ feelings do not enter into the investment process.

The most valuable conversations happening among our advisors and clients this week are not about the spread of a virus or the next moves the Fed might make. They are about whether or not any of the clients’ goals or objectives may have changed. They are about affirming how much or how little risk is being taken, and why. They are about contingency plans for spending needs and the tax impact of asset location and other non-sexy but essential topics that are the cornerstone of these relationships.

We are being flooded with inquiries from people who want to become clients of ours, which is exactly what you would expect from a firm that has millions of pageviews and subscribers and followers and listeners and viewers for all of its content. Paradoxically, the worse the market gets, the bigger our pipeline grows. This counter-cyclicality makes us incredibly unique in comparison with the other 13,000 registered investment advisory firms, although we take no pleasure in that fact. But the process to get in to our firm takes at least four conversations or meetings and there’s just no chance we’re going to speed up our onboarding, no matter who calls or emails. Onboarding correctly is the reason our phones are not ringing off the hook with panic – we’ve been selective with clients up front, and have set expectations very deliberately from the outset. We’re happy to have an initial conversation with a potential investment client, but we can’t solve someone’s emergency situation right away.

Client service is as important as asset allocation in times like this – it is the difference between a firm that takes advantage of a tough market versus a firm that unravels. Back when I was a broker, client service looked like a Civil War triage tent, the surgeon bounced from bed to bed depending on which patient was screaming or bleeding the most. Our client service environment now looks, feels and sounds more like a dental office – everyone knows exactly when they’re going to hear from us. Appointments are booked out far in advance and there is plenty of time set aside for spontaneous calls or emails in between. We are monitoring client logins to the portals that allow them to check their accounts. We know where the hotspots are in real-time and who needs to be spoken with or helped.

As I mentioned the other day, we built our firm in the cloud and working remotely has been second nature for us since our founding in 2013. So far so good. I am in exile out on Long Island this week, the immunosuppressants I take for Crohn’s disease simply mean that I should try harder than most to avoid contact when there’s a flu or virus going around. I’m obeying my doctor’s orders. There is a lot of Purell involved.

People seem to be listening to experts, being vigilant about their hygiene and canceling unnecessary travel / events. If they’ve been smart about keeping their monthly expenses reasonable and not taking on a lot of debt, they’ll be okay. We’ll hear horror stories about those who’ve been, shall we say, imprudent with the size of their lifestyles.

The first ten years of my Wall Street career were bookended by two of the worst bear markets in history – 2000-2002 and 2007-2009. In both cases, the stock market was cut in half. I got clients through those times. I got clients through 9/11 and the European debt crisis and all sorts of lesser (but no less scary) panics along the way. This will be no different. In three years, we’ll have more vaccines, better preparedness for epidemics and all sorts of lessons as business owners, investors and citizens under our belts. Some things will have gone back to how they were. Some things will have changed forever. But life will go on.