We have seen a rapid intensification in efforts to stem the spread of the Covid-19 virus over the last few days. Schools are closing, states are restricting large gatherings, stores and restaurants are limiting service, most events are canceled for the foreseeable future, and some cities are now even mandating that residents stay at home. With such an unprecedented response, it is understandable that fear and emotions are running high. In times like these, we’d like to take a moment to remind clients and ourselves alike that fear is not an investment strategy.
We woke up this morning to the same type of market that we closed last week with - erratic. Unfortunately, we now believe that this “shoot first, ask questions later’’ type of market could be with us for quite a while. At this stage, indiscriminate selling has taken over. Stocks, bonds, and even gold were being sold last week. Often, this type of action is indicative of a market that has lost sight of the fundamentals and is trading purely on fear.
Truthfully, no one knows how long this could last or what the economic toll may ultimately be. Rather than focus on the unknowable, we turn to a few principles that have guided us through the most difficult times in our history.
The first is to stick to our long-term investment plans. As the statistics show, market timing is inherently a fool’s errand. From the chart below, we see that missing out on just 10 of the market's best days from January of 1995 to today reduced average annual returns from 7.3% to 4.2%. As painful as it can feel to be invested on days like today, the long-term damage to a portfolio is historically only intensified by not remaining invested for an ultimate rebound. We are in this for the long haul and we have the utmost confidence that the companies we have carefully selected will continue to find ways to grow their businesses and increase shareholder value over time.
Source: Strategas Research Partners
To that end, we see the dividend as a beacon of light in foggy markets. Companies that have ample capacity to pay and grow their dividends in uncertain times are always attractive. Our portfolios are chock full of such companies. Take Microsoft (MSFT) for example. In 2019, the company generated roughly $38.2 billion in cash flow that was available to reinvest in their company for future growth, to acquire other companies, and/or to pay dividends to shareholders. They decided to pay approximately $13.8 billion in dividends. That means that cash flow could theoretically drop in half and Microsoft would still generate enough cash organically to grow its dividend payout by 38%. To be clear, we’re not expecting a dividend increase of that magnitude, but it demonstrates the type of quality that we seek to build our portfolios on. We are constantly evaluating the companies in client portfolios to ensure they adhere to our standards.
Today we witnessed the Dow having its worst day since Black Monday. Over the past week, there were three 15-minute exchange-mandated halts in trading (circuit breakers meant to curb panic in volatile markets). Unprecedented times for sure. We’ve been through enough of these “black swan” events to know that they eventually do end.
The government and the Federal Reserve step in to support the economy when things bend to the point that they could break. In an emergency meeting over the weekend, the Fed cut the Federal Funds rate to 0%, introduced $700 billion worth of quantitative easing, and committed an additional $1.5 trillion to shore up liquidity in the bond market. These are all measures aimed at keeping the economy afloat and allowing our financial system to work as planned. We expect the Fed to continue monitoring the economy and introducing additional measures as they deem necessary. We won’t fight the Fed.
On the government side, the House has passed legislation that would extend paid sick and family leave, enhance unemployment insurance, increase the Federal Medicaid Match, enhance the food stamp program, and offer free coronavirus testing. This measure must now pass the Senate, but it's a good start as additional stimulus is considered. Once the virus subsides, we expect these efforts will go a long way in restoring demand and kickstarting the economy once again.
As we said last week, we know these times can be difficult. The most important thing to remember is not to panic. Know that we have taken steps to make client portfolios more defensive in the short-term, but that we maintain a long-term focus on fulfilling your investment objectives. We will continue to closely monitor client portfolios and introduce changes that we believe will further insulate and bolster the portfolios as they present themselves.
We will stay in touch with updates as events unfold and encourage you to reach out to your advisor if you would like to discuss further.
DCM Investment Policy Committee
The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation. The specific securities identified and described herein do not represent all of the securities purchased or sold for the portfolio, and it should not be assumed that investment in these securities were or will be profitable. There is no assurance that the securities purchased remain in the portfolio or that securities sold have not been repurchased. For a complete list of holdings please contact your portfolio advisor.
This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.
S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.