INSIGHTS FROM FIRST FOUNDATION

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Market Action Update: Through the Looking-Glass

In Lewis Carroll’s novel Through the Looking-Glass (the sequel to the classic, Alice’s Adventures to Wonderland), Alice once again enters another fantastical world of adventure. Key themes throughout the novel include the reversal of logic and of course, chess. Chess at its heart is a game based on logic and combines both short-term actions as well as setting up long-term endgame scenarios. This is very much similar to investing and specifically applies to portfolio construction, being aware of the tactical short-term opportunities in the current market environment while keeping an eye on the long-term.

An update on what’s going on 

As we noted in our last Market Action Update: Don't Panic, investors have been warily watching the data on COVID-19, the official name of the novel coronavirus. Fears accelerated over the weekend, as new pockets of the infection cropped up in South Korea, Iran, and Italy. To stem the outbreak, Italian authorities have locked down citizens in the region of Lombardy, south of Milan, closing schools and canceling public events. Meanwhile, several nations, including Turkey and Iraq have closed their land borders with Iran. It’s important to note that the World Health Organization (WHO) came out recently to state that COVID-19 is NOT a pandemic. Currently there are 79,339 cases in 30 countries which have resulted in 2,619 deaths. At the end of January those numbers were around 14,000 cases in 23 countries with 300 deaths.

The economic and financial market impact

As we have progressed through the fourth quarter earnings season, companies have begun to increasingly digest the financial impacts of the coronavirus.  Though the overall death rate remains relatively low around 3%, as events are canceled across the globe on account of health concerns, the virus's impact on global growth seems like it could be more meaningful than initially thought. Companies are already warning that production will be impacted due to the virus – auto parts, fabrics, and electronics are not being produced or are sitting idle in factories with no workers. Service industries have been impacted by travel restrictions, and as this drags on, supply chains will become a bigger issue. It takes about 21 days for a container ship to travel from Shanghai to the port of Los Angeles.

Despite the stimulus Central Banks stand to provide, the economic environment that was believed to be on tap for 2020, has significantly been adjusted – the IMF now expects China’s GDP to come in at 5.6% in 2020 versus 6.0% – and the Central Bank capacity that was thought to have been reserved to stem an economic slowdown will likely be spent to cushion the virus' unexpected economic shock. Expectations of rate cuts by the Fed have increased overnight, with investors now pricing in a 23% chance of a March rate cut (up from 11%), a 95% chance of at least one rate cut in 2020, and a 75% chance of at least two cuts.

Outside of health concerns, U.S. political uncertainty into the 2020 Presidential election remains.

Chess vs. checkers 

Warren Buffett spoke to CNBC this morning and said, “The real question is: ‘Has the 10-year or 20-year outlook for American business changed in the last 24 or 48 hours?’” He and Charlie Munger have famously taken advantage of market dislocations, “You’ll notice many of the businesses we partially own… those are businesses and you don’t buy or sell your business based on today’s headlines. If it gives you a chance to buy something you like and you can buy it even cheaper then it’s your good luck.” He also noted in his annual shareholder letter to Berkshire Hathaway investors, “If something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.”

With today’s market volatility, the 10-year U.S. treasury is now yielding 1.36%, further morphing a historically viewed long duration asset more into a short-duration asset (the 2-year U.S. treasury was yielding 1.35% yesterday!). Over the last year we have orientated our asset allocation strategies more defensively for moments of disruption. Our generally optimistic base case scenario for 2020 hasn’t changed and we continue to monitor the data vigilantly. Stay the course and always remember about the long-game.


As always, we appreciate your confidence in us.  Please don’t hesitate to reach out to your wealth advisor for questions. 

IMPORTANT DISCLOSURE INFORMATION    

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. Please remember that if you are a First Foundation client, it remains your responsibility to advise First Foundation, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request, or at firstfoundationinc.com.  Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Andrew Chan, CAIA, Managing Director of Portfolio Strategy
About the Author
Andrew Chan, CAIA, Managing Director of Portfolio Strategy
Mr. Chan serves on the investment team and is responsible for conducting investment manager research and portfolio construction. As a member of the investment committee, he provides market commentary and investment insights. Mr. Chan’s responsibilities include overseeing client portfolios, calculating risk metrics, conducting the rebalancing of client portfolios, and evaluating the selection of new investment managers. With over 10 years of wealth management experience, Mr. Chan has played key roles across various aspects of investment and wealth management. Prior to joining First Foundation Advisors, Mr. Chan was most recently a portfolio manager at U.S. Trust where, in addition to his daily responsibilities, he served on numerous internal committees including the investment manager committee, the portfolio model committee, and the strategic technology committee. He also served on the in-house strategic consultant committee reporting directly to the President of U.S. Trust. Mr. Chan is a graduate of the Wharton School Executive Program on Investment Management and holds a Bachelor of Arts degree in Business Administration from the University of California, Riverside. He is a Chartered Alternative Investment Analyst (CAIA). Mr. Chan serves on the executive board for CAIA Los Angeles and is the Interim President for the association. Read more