After two months of shelter-in-place orders, all but two states are beginning to loosen restrictions on how we can begin interacting. While this is exciting, our ability to return to life as we knew it remains far away.

Jeff Powell, CIO & Managing Partner

Many states, like California, are opening up county by county. California has a four-phase system. Phase 1 is a complete lockdown of all businesses except for essential services.

Many states, like California, are opening up county by county. California has a four-phase system. Phase 1 is a complete lockdown of all businesses except for essential services.

Phase 2, which Marin County (and most of the Bay Area except Santa Clara County) will be entering on May 18th, opens lower risk businesses, like construction, businesses that primarily operate outdoors, curbside pickup for retail, daycare services, manufacturing, and logistics businesses.

Phase 3 is opening up higher-risk businesses, like movie theaters, religious organizations, and other more personal hospitality service businesses. Phase 4 would end the stay at home order. I expect our recovery to be very slow. We have never seen our economy deteriorate so quickly. For example, ISM Manufacturing dropped well into recessionary levels (below 50).

While manufacturing is important to our economy, it only represents 11% of our overall economy. We are a service-based economy, representing 67% of our GDP. Prior to the COVID-19 pandemic, our economy was doing well. As you can see from the April 2020 ISM non-manufacturing chart below, we have quickly dropped to levels unseen since the darkest days of the Great Recession of 2008.

For the first time ever, all 50 states in the United States were under disaster declaration. 42 out of 50 states had statewide shelter-in-place orders, affecting over 300 million Americans. These state-by-state orders have been devastating to businesses that were not considered essential businesses. Over 30 million Americans have been forced to file for unemployment in March and April.

April’s reported unemployment was 14.7%, its highest rate since 1939. Over 6 million people have filed for unemployment in the first two weeks in May. This would add approximately 3% to our current unemployment rate, and we have two weeks left in the month. We could approach all-time unemployment highs experienced in the Great Depression, when rates reached 25%.

Markets Rally Despite Ugly Data

The S&P 500 began a strong rally after the U.S. government passed the $2 trillion CARES Act. As of May 15th, the S&P 500 has rallied almost 28% from its March 23rd lows. It has rallied despite a record collapse in our economy and once in a lifetime unemployment levels. Even with its rally, the S&P 500 remains over 15% off of it’s all-time high found on February 19th.

Polaris Greystone has not seen the same rally as the markets. It would have been impossible to do so. On March 23rd (the low of the markets, in which the S&P 500 lost over 5% that day alone) our portfolios were positioned defensively. We were holding less than half the normal equity position across all strategies.

Over one-third of our holdings at the time were in consumer staples stocks. Our decisions to be defensive protected most strategies from more than half of the downside of their like benchmark. On March 24th, the S&P 500 gapped up over 100 points (almost 6%) and ended the day up 9.38% in a single day.

The Dow Jones Industrial Average was up 11.37%. It was the 5th best day in the DJIA’s history. We did nibble a little bit on March 25th, adding a few positions to our stock strategies. But we had seen five other attempted rallies, only to see them fail (see the gold arrows in the S&P 500 chart). Had you just waited two days after the initial move and got fully invested on March 25th, you would have only seen an 8.9% rally.

Polaris Greystone has incrementally put money back into the market in areas that we feel will benefit from a work from home environment and a slow recovery in our economy. We are very pleased with the downside protection we showed, and the caution with which we have added to your portfolio as the markets rallied upon nothing other than sentiment.

What’s Going On With COVID-19?

The United States continues to have the highest total cases and deaths anywhere in the world. As of May 17th, 1,527,664 people have been infected in the United States, with 90,978 of these people dying. The United States peaked in daily new cases of COVID-19 in late April. We’ve gone from almost 40,000 daily new cases to less than 20,000 on May 17th. We will be monitoring daily new cases very closely to see if the decision to ease our shelter-in-place orders has any setbacks.

We’ve seen the number of daily deaths also drop. The modeling conducted by the University of Washington, in conjunction with Johns Hopkins projects that the United States will have approximately 147,000 COVID-19 deaths.

COVID-19 Predictions

This pandemic will have a lasting impact on all of our lives. Here are a few things that I think will forever change in our daily lives.

Polaris Investment Themes

As we’ve discussed many times, Polaris uses four pillars of investing to help us make our portfolio management decisions. They are: Technical analysis, macro-economic analysis, fundamental analysis, and market sentiment. In our current environment, fundamental analysis and macro-economic analysis are useless, as we are experiencing never before circumstances. This market is completely sentiment driven.

We are using our technical analysis to read the sentiment. If the markets continue to move up, we will continue to hold “work from home” stocks, we will continue to buy oversold companies that we feel will fully recover in the next six months to a year and a half, and we will continue to buy companies that will take advantage of the coming demographic shift. If the markets want to retrace part of their rally surge, you will see us sell our high-risk stocks, raise cash, and get back into more defensive segments of the market.

I’m not sure that the market will revisit the lows found on March 23rd, but I do think there is a strong case that the markets will have a pullback before eventually returning to where we were in February. This could take six months to a year to happen. Keep in mind that “the markets can remain irrational longer than you can remain solvent.”We will remain ever vigilant in protecting your portfolio first, then look to grow it when risk subsides.

This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.