1st Quarter 2020 Newsletter

Market Update

We hope this finds you well; certainly, we are in trying times. Most of us are now on lock-down and watching the news develop rapidly as the U.S economy has been nearly shut down, intentionally. The impact on our jobs, families and relationships has been tremendous.

In this letter we want to provide you an update on the markets, specifically how these events have impacted your investments. Bob and I have spent the last two weeks discussing the markets and your money individually. We have been modeling different actions and taking direct steps in regards to your target asset allocation, re-balancing where needed and other key portfolio management functions that this firm performs. Portfolio management is all about understanding risk and positioning for the future- but with a deep analysis of historical information and actual market experience to help set a course forward. Covid-19 has challenged us to act, and react, quickly to events unforeseen just a few weeks ago. Each client of the firm has a custom portfolio, based on key factors such as age, risk tolerance, employment, family situation and long-term goals. These are the most common questions and discussions we have been covering with clients and they worth reiterating.

How are bonds doing?

Last week the bond market came under duress as credit markets stated to show sign of concerns. Because of this uncertainty, underlying pricing on bonds saw large swings that are far from typical. Recently we have seen prices in the credit and bond market begin to stabilize.

Let’s get into the details a bit more. At Copper River, we analyze and purchase individual bonds for our clients in what’s called a bond ladder strategy. The bonds acquired are held at Schwab, but they are sourced from Blackrock, and other institutional bond dealers. Schwab has a limited inventory of bonds, which is why we use other dealers who can offer better prices, inventory and execution. Additionally, we have strong relationships with some of the largest bond dealers because we also advise on bond portfolios for institutional investors. The bonds held by our clients are of investment grade quality, meaning these are debt obligations of some of the largest companies of the world that have exceptional businesses and balance sheets. The bond ladder portfolios that have been constructed for our clients are diversified by issuer, industry sector and maturity. The investment objective is to hold the bonds to maturity, whereupon, absent default, the bonds are repaid back at face value. The default rate for A rated bonds in last 100 years is less than 1%.

Let’s look at an example as you would see stated on your statement:

Abbott Laboratories 3.5% (Coupon) 11/30/2023 (Maturity) $25,000

Summary- Each bond has a stated date of maturity listed on the issuance (this one matures November 2023). A bond has a stated coupon of 3.5%. The coupon is paid out to you in cash (typically semiannually). This bond would send a coupon payment to the holder of $437.00 every six months. An underlying price of a bond will fluctuate with market demands, perceived credit risk and interest rate movements. But unlike equities, bonds mature on a set date, at which the principal amount invested is returned to the buyer. As mentioned above, the day-to-day pricing is not a concern as it is in equities and we are not trading these bonds, but holding to maturity. This individual bond ladder strategy is extremely effective for investors looking to decrease portfolio risk and capture a steady stream of interest payments. Very few firms and individual investors utilize this strategy as it does require quite a bit of work for the advisor, as well as deep market experience to execute well. In contrast, most individual investors are in (Bond Funds), which may have the same feature of a coupon payment (yield) but does not have the mechanics of returning principal invested at a set maturity date as they are open ended.

What has you worried in terms of investments?

The length and duration of the pandemic is of great concern for investments. The markets really dislike two things. One is uncertainty, and the virus and the spread globally is still uncertain. Second, the market trends (higher or lower) directionally over a set time period based on corporate earnings and earnings growth. Right now, with so many sectors of the economy shut down we are seeing incredible pressure on GDP, unemployment, earnings and other key macro-economic indicators that only weeks ago were in great shape.

What has you hopeful for the markets?

We feel strongly that the strength of the U.S and global biotech sector and its capabilities. A solution in terms of vaccination and suppressing the virus will come from this sector, as it did in last pandemic which was H1N1 in 2009. Since we essentially are facing a medical problem, we need to understand how the sector has put forth past solutions forward in terms of past viruses that have impacted us. This includes SARS (2003) Zika (2016) HIV and Ebola.

In addition certain parts or sectors of the markets have held up, and we expect will continue to hold up as we go through this global crisis. These segments and sectors include: TIPS ( Treasury Inflation Bonds), U.S Dollar, Biotech, Health Care, Consumer Staples and North America Technology. We can’t express enough the positive impact companies such as Amazon, Apple and Google have had on all our lives and from an investment standpoint are still attractive to own.

https://www.cnbc.com/2020/03/20/a-coronavirus-treatment-could-come-much-quicker-than-a-vaccine.html

Will the markets recover and why are they going back up?

Equity markets tend to overreact to the upside, as well as the downside. These daily moves of 1000-2000 points in the DOW are not good at all, and show that the market has not set a direction and or floor yet. Volatility is off the chart. As of today, the S&P500 is down -21% YTD, but has gained back +10% in last few sessions. While the claw back is great, investors need to be cautious as we still need a better understanding on how this global virus will impact us in the long run and just how long this economic shutdown will last. Below is the S&P 500 since mid-2016. You can see the recent pullback and just the depth of the correction over past two weeks, but also just how high the gains have been since early 2016. On a positive note investors should note the long term power of the markets. Over past 100 years the S&P 500 annualized total return for the index is 9.8%. For investment grade corporate bonds the average annual return is 4.43%.

Are the market mechanics functioning?

Yes. During 2008/2009 we witnessed fundamental market mechanisms break. During the recent market sell-off, we have seen extremely volatile markets, credit gapping and buyer seller imbalances. The Federal Reserve has taken a very active approach in terms of backstopping and repurchase of government, MBS, municipal and corporate bond securities as well as reducing Fed Funds rate to 0. This had a very positive impact in providing liquidity into the market and help ensure smoother functioning. Recently, we have seen tighter bid/ask spreads on securities and the Schwab platform and subsequent service have been excellent. Overall, what we refer to as “the plumbing” in financial services, is functioning and, given the decisive role that the Fed is playing, we see no reason that it will not hold up well as we get through this global event.

Is this market correction like 2001 and or 2008/2009?

Bob and I were working in the financial services during the last three major market corrections. We understand the various dynamics that corrections have on various asset classes globally, as well as the opportunities that bear markets bring. Both 2001 and 2008 compared to the current pandemic are all very different and the main markets (Equities, Fixed Income and PE) will all react differently as we go through this. It should be noted that in both 2001 and 2008 the equity markets corrected 50% from their highs (see below). At this point looking at the data, and our past experiences we would say 2008/2009 was a more dire period in terms of how the markets functioned. In 2008/2009 many parts of the financial markets were not functioning properly, with such core pieces as lending, securitization, mortgage markets and key components of the capital markets broke or went on life support.

Conclusion

We realize that there is so much information out there, and as such we attempted to keep this update brief and concise. Looking back on 2019, we spent a great deal of time as a firm re-balancing our clients’ positions into bonds and private equity, providing a superb ballast inside a portfolio during times like this. Even before Covid-19, which has been an extraordinary and unprecedented medical event, it was obvious many investors were too heavily weighted in equities. Bull markets breed confidence, and after 12 years of price escalation, investors who were approaching retirement or in retirement were over-weighted in risk assets and, quite frankly, holding aggressive positions that today have experienced considerable downward corrections. For these investors looking at their statements at the end of this month will be enlightening. Many of you have contacted us to help family members, friends or neighbors that continue to be improperly positioned in terms of risk weighting and asset allocation and may need judicious and prescient analysis and advice. At Copper River, our extensive expertise in the financial arena is unique; we have significant insight into the markets, the highs and, of course, the lows. This invaluable experience allows to capitalize on the bull market while mitigating losses for the bear. We are happy to help anyone who has concerns so please use us as a free source of assistance to those in need. Stay safe and help one another.

Market and Virus Update

Confirmed cases of COVID-19

Confirmed cases of COVID-19In the last 7 trading days the equity markets (S&P 500) has fallen -10%. In terms of a market movement in a specified time period this is the largest since 2008. In market technical terms a 10% drop constitutes a “market correction”. What the market is experiencing called a “Black Swan” event which is defined as a shock to the markets based on an unforeseen event that would be considered rare. The good news is this 12% market correction comes off all time market highs set in mid February. Let’s put these last few sentences in context to overall market returns. The S&P 500 is up +5.19% in the past 6 months and +8.57% on 1 year basis despite the down movements over the past 6 days. We have been busy fielding calls and emails on whats next for the equity markets and what should be done as it relates to investing. Lets break this down a bit.

Coronavirus ( Covid-19)– This is the event that has spooked the markets globally. Very few market indices, countries, sectors and individual equities have not seen price depreciation. Of exception is the bond market, which has rallied on an increased demand for the safe haven asset class. As a firm that specializes in bonds the asset class has performed, as it has for the last 100 plus years, which is predictable even during times of stress. The chart below caught our attention, and while we have no idea on the medical aspects of this event we can say with certainty that markets will be impacted if coronavirus cases continue to spike. This is something that will need to be watched as a correlation has been drawn between cases spreading and market pressure to the downside.

What could happen to my investments if the Virus spreads? The virus in only 6 trading days has caused some of the largest U.S companies to already guide their earnings lower for Q1 and Q2. Examples of this in the past few days have been Visa, Disney, Apple and Alcoa. Continued and real coronavirus disruption would eventually reflect in the financials of the U.S fortune 500 companies, as well as those in the Russell 2000 etc. Impact to these companies current and forward earnings would be a drag on a companies subsequent equity prices. In the U.S we are already seeing heavy pressure on travel related companies and the transport sector. If the virus spreads rapidly in the U.S we will see financial impacts throughout the economy as the U.S consumer pulls back from spending. Consumer spending in the U.S comprises of 70% of U.S GDP.

What can we do to protect our investments?  Every client portfolio we manage is customized based on clients age, risk tolerance and goals. So we can not just say these 3 or 4  steps need to be taken to find safety.  Portfolio management and managing the risk in and around it focuses directly back to your asset allocation. Re-balancing to appropriate percentages of equities, bonds, cash and (private equity) is the key to long term growth and effectively managing risk. The obvious moves of shifting into a higher percentage of bonds, cash as well as certain private equity offerings can offer protection and will naturally be part of any conversation. As a client of the firm you are already aware we have deep experience and use of bonds and private equity in our portfolios with readily access to these two important asset classes. We will be setting up client meetings in our office, and calls with each investor over the next week to discuss your current holdings and appropriate asset allocation going forward into the rest of 2020.

In conclusion, we are watching markets closely and your positions even closer. As events unfold we look forward to having individual conversations as related to your investments and making adjustments that are warranted.  Please feel free to reach out with any questions and we look forward to continued work ahead.

Jim Etten
President
Copper River Advisors
303.513.0705
jim.etten@crawealth.com
www.copperriver1.wpengine.com