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Klingman Insights

Covid-19 Virus Update

March 13, 2020

These are anxious times on many levels. While we spend most of our time helping you manage your wealth, we all know there's nothing more important than our health. As we said in the call that we hosted last week, the more extreme the responses are to try to stop the spread of this virus, the more severe the short-term economic impacts will be. We believe the steps taken by governments and companies around the world will significantly impact economic activity over the coming months. Beyond the severity of the economic impact is the question of the length and whether there might be any permanent change in consumer or economic activity.

We cannot pretend to know how long these changes will be in effect; however the cycle of the virus in China gives us hope that this may run its course over the next few months. But nobody knows exactly how this will play out. Clearly the news will get worse in the near-term and that will continue to impact economic activity and the markets. As far as permanent effects, as we have seen with catastrophic events such as 9/11, eventually consumers and economic activity return to pre-crisis levels with minimal long-term impact.

There will be a lot of coverage in the press that as of last night's close the Dow Jones Industrial Average officially entered bear market territory with a decline of over 20% from its high. In all likelihood the S&P 500 will also enter bear market territory by the close of markets today. We will provide more background and data in our next market Outlook call, but since 1926 there have been eight bear markets which have ranged in length from 6 months to 2.8 years. What makes this bear market stand out is how quickly markets fell from the all-time high. In past bear markets, the average number of days from peak to 20% decline has been 255 days with the median being 156 days. The recent market selloff reached this dubious achievement in just 17 days. Historically “event driven” bear markets, that is market declines that were not driven by economic recession but instead triggered by events like war, oil price shocks or emerging market crises, have been of shorter duration and tend to rebound to previous highs more quickly. We have never had a bear market triggered by a viral outbreak event, but it certainly seems to fall into that category.

So what are we doing? Because every client is assigned to a target asset allocation model consistent with their goals, risk tolerance and time horizon, we are not forced to sell stocks in this environment. In fact, in the last two days many clients have now become under weighted to equities, and in the days and weeks ahead, we expect to use cash and investment grade fixed income proceeds to purchase equities at what we believe are discounted prices. We will also look for tax loss harvesting opportunities in select accounts to use against any potential future gains.

Because we also want to act responsibly for our team, starting tomorrow most of our staff will be working remotely. The technology is in place such that there should be no disruption in our ability to serve each of you. If you call or email the office, we will receive your calls and messages as if we were sitting at our desks.

Please be safe and don’t hesitate to reach out to any of us with any additional questions.

Best,

Gerry


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