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The Great Compromise

The Great Compromise

| April 22, 2020
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Following a week when the President announced a plan to begin re-opening the country that largely delegated decision-making to the states, I’m reminded of The Great Compromise of 1787.  That historic accord during the Constitutional Convention gave birth to the system of congressional representation that endures today – our democratic nation-state.  The Founding Fathers assembled, put aside their passions and prejudices, and, after a heated debate, drafted an imperfect document.

This pandemic has given rise to a number of debates and compromises: 

Is the federal or state government responsible?  Yes.  Our constitution separates and limits powers to each.  When the health and welfare of the people is of mutual concern, working at cross-purposes while exercising legitimate constitutional authority is a needless dispute.  Playing politics in the midst of this crisis is callous, and after 233 years, Americans are still struggling to find a “more perfect union.” 

Is healthcare or economic policy the top priority?  The public wants and needs to get back to work, but it wants to do so safely.  Finding a way to maximize lives saved and minimize the economic cost is the ultimate objective. 

Will the recession recover quickly or linger?  The S&P 500 Index bottomed on March 23 and then rallied 25% thru mid-April.  Federal Reserve and congressional relief efforts, along with preliminary hope for Covid-19 drug treatments, have provided short-term market optimism.  The rally may be pricing in too much good news, though.  The longer shelter-in-place orders stay in force, the more likely market momentum reverses.  Stimulus can help only so much if the economy remains closed.   

Each of these debates will impact investments.  As we enter a new investment regime, the global economies and markets will be shaped by the magnitude and duration of the health crisis.  There is no comparable bank of memories to help guide the way forward, but we believe we can identify some key themes that are likely to drive future opportunities:

  • Quality companies with strong balance sheets, low debt, significant competitive advantages and seasoned management will navigate this crisis with less disruption and more staying power.
  • Active management, with its security selection and fundamental research-based analysis, is likely the best option to capitalize on the substantial dislocations developing between superior and inferior businesses.
  • Income-oriented portfolios will focus on dividends from companies with durable earnings, and credit management in investment grade, government and flexible strategies .
  • The importance of a diversified portfolio to mitigate risks has been confirmed once again, as gains in Treasury bonds have, to some extent, offset losses in equities.
  • Valuations matter, and opportunities to buy great businesses at fair prices will emerge for disciplined investors with a long vision.

Emotions often derail long-term financial plans, and it’s easy to be emotional these days, constantly hearing terrible health and economic news.  Your wealth advisor may be working remotely, but is there to listen, to comfort, to educate and advise during these unsettling times.  Maybe you now realize the riskiness of your portfolio is more than you initially thought you could stomach.  Maybe you see this crisis as a once-in-a-lifetime investment opportunity.  Whatever your situation, we want you invested in an allocation in which you’re most comfortable. We call this a  “Sleep Well At Night” (SWAN) portfolio – because sticking with a plan for the longest period of time, regardless of the obstacles the market throws at you, is the most proven way to create long-term wealth.          

The healthcare system saves lives; the economy provides us everything we need to live.  Successfully navigating these competing interests requires the shared wisdom of the body politic.  Debate should not impede progress.  Just like our investment due diligence process demonstrates, success comes from a healthy compromise of discipline, research, data, innovation, experience and patience.  Aesop was fairly prophetic.  The Tortoise beats the Hare.  Maybe he’ll be proven right again this time.        

E Pluribus Unum.

Innumerable thanks to those healthcare workers fighting the virus on the front lines.  We are forever in your debt.        

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