Broker Check

June Newsletter

June 3, 2020

“….The New Normal….”

As May came to an end, I started the monthly process of accumulating and analyzing data to understand how the Virus has affected our managed portfolio to date. And more importantly, how it will impact the portfolio going forward, as medical research and the re-opening of the economy will establish our “New Normal”.

Then, just as I finished gathering my thoughts, our world was again disrupted by civil unrest and unthinkable events. Today, as I watched the news I saw the spectrum of civil protest to violence and looting, along with the possibility of military response. Déjà vu sets in and carries me back some fifty years, to my college days when similar civil unrest unfolded and changed our world forever. We all know that change is necessary and that we must adhere to humane, civil actions to bring us together. Although our markets were shaken on Monday morning, leaders from all walks of life have pledged to find a resolution without further violence. Accordingly, our markets have rebounded, believing that we are strong enough to “set things right”.

So, where are we now? From reading our letters, you know that our view of the market changed to a position of caution in 2019 as market valuations shot up.  Some combination of new money from individual and foreign investors drove valuations beyond what we believed were sustainable levels. Our response (dictated by our time-tested strategy) was to “sell-high” on the equity side and “buy-low” on the income side, of the portfolio. Our rebalancing of all portfolios left us basically where we were at the end of 2018 on an equity versus income allocation. In many cases, we even reduced equity allocations further for clients either in, or near, retirement to protect their portfolio principal balances.

The equity buying euphoria continued into 2020 until the Virus created fear and thrust our markets into a freefall. That Black Swan event caught all market observers off balance as the roller-coaster-ride made us rethink our response. We went to work immediately to reset our portfolio allocations. Our built-in, multi-asset portfolio structure proved to be resilient.  We immediately bought “low” and broadened our allocations to allow for our active management approach to take advantage of the unconstrained and unbelievable opportunities. Those actions have brought us back to where we were one year ago on a total portfolio valuation basis. In the process, our portfolio looks much different (by category percentages) than it did back then and it continues to grow in value.

Here are the Virus-impacted performance numbers for our aggregate managed portfolio:

  • From December 31, 2019 to the market-top, February 21, 2020, plus 1.72 percent
  • From market-top to market-low, March 23,2020, minus 27.76 percent (Everything lost value, including the income portfolio, as the sky was surely falling)
  • From market-low to May 31,2020, plus 25.16 percent (lead by equity values increasing by 38.62 percent)

These results illustrate the roller-coaster-ride and the extensive portfolio work needed to overcome the unrealized losses in portfolios. However in the process, some losses were realized as we moved out of energy allocations into large-cap domestic equities and expanded allocations in both alternative equity and income categories. 

Of special interest to our clients is what the longer-term view will look like. We will no longer report performance for periods looking back more than five years as the “New Normal” should not be compared to our longer-term look backs where economic models and investment fundamentals are now “outdated” and could provide a misleading impression.  Accordingly, our historic long-term results will most likely not be duplicated any time soon. To put that comment into perspective, economists are now predicting that it could take ten years and possibly longer, to recover from the economic impact  brought on by the Virus. We cannot ignore that one-in-four American workers is now unemployed (levels not seen since the Great Depression) and our economic systems will need to be re-tooled to bring everyone needing a job back to work. In the recovery process, our central banks are committed to keeping interest rates at near zero for as long as it takes. 

Longer-term performance results are:

  • From December 31,2018 (our “fair value” starting point) through May 31,2020, plus 9.05 percent
  • Five-year look back from May 31, 2015, plus 14.19 percent
  • One-year period ended May 31,2020, plus 0.29 percent

When considering these “New Normal” results and to forecast future returns, we must keep in mind that although the Virus looks like it MAY be subsiding, that without continued social distancing and promised medical solutions, all bets are off. Nevertheless, promised continuing relief from the government should keep our economy afloat until disaster relief is no longer necessary.

To that end, there are several additional stimulus bills working their way through Congress to keep our economy from shrinking further. And, we must not forget that once our economy is, in fact, back on its feet that we will need to repay all the debt currently being incurred to keep us going; hence, the ten-year economic recovery period alluded to earlier in this letter. Our rather foggy crystal ball now suggests that we can expect annualized total returns, a combination of growth and cash flow, to be in the three-to-five percent range for the foreseeable future as economic growth catches up to the current market growth. Furthermore, the minimal cash flows from reduced dividends and historically low interest rates will probably make up the bulk of the annualized returns, as some years will be effected by continued equity market volatility. In that process, we believe that our diversified equity allocations will avoid both the “low” lows and the “high” highs. On the income side of the portfolio, we believe that government promises to buoy corporate debt issues will keep income valuations more normalized until “real” interest rates can be re-established. All-in-all, it looks like some belt tightening may be in our future for some time to come. Nevertheless, history will repeat itself again as the American Entrepreneurial Spirit regains a strong footing driven by new technologies and continued innovations that will drive market valuations forward.

All of this discussion now dictates that we meet with all clients over the coming months to re-examine client risk profiles and Investment Policy Statements. Our team behind the scenes has been working diligently to allow client interactions to take place in our on-going work-at-home structure. To that end, we will soon be entirely cloud based and many meetings will be held virtually for the safety of all involved.  

It has come to our attention that some taxpayers are beginning to receive their CARES ACT  Economic Impact Payments, (stimulus checks), via Debit Cards.  Please note, that this is NOT a scam.  For more information please see the link below, specifically Q45 for clarification.  Also, our main office is now staffed from  9am until 2:30pm,Monday through Friday, and continues to abide by the safety parameters suggested by San Juan Basin Health.  If you would like to have an in-person appointment this can be arranged while still abiding by the current recommended safety criteria and in conjunction with the criteria outlined by our office mates, the accounting firm of Tafoya Barrett and Associates.

Finally, as a Country, we must heal the wounds brought on by senseless violence as we search for peaceful means to solve the deep-rooted cultural issues of our time. Please do your part and do it peacefully!  

With great respect for our clients continued support during these troubled times!


Intelligent Investment Management, LLP

Steve,  James, Jeannie, Laura, Helen, Stephenie