2020 Spring Newsletter – First Quarter Review

First Quarter Newsletter

I’m reminded of our Thanksgiving tradition, going around the table each taking a turn to express what we are particularly grateful for.  Some comments are reflective and carry a sincere, serious tone; others invariably focus on something as simple as ‘I’m thankful for the mashed potatoes.’  The events of the last two months have given me pause and made me reflect on all that we are blessed with.  Never could I have imagined a crisis so stark, where lives would be lost so quickly, as is being experienced currently in Italy, Spain, and New York; or where much of our economy would simply shut down, like turning off the lights before walking out the door.  All of us at Cribstone are immensely thankful for you, and the responsibility you place in us to make sound judgments in such challenging times.  We have found your expressions of concern for us extremely heartwarming, and it makes what we do on a daily basis all the more meaningful.  In addition, I feel personally fortunate to lead such a dedicated group of individuals as we have here at Cribstone.  Amyn, Tina, Jeff, Taylor, Maranda, and Crystal have been ‘all hands-on deck’ during this tumultuous time, and I am thankful for them.

Using words like ‘typical’ to define a recession can lead us into muddy waters.  The causes of an economic slowdown are often unique; if there is a common thread, it is that there has been a prolonged buildup of excess that eventually falls under its own weight.  The mortgage crisis in 2008-9, while a severe example, represents this scenario well.  Lenders provided capital to anyone willing to sign their name on the dotted line, and a housing boom was born.  With the housing spike came extreme leverage in the financial system and eventually, people lost their capacity to service the debt. The long-built excesses in housing led us down a very slippery slope that took quite some time to work itself out.

This recession (although technically not a recession yet, it’s almost sure to become one) is also different.  While equity markets were somewhat richly priced following the runup of 2019 and the bull market was long in the tooth, the accommodative monetary policy was supporting asset returns.  Then COVID-19 struck with such pervasive force that worldwide, everything simply stopped.  The world sits sequestered and biding its time for the virus to either peter out, or for therapies or vaccines to return us to normalcy.  Until then, economic activity has ground to a snail’s pace.

Be prepared that the economic data that will hit the press in the coming months could be hard to stomach.  Last week over 3 million people filed for unemployment benefits, more than four times higher than the previous record. St. Louis Federal Reserve chair James Bullard estimated this week that the U.S. may lose 47 million jobs in the near term, implying an unemployment rate of approximately 32%.  These are large numbers by historical standards, indicative of this rather unique shock as compared to any other experienced by the US economy in the last 100 years. [1]  Importantly though, there is little doubt that we will make it through to the other side of this.  The unprecedented actions taken by Congress last week in passing the CARES Act is a productive step that will be helpful in supporting people and businesses alike during this crisis.

Rather than recap the elements of this bill, along with its two predecessor bills, we are pleased to point you to our  COVID-19 Resources page, where we have created a special section that outlines key components of the government’s actions, as well as other resources that we thought you may find helpful.  There are a few things that the CARES Act does, however, that we would like to draw your attention to:

  1. Suspends all Required Minimum Distributions for 2020
  2. Provides payments to all households equal to $1,200 per adult, $500 child (limits and phaseouts above $150k in joint income)
  3. Waives Required Minimum Distributions for 2020, which along with the decline in equity valuations provides a unique opportunity for Roth conversions

What might the road to recovery look like? Although it is too early to tell, parts of the world like China and South Korea might provide some insight.  Wuhan, China was the epicenter of COVID-19, followed about a month later with rapid expansion in South Korea.  As seen below, both are now recovering well and while cases have not been extinguished entirely, they are now contained.  With the combination of China and South Korea representing about 20% of the world’s population and economic might, this is quite positive and provides some hope that we may follow a similar path.  With China, economic indicators that can be measured daily or hourly, like road traffic, air pollution, and port activity, all point to increased activity.  And last week’s data on South Korean exports measuring the first 20 days of March showed a monthly rebound of over 50% in goods sent to China.[2]

Graph measuring a monthly rebound of goods sent to China and South Korea.
Source:  World Health Organization, March 26, 2020

As widely discussed, the cases of COVID-19 are expected to reach their peak in the U.S. over the next two weeks, and we may start seeing the results of 80% or so of Americans doing everything possible to shelter in place.  Times like these, although extremely difficult from a human perspective, tend to present investment opportunities that are few and far between.  Cribstone came into this crisis on a more conservative footing for you than what your normal investment policy would dictate. This has generally not only led to better protection than the blended benchmarks that we measure ourselves against but also positions us well to take advantage of any opportunities that might present themselves.

As we have stated in each of our three prior communications regarding coronavirus, this too shall pass.  In the meantime, we will continue to communicate with you what we know, including what concerns us, and maintain our steady focus on doing whatever we can to promote your long-term financial health.


Scott Upham, CIMA® CPWA
Managing Partner

Contributions were made to this letter Contributions were made to this letter by Amyn Moolji, CIO & COO, & Jeffrey Burch, Director of Wealth Management, & Taylor Haselgard, Portfolio Manager.

[1] Back of the Envelope Estimates of Next Quarter’s Unemployment Rate, Miguel Faria-e-Castro, St. Louis Fed, March 24, 2020

[2] What will a Recovery Look Like? Jeffrey Kleintop, Global Chief Investment Strategist, Charles Schwab, March 30, 2020

Cribstone Capital Management (“CCM”) is an SEC-registered investment advisor located in the State of Maine. The firm and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC-registered investment advisors.  CCM may only transact business in those states in which it is notice filed or qualifies for an exemption from notice filing requirements.  For information pertaining to the registration status of the firm, please contact the SEC on its website at www.adviserinfo.sec.gov.  A copy of the firm’s current written disclosure brochure discussing the firm’s business operation and fees is available from CCM upon request.

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