Second Quarter Newsletter
July 14, 2020
“What we learn from history is that people don’t learn from history” – Warren Buffet
We hope you are finding ways to enjoy what has been a fantastic summer thus far, albeit maybe a little quieter than normal. Everyone at Cribstone is doing quite well and making the most of these trying times. Equal to our summer heat, the equity markets have warmed up substantially over the last quarter, recovering most, but not all, of their ground lost from February and March. The S&P 500’s recovery reached a short-term peak on June 8, down about 4.5% from its record high. If it feels remarkable, it should, as the S&P 500 just recorded it’s the best quarter ever in terms of performance. We take that with one very large grain of salt though, recognizing that the prior quarter was one of the worst ever. Things have a way of balancing out.
At Cribstone, we are generally pleased with our decisions so far this year, having entered the market malaise more cautiously positioned than normal, which helped to protect values. This allowed us to proactively add to stock exposure in most accounts when it was particularly challenging to do so, at or near the March bottom. This really aided accounts in recovering from the decline. Additionally, the positions that we thought would protect, namely managed futures and gold, performed mostly as expected. They provided first a buffer against the market decline and then served as the source of funding as we added back to stocks.
As mentioned in our last letter, what will be debated and discussed and then ultimately measured is what shape our economic recovery takes. Much desired, some economists predicted that we would see a V-shaped recovery, where economic growth comes back with the same fervor with which it departed in March. The early economic data we received as states began reopening notably have some elements of a V-shaped recovery. Initial unemployment benefit claims, which peaked at 6.9 million for the last week of March, have been on a steady decline to the latest measure of 1.3m for the first week of July. Recognize that this is still very challenging news, given claims peaked at less than 0.7m in the 2008 financial crisis. The unemployment rate, which surged from under 4% to 14.7% after the pandemic took hold, declined to 13.3% in May, and then to 11.1% in June as many furloughed employees were brought back to work. While this is substantially positive news, the various components of the Cares Act, such as the Paycheck Protection Program (PPP), if allowed to expire in the coming weeks could create upward pressure on the rate in the coming months.
Unemployment is not the only area showing signs of a V-shape recovery. Job Openings, building permits, payrolls, industrial production, personal consumption, and retail sales have all rebounded from the lows. As JP Morgan’s lead economist observed, however, the economy fell off a cliff in March and hit a trampoline at the bottom. How far this trampoline takes us is still up for debate. While we are encouraged to see evidence of economic acceleration, we also recognize the fragile nature of the recovery and the unique conditions that led to the decline in the first place. Humankind has learned much over the last seven months about COVID-19, but we have yet to learn all that is needed to truly put it behind us, as we see from its resurgence in some states. We are optimistic but realistic.
For now, we are balancing the opportunity for growth, with the desire to maintain elements of protection. Many of you, in fact, have participated in our discussions about hedging using options. We are also holding slightly higher levels of cash in all accounts. Cribstone will continue to do everything possible to find balance in these uncertain times. If we have not connected in the last few months, now would be a great time to do so to ensure that we are operating on the same page with respect to risk management and portfolio structure. We have been and will continue to be, very active to rebalance risks in your portfolio. Many of you have noticed this activity through what may seem like volumes of paper confirmations from Schwab. If you are still receiving these paper trade confirmations, and you would like to stem the flow of envelopes, it would be a great time to modify your settings at Schwab by moving to electronic trade confirmations. If this is of interest, please let us know and we can walk you through the process.
Lastly, please find enclosed the Client Relationship Summary (CRS) form, which is now a requirement of the Securities and Exchange Commission (SEC). The form outlines all aspects of your relationship with Cribstone, custodians such as Schwab, and any products or services that we utilize. When Cribstone became an independent firm in 2015, it was to serve you without compromise. The CRS form, to a great extent, documents exactly the kind of relationships and structure that we want. We believe it’s critical for you to have complete transparency in regard to who we are, what we do, and the fees and costs for us to carry out our work. While this is also outlined in our Wealth Management Agreement, the new CRS document is intended to provide a short synopsis of these details in one easy to read place.
On behalf of everyone at Cribstone, thank you for working with us. While we are connecting to most of you by telephone and online meetings, we have begun face to face meetings again (with masks). We are open to whatever method works best for you, so if you’d like to connect, please give us a call. We wish you and your family the best and continued good health!
Scott Upham, CIMA® CPWA®
Contributions were made to this letter by Amyn Moolji, CIO and COO, Jeffrey Burch, and Taylor Haselgard.
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.