Client Letter 4/6/20


I wanted to write you a personalized letter to accomplish a few things:

1) Discuss the current state of the market – explain what I am seeing

2) Discuss the time frame of a potential rebound – offer reassurance

3) Review your current portfolio’s asset classes – this will give you an idea of why you have each holding

4) Discuss opportunities – investment, sector and strategic  – provide a rainbow of opportunity over the next 12-24 months


Current state of the market

We have had the fastest 30% sell-off ever, exceeding the pace of declines during the great depression. It took the S&P 500 only 22 trading days to fall 30% from its record high reached on Feb. 19, making it the fastest drop of this magnitude in history, according to data from Bank of American Securities. Investors continued to dump equities as they feared that the economic fallout from the coronavirus outpaced the actions from global central banks and governments.

Not only did you live through the fastest drop in history you also saw the highest VIX (measure of volatility) in one month and finally, March 2020 had the 3rd biggest daily loss and the 5th largest daily gain since 1915.

It can be tough to compare a chart without a side by side view of a more regular chart, so here is January 2020 next to March 2020.

The fear of the virus was not discriminatory in the asset classes it chose to shred. You can see in the chart below there were very few asset classes that survived the carnage.

This made things abnormally difficult to avoid large losses considering a majority of asset classes were down greater than 10%.

It was not only the market drops and the decreasing balances in your investment account that made March a difficult month, but it was the constant news coverage and the speed at which everything was happening. The entire month was an onslaught of information, fear and uncertainty. To top it all off we were physically separated from each other staring at the same four walls every day. For all intents and purposes, we became prisoners in our own home, and we could not do anything to remedy the situation. March was an extreme test of our emotions and our psyche.

Despite how painful March was for our psyche and our portfolio if you are reading this I am under the assumption that it was not terminal and for that I say congratulations. March was crazy on a number of levels and it is now behind us! That is not to say the market volatility is over or that we have found a market bottom, but I would think that April will not be as hostile on our sanity as March was. While I could be wrong I do want you to remember that investing isn’t about a single decision or a single month but a group of collective decisions made over your lifetime.

I have always believed that in the good times, it’s good enough to be average. In good times, the average investor makes money. In good times, the greatest rewards are likely to go to higher-risk investments rather than lower-risk investments. Thus, in order to beat the averages in good times, I’d probably need to accept above-average risk. This additional risk could turn around and bite us any minute. There is a time when it is essential that we beat the market, and that’s in bad times. If I do this job well, it hopefully helps combat people’s natural tendency to “throw in the towel” at the bottom. Market timing has proven to be impossible for even the best investors on a consistent basis, but making decisions based upon each client’s individual asset allocation is extremely important right now. I have attached your specific year-to-date performance per account. I am very aware that losses are never easy to swallow, but I would hope you will take some comfort in knowing your accounts have not participated in the full downside when compared to the broader equities market This is important because every percentage loss requires an even larger percentage gain to get back to even.

Losing 10% requires an 11.11% gain to recover, losing 20% requires a 25% gain to recover, and losing 50% requires a 100% gain (a doubling) to recover.  You can see this exponential relationship more clearly here:

And if you plug in the size of the current decline (~33% loss), you can see how much of a gain we would need to recover:

Without any further decline, the market has to go up 50% to get back to even.  This is why every $100 invested now, will grow to $150 (50% more) by the time a recovery occurs.


Potential timing of a market rebound

The next question is when will a recovery occur. I am fully aware that this event is different than any other event we have seen in recent history but with each event driven market drop has come a recovery. The one thing we can look at is the historical charts showing each 20% market drop and the length of time it has taken to recover.

As I have discussed in previous posts this recession can be described as an “Event Driven” recession (with the event being the Coronavirus). As you can see from the Goldman Sachs Global Investment Research team event driven recessions tend to be the shortest and rebound the fastest.

Goldman Sachs U.S. chief equity strategist David Kostin, thinks that the S&P 500 will likely head lower over the next three months as a result of the economic fallout from the spreading coronavirus deepens. Kostin did deliver a measure of hope, reiterating his stance that V-Shaped recoveries in stocks usually follow “event-driven” bear markets. He expects the S&P 500 to end 2020 at $3,200. There are many factors and variables at play with this black swan event. It is important to have a plan and implement that plan over time.

These are the reasons it is important that I do my job well when the market is down. As long as we can mitigate the downside in comparison to the overall market it makes getting back to even and beyond that much more achievable. We have a significant amount of cash on the sidelines to participate in what history would say would be a future market rebound.

A summary of your Current Holdings

Your current account holdings are made up of both equities, bonds and preferred stock. Each position plays a vital role in your portfolio. We are holding some equities because of the dividends that they are providing during this time of volatility. Some of your equity holdings are defensive in nature and tend to do well when we are going through a bear market. I will discuss the equities I have purchased for your portfolio in the last 30 days in the Opportunities section below.


In addition to that we are holding a number of bonds/bond funds. Historically bonds have provided a level of calm in choppy markets and delivered a coupon payment to your portfolio. Some panicked bond fund holders are requesting bond funds to return to them a portion of their cash. The bond fund then has to go in and create a cash position by selling some of their bond holdings. The only issue is their “bid” to purchase their bond holdings is significantly lower than normal. So for them to exit a position and get their client cash, they are being forced to liquidate the bonds at a significant discount. This is mainly due to the lack of buyers.

A majority of your bond holdings are investment-grade bonds in companies with good balance sheets. These are companies that are in position to sustain a short-term economic downturn as a result of this virus. I am telling all of my clients to retain their positions, as we do not want to sell them at a loss when they are the fixed-income portion of your portfolio. I believe the bond market has begun to stabilize as the Federal Reserve has stepped in to provide pricing stability through the purchase of bonds.



Finally we are holding preferred stock – Preferred stock is a form of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. There have been many market disconnects during this strange time and one of the main disconnects can be seen in preferred stocks, Bonds and Metals. All three have been seen as a refuge from a market collapse in previous recessionary periods but each has traded in more of a disconnected nature over the past 30 days. The issue right now with preferred stock is that there is not volume (buyers). With the state of the economy right now, there are very few buyers. This isn’t because of the quality of the preferred stocks. It is because of the uncertainty of the times. When there is a buyer, it is at a deep discount. Once someone sells at that discount, the new price is reflected by that sale. Preferred stock — because of the low volume — has always been a small portion of your portfolio. We were always expecting dividend payments, and those payments are continuing even in these uncertain times.

* snapshot 3/19/20

Notice the High and Low of the day- This is very abnormal for a preferred stock. Much of this can be related to the lack of volume. As long as you aren’t a seller, or looking to be a seller any time soon, liquidity in a preferred stock in a quality company should not be a major issue but depending on the time of day you look at your account it may distort the loss or gain.  As a percentage of your portfolio, preferred stocks make up a smaller portion (i.e. under 15% of your portfolio). This is because of the historic lack of liquidity.


Your account is currently holding a higher than average cash position. I don’t see any wholesale changes to your cash position in the coming week. The next question is when will I decide to deploy the cash and what will I be looking at.


Every market drop proves to provide opportunities in the future. The markets could go lower; the market is trading on emotion right now with little information. This is a difficult time for any portfolio manager, as the market can have 10% up days and 10% down days as we have seen. This is very abnormal. At no point in history have we seen this much volatility.

I have a rules-based plan and have not made decisions without consulting the plan. We do not know the data on the short-term economic impact of the virus and the lockdown. In the next few weeks, we will begin to get data on:

  • The amount of people that are infected, as we consistently get more testing,
  • Projections on length of business closure
  • Which businesses will be most affected and what the true impact on their forward earnings will be.

Based on this information, I can begin to model out 12-24 months to figure out what forward earnings should look like and back that into current price. This will provide buying opportunities. Due to the impossible nature of market timing (as mentioned above), I cannot be on the absolute front end of the recovery. However, I will be selective and make sound decisions based on the rules-based approach I have laid out.

The things I have purchased in your account over the last 30 days and the reasoning behind those purchases are below:

Domino’s Pizza – Dominos was well ahead of its competitors converting all of its stores to focus on carry out and delivery years ago. As a result of that they should see a large boom in sales when people are either cooking at home or ordering delivery type food. Dominos has been a fantastically run company. They have a great balance sheet (see 3rd party equity research included after this letter). Dominos is one of the business models that can sustain a quarantine.

Zoom Communications – Zoom provides a remote conferencing service that combines video conferencing, online meetings, chat, and mobile collaboration. To me this was an easy direction to look as with the pandemic occurring businesses would have to shut down their offices and move to a work at home environment to which Zoom was the likely benefactor. Instead of walking into your ten o’clock meeting, the new norm will be to dial into Zoom Video and have a video conference call at ten o’clock.

Because of this dynamic, so long as the Covid-19 outbreak keeps employees at home, demand for Zoom Video’s solutions will grow, and ZM stock should perform better than peers.

The next step was to look at Zoom’s current financial situation. (I have included a 3rd party analyst report to show you what I look at to make a purchase decision).

Home Depot– Home Depot has always been a solid company with a good balance sheet. When Home Depot was dubbed an essential service, I figured they would be a benefactor of very low interest rates.

Kroger– is the largest supermarket in the United States by revenue. During times of pandemic grocery stores are a benefactor as more people are eating at home and cooking for themselves. In addition to that many people are opting for higher priced items if the lower priced item is not available as they don’t want to go back to the grocery store each week, they are buying in larger than normal quantities. Kroger is considered an essential service and will not be closing its’ doors during the coronavirus threat.

Gilead Sciences – , is an American biotechnology company that researches, develops and commercializes drugs. The company focuses primarily on antiviral drugs used in the treatment of HIV, hepatitis B, hepatitis C, and influenza. Gilead was positioned well to use one of their previous Ebola drugs, Remdesivir to fight Covid-19. As a nucleotide analog that mimics adenosine, one of the building blocks of any RNA virus’s genome, the therapy could also attack SARSCoV-2, the virus causing COVID-19—or so the theory goes. Remdesivir will now start two phase 3 trials—initially at 15 centers up and down the U.K.—to assess how well it can work in patients with moderate to severe COVID-19.

Gold and Silver- Historically Gold and Silver have been considered safe havens during market turmoil. In the early days of the bear market this had not been the case as investors were fleeing all asset classes in an indiscriminatory fashion to create larger cash positions. At the end of the day the results in Gold and Silver were not what I expected. I would expect as volatility continues over the next few months, we would see a bounce in Gold and Silver.

You made it to the bottom of the single longest letter I have ever written. I hope this letter provides you with a level of confidence in myself and the actions I am taking in your portfolio. I am constantly monitoring your portfolio’s; looking for opportunities to either buy or sell when the appropriate time presents itself. I have a plan and the plan is designed for YOU. I have been working through multiple market corrections. This has continued to build the importance of a rules-based philosophy with each of your portfolios. There is no emotion in my decision making. In times like these, I would be ignorant to say it is the same as a previous large event. Events/disruptions are always unknown, and they never look like the ones that came before them. I do know that this is a singular, black swan type of event that will have a massive impact on the short-term economic viability of many businesses. At the end of the day, I have faith in people. Historically, people have always adapted, solved the problems, and come out on top.


“History never repeats itself – Man always does.” – Voltaire






Philip Lockwood


Securities offered through Parkland Securities, LLC, Member FINRA ( and SIPC ( Investment Advisory services offered through SPC, a Registered Investment Advisor.
Lockwood Financial Strategies, LLC is independent of Parkalnd Securities, LLC and SPC
Lockwood Financial Strategies LLC. 3100 Ingersoll Ave. Des Moines, IA 50312. Phone: 515-274-8006