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Quarterly Review-April 2020

In a Matter of Months, We are Living in a Different World

The calm of January is over, and we are living through an experience like none we have ever encountered. We hope that you and your families are safe and staying healthy through the crisis.

Lucas Capital Management is fully functional and available to take your calls every day. Please reach out if you have any questions or concerns.

Living With an Uncertain Future

COVID-19 has permanently altered every aspect of our lives. As citizens, our mobility is constrained and our businesses or places of employment are likely to be closed. Unemployment has skyrocketed with an estimated 22 million people, 13.5 percent of the U.S. labor force, filing unemployment claims in the past four weeks1. The $2.3 trillion stimulus package signed into law is unprecedented in scope and represents a full 11 percent of the nations’ GDP2. Goldman Sachs is predicting that the second-quarter GDP drops 34 percent, by far the largest decline since the great depression3.

The striking data showing the collapse of our economy is reflective of what has already happened. Our life changed in the past couple of months. Since we have never been through an episode like this before, the future path to recovery is unclear. Many economists and business leaders are beginning to speculate on how we will return from this economic abyss. Having no historical analogies, any predictions are suspect. Certainly, the timing of any recovery is no more than guesswork. Over the long-run, we believe our economy will regain strength, people will go back to work, businesses will reopen and the stock market will recover. Our economy was relatively strong when the COVID-19 crisis started and we believe it will regain strength as the economic wheels regain momentum.

In our mind, the biggest question is when and how fast the recovery will occur. There is still so much we don’t know, which causes uncertainty regarding the timing and pace of recovery. To begin to understand the timing, you should consider each of these questions in order:

1. How will COVID-19 continue to spread across the U.S. and the world?

This is a healthcare crisis with the ultimate solution being the elimination or containment of the virus. By implementing social distancing, we have slowed the spread; yet it still is killing 8,000 people every day4. Broader testing, which will help assess the overall spread, is still limited, with only 1 percent of the U.S. population having been tested5.

2. What long-term constraints will remain in place after we can leave our homes and go back to work?

Speculation abounds on the phasing of people re-entering the workforce and reopening of retail businesses. These decisions will impact the pace of economic recovery.

3. What are the economic impacts of shutting down the world economy?

Many forecasts show second-quarter U.S. GDP declining more than 20 percent, with expectations that the economy snaps back in the third quarter6. Forecasts vary widely on extent and timing of the slowdown/recovery. The unemployment data, which is usually reliable, shows that 13.5 percent7 of the workforce is unemployed. The best we can hope for is a quick recovery with people going back to work and return to a stable economy by year-end.

4. How will the stock market react?

The stock market is always forward looking and prices are in anticipation of the future. Logic tells us that we need to follow the order of questions: The extent of the pandemic, when do people return to work, what’s the economic impact. Only then could you conclude the value of companies in the stock market. Yet, as we know, the stock market sometimes “skips steps” and anticipates the future. We don’t know how fast the stock market will recover from the selloff we have experienced over the past two months.

Because of the unprecedented nature of this crisis, the road ahead is uncertain. We have don’t have any reliable historical guide. Over the long-term, we believe that the COVID-19 crisis will end, the economy will recover, and the stock market will return to new highs. Without doubt, there will also be some volatility along the way. It could be a resurgence of infections after we soften restrictions on social distancing, or that the economy does not bounce back quickly because more businesses than expected are permanently closed. One quote that seems appropriate in the current situation is from former FED Chairman Alan Greenspan: “I’m not afraid of the risks that I know exist, I’m afraid of the ones that no one has considered.”

Facing the uncertain future with the right asset allocation is important for long-term performance. The stock market will recover, yet it’s nearly impossible to accurately predict the timing. Based on the daily volatility we have seen over the past few weeks, trying to time entry and exit points with any accuracy is fraught with danger. Our best advice is to keep your risk level where you are comfortable and don’t look at the daily gains and losses in your portfolio. As your advisors, we are here every day to discuss your portfolio, your risk level, and make sure that you are comfortable with your current allocations.

Lucas Capital is Working Remotely and Fully Functional

Brett Flynn has been going to the Lucas office every day to keep our doors open while the remainder of the staff is working from home. We have excellent technology so that we are fully functional and can meet all your needs as if we were working together under one roof.

Don’t hesitate to give us a call or email if you have any questions or think that we can help in any way. During this crisis, we have also been talking to many friends-of-friends and family members who are concerned about their finances. If you know of anyone who is concerned and would like to chat with a trusted financial advisor, please let them know about Lucas Capital. In times like these, we are happy to help anyone with concerns.

Improvements to IRA Rules That May Benefit You

What seems like a lifetime ago, in December 2019, the SECURE Act became law. Under this act, the first year you must take a Required Minimum Distribution (RMD) from retirement accounts was extended to age 72 from age 70-½. This change provides an extra 1-½ years for your money to grow tax-free and defer having to pay tax on your distributions.

Another benefit that the government just provided in the Coronavirus Relief Bill (CARES Act) is a suspension of the RMD for 2020. This suspension includes retirement accounts subject to an RMD such as an IRA, 401(k) and inherited IRA accounts. Please let us know if you have any questions or want to discuss how these changes can benefit you.

Stay safe, healthy and know that Lucas Capital is here to help with all your financial needs.

 

Sources:

  1. U.S. Department of Labor https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20200632.pdf
  2. https://howmuch.net/articles/worlds-economic-programs-against-coronavirus
  3. https://www.cnbc.com/2020/03/31/coronavirus-update-goldman-sees-15percent-jobless-rate-followed-by-record-rebound.html; Bureau of Economic Analysis https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey
  4. https://www.worldometers.info/coronavirus/coronavirus-death-toll/
  5. https://covidtracking.com/data
  6. https://fortune.com/2020/03/23/morgan-stanley-goldman-sachs-estimate-coronavirus-economic-pain/
  7. https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20200632.pdf

A copy of Lucas Capital Management, LLC’s ADV is always available upon request.

NOTE: This report has been prepared for the discretionary account clients of Lucas Capital Management LLC (LCM) only and is not intended for the general public. The intention of this material is to provide the basis for investment decisions made by LCM on your behalf. The opinions expressed in this report are those of Lucas Capital Management. Information contained herein is based on sources we believe to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions are subject to change without notice. This report is for informational purposes only and is not intended as an offer to sell or a solicitation to buy securities. This report may not be reproduced or distributed without our permission and is a service provided exclusively for our clients. Lucas Capital Management and its affiliated companies and/or associated persons may, from time to time, have positions in, or options on the securities discussed herein and may make purchases/sales while this report is in circulation. More information is available upon request.