First, I want to say thank you to everyone for passing me comments, questions and good vibes during this volatility within the stock and bond markets. Due to the positive response of this newsletter I will be publishing on a weekly basis until we have normal volatility numbers. Also, for anyone with impaired vision or would like to digest this content in audio format we are working to have an audio version as well.
Fed’s Current Balance Sheet
The second- and third-degree effects of COVID19 will significantly increase the odds of a global economy that goes into a recession. I also believe when you look at market internals it is pretty clear to me the ‘bail out’ or ‘stimulus plan’ that will be needed will be very large and will add $3 Trillion in debt over one year. And I don’t believe that bailing out leveraged companies that did stock buybacks with debt and enriched executives and hedge funds will sit well with main street. The government has to do a better job than 2008 and make sure there is a better balance between helping normal working people and providing liquidity to companies.
“Dorothy we’re not in Kansas anymore”
Cycles in the markets are normal. How we see get these cycles is what is not normal.
Below is how normal people react to the news:
-Don’t see bad news
-Ignore bad news
-Deny bad news <- in my opinion we are here
-Panic at bad news
-Accept bad news
-Don’t see good news
-Ignore good news <- this is where the bottom typically happens
-Deny good news
-Realized you missed the good news
(from Morgan Housel)
Act 1: The Extreme Questions
Don’t panic- Should I cash out?
No, cashing out in a 0% interest rate environment will only hurt your own balance sheet. We are locked down in our homes, isolating ourselves from the pandemic. Anxiety levels are stratospheric and we are watching the news and our accounts more frequently than ever before.
In such an environment when losses are mounting, selling something provides some emotional relief. We are not trading algorithms. We are humans who hate to lose money. And even more, we hate seeing the world turned upside down.
It is scary to lose 20-30% of your portfolio and there are more losses coming. But I would like to remind everyone that they still hold the same number of shares and until you convert those shares into cash. It is your appraised value that has gone down. And If you are in your 70’s you still have 3 more corrections with 3 bull markets in your lifetime, so keep your investment time horizon in view. A vaccine, cure, news that millions of people have survived COVID19 or even if the summer months slow down the virus giving us more time to get a vaccine/cure could all send the markets up.
Therefore, it is about staying invested through the ups and downs and not timing a decision to get out and another to get back into the markets. If it makes you feel any better Warren Buffett owns approx. 25% stake in each of the 4 major airlines.
Be patient- Should I put more money in the market?
Remember there are three phases to bear markets. This is act 1 and we are already rebalancing on each 15% drop and we will be reassessing client’s plans as the environment changes. We do not know how long the negative sentiment will be here as it is strongly correlated with COVID-19. When we have a service-based economy, unemployment numbers will look ugly. We know Q1 numbers will be bad but how bad will Q2 look? Most analyst have put a floor on the S&P 500 at 2,200, but you shouldn’t try to catch a falling knife. Our advice would be to dollar cost average into equities that have unbalanced your ideal allocation for your risk profile.
Stress test and observations
We have seen three key observations from stress testing our current client’s portfolios, first specifically within corporate bonds, investment bonds have had significant yield spreads. Which means companies don’t have cash and this increases the uncertainty of being paid back. When a stimulus plan is implemented it will cause the government to print money => issue new bonds => causes yield curve to steepen. The odds are intermediate corporate bonds will have another 5-10% drop from present levels. However, the new money in the system will help stabilize municipal bonds.
The second observation is that emerging markets have held up better than US companies in this drawdown. We believe this is related to currency changes that have made the dollar stronger and positive news around COVID-19 in those regions.
Lastly, money market funds or what most people call their ‘cash’ seem to have found a lack of liquidity problem similar to 2008. But good news is the Fed seems to be in front of it this time around. Please read this press release: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm
Banks reserve requirement lifted….wait what are we in 2008?
US: $1.5T in Repo Market (Overnight lending)
$1.1T Commercial paper (Short term business lending)
$1T in Fiscal stimulus (About half will go directly to individuals)
$700B QE4 (the fed buying assets)
World: $750 ECB
$600B France/UK bank loans
$100B Europe as a whole
This is some serious firepower that will move the markets forward over time get ready and make sure you have your seatbelt on for a bumpy ride.
As an advisor stewarding client’s wealth over 16 years there are lessons learned with every market correction that make us better advisors. In 2008 I was a manager at American Express Financial Advisors of 15 Advisors and managed my own client’s portfolios through the great recession. My team managed close to a billion dollars of client’s assets through these times. I have learned things that only frontline experience would give you. For example, the mental fatigue an advisor gets during these times impacts their decision-making ability when it comes to giving you advice. We are actively taking steps with all our employees to prevent mental fatigue so we can give you sound advice at a time when you need it most. If you have questions or want a second opinion on your investments feel free to reach out to me. Click here to contact me.
Amar founded Client First Capital to create a platform that reflects his values and provides impartial, evidenced based advice to his clients around maximizing their financial well-being. Amar strongly believes that integrity, transparency, knowledge and insight are core values to a successful, long term client relationship. Amar has more than 15 years of experience in the financial industry helping individuals, families and businesses achieve their financial goals having cultivated long lasting client relationships based on trust and mutual respect. He is experienced in estate planning advice, retirement planning and risk management. He and his team help clients protect, distribute and grow their wealth.