Manny’s Market Outlook
First and foremost, I hope this note finds you, your families and loved ones healthy and well. These are trying times but we will get through this together. Social distancing is imperative right now, especially since it seems to be working. Over the last 24 hours we’ve received some encouraging news. Dr. Anthony Fauci, Director of the U.S.’ National Institute of Allergy and Infectious Diseases, who probably needs no introduction at this point, said on CNN that he’s starting to see “glimmers” that social distancing may be slowing the spread of the virus. Importantly, it looks like cases in Italy are starting to level off as well. New infections in the past 24 hours totaled 4,053, compared with 4,050 the previous day. Monday had seen the fewest new cases since March 17th, according to civil protection authorities. Lombardy, the worst hit region, rose by 1,047 on Tuesday. That’s the fewest new infections in more than two weeks. South Korea, one of the earliest countries effected, are seeing more patients leaving the hospitals than entering. Undoubtedly, as the news improves in Asia and Europe, it will be getting worse here in the U.S., as our virus peak is still seen as a few weeks away. While health concerns will most likely rise, I believe the worst is behind us in regards to market volatility. Does that mean we don’t test the lows? Maybe. Is now the time for investors to buy, sell or sit put? These are the questions we will explore now.
March roiled our markets but let’s look at the numbers. Here are the percentage gains for the 7 up days we saw in the S&P in March: +0.5%, +4.2%, +4.6%, +4.9%, +6.0%, +9.3%, +9.4% and yet we still ended the month down 19%. To put that into perspective, March had the best of times and worst of times. We experienced the quickest meltdown in history, with a peak to trough return of -33.9%. This precipitous drop was then followed by the best three day stretch for the stock market since the 1930s. Why is this important? Because I believe we’re going to experience a stock market unlike the past few years. What I’m alluding to is volatility, which has been non-existent for the last few years, but has suddenly reared its ugly head. I think as investors we need to understand this new reality In order to avoid making emotional trading or investing decisions. The good news is I believe the worst of the volatility is behind us. But we must not be shocked by 1-5% moves in the indices. This is the new normal, and the opportunistic investor can use it to their advantage.
Outside of the obvious question of how long will this last, most investors are asking themselves the same questions. Is the bottom in? Should I be buying or selling? What should I be buying or selling? The good news is there’s no cookie cutter approach. The bad news is there’s no cookie cutter approach. But let’s look at the current pros and cons and see what we can decipher.
First, the pros:
- The selloff was so drastic that we believe markets got to either fair or even under, valuation in March. Back on March 23rd the Volatility Index had already ripped to 2008 financial crisis highs forcing all sorts of dislocations – many assets were trading well below their intrinsic value.
- Banks and the financial system are healthier than they were a decade ago.
- The Fed acted more swiftly, and with more assistance, than any time in history. That action insured the dislocations in many markets ceased and shored up the high yield bond markets.
- The Federal Funds rate is back near Zero which makes the dividend yield on the S&P attractive compared to treasuries and other fixed income instruments. We’re arguably back to TINA (there is no alternative) based on yields besides stocks for retirees and pension funds.
- The CARES act has been implemented (more on that later) and there is discussion of an infrastructure bill to be passed as well (both the Speaker and the President finally agree on something).
- Quarantining seems to be slowing the virus. Warmer weather is on the way and may also slow the spread of the virus. And even thought a vaccine could be as far out as 18 months, I wouldn’t bet against our scientists, doctors, academics and researchers. Capitalism is an extremely powerful motivator.
- The price of oil and gas is a tax cut for the economy when things begins to normalize.
Now the cons:
- The selloff was swift but from nose-bleed levels.
- The news flow around the virus will get worse, peak U.S. infections and deaths are a number of weeks out.
- There’s a risk the U.S. and Europe won’t be able to control the virus like China did.
- There’s no certainty or knowledge around when businesses will be allowed to re-open.
- We don’t know what life after the virus will be like.
- How long does it take the consumer to regain confidence?
- From ultra-high consumer debt levels, most people realize they don’t have enough cash on hand, does this lead us to become the next Japan and a society of savers?
- Corporate buybacks of their own stock are off the table. Corporations were arguably the main buyers of stocks over the last few years.
- Democrats could take control of the government post-November elections- they would likely raise taxes and prioritize environmental concerns economic ones.
- Central banks after acting so quickly and dramatically arguably have no monetary bullets left to fire.
I will say that we here at Twelve Points have turned bullish from our prior cautious stance, but it truly depends on your time horizon. Arguably, if you have a time horizon that’s longer than 5 years, whether it’s due to liquidity needs or retirement, you should be a buyer and try not to pay heed to the volatility. The single most important thing to do is for investors first to calm down. For instance, most of us have investments in the stock market in the form of retirement funds. Unless we are retiring in the next five years, I don’t think we should be concerned about this downturn. We need to distinguish between those who have long-term interests in the stock market and other investors who are looking for a short-term gain. Most of the time the best thing to do is nothing at all. More importantly, don’t act out of emotion. It’s easier said than done, but if you feel you are unable to do so than we urge you not to look at the market. At the same time, there are assets that are trading far below their intrinsic value. Investors have the opportunity to invest in America’s greatest companies at values we haven’t seen in a decade. And to be bearish at some of these prices is almost betting against America and more importantly, humanity.
Now that isn’t to say we’d jump in right here with all our dollars. As previously stated, the market has already ripped 17% from the March 23rd lows. And we believe we’re looking at a bumpy ride for the next few months. Volatility has returned and we will most likely go re-test the lows the S&P 500 made, around 2200, sometime over the coming weeks. We do not expect a V-shaped recovery in this market or the economy; we expect ebbs and flows. Do we think the “low” is in? Not sure. We think a “low” is in. Whether or not we trade below the March 23rd low, we believe at those levels we’re close, close enough that we’re buying bargains we will be happy with over the years to come. The best advice we can give, especially to money on the sidelines, is to dollar cost average in. You will never be able to time the market and trying is a fool’s errand. Instead, put that money to work on a two week basis, or every 150 point drop in the S&P. This course will either take you far enough out that we have more clarity on where things are going, or provide that opportunity to invest at historically attractive levels.
The government has provided some relief in the form of the CARES act. I won’t bore you with the details as I’m sure your accountants already have. If not, please reach out and we’ll be happy to help you with the necessary steps everyone should be taking. Client or not, we’re here to help and be good neighbors. All any of us can do is stick together (by social distancing of course) and help each other out. We are going though unprecedented times, the likes of which none of us have ever experienced. We’re truly living in a history class. But we’re more optimistic than most. We truly believe there are great times ahead and together we will get there. There will be a new economy born from this. There will be new opportunities and new industries. The way America does business will change. But given the amount of stimulus that’s been unleashed, when we get out of this we might make the previous roaring 20’s look tame. We see a lot of opportunity being presented over the coming weeks and we look forward to navigating these unchartered waters together. At the end of the day we stand ready and willing to invest in America. We’re willing to invest in capitalism.
To that end I’ll leave you with two powerful quotes that I read every morning during difficult and uncertain times. Both come from the Oracle of Omaha, Warren Buffett:
“A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem.”
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”