The Navigator | June 2020 Equities had another positive month in May, which contributed to the S&P 500 having its Read More
March 31, 2020
At this point in the crisis and for the next several weeks, I believe the juxtaposition of my right-brain (compassion and concern for the medical crisis) and my left-brain (managing money and measuring risk/return tradeoffs) will be starkest. Though the medical crisis with concomitant headlines will worsen as the intensity of the situation currently in New York City circulates throughout the country, the haphazard “sell everything” market panic that peaked on March 23 has improved and is moving further back in the rearview mirror.
That doesn’t mean the all-clear sign has been posted. Volatility will remain a daily constant at least until new Covid-19 cases decline and the VIX (greed & fear index) trades consistently below 40 (today it sits at 60). A retest of the lows could also be in our future. But things have improved and not just the rise in stock prices. There have been marked improvements in the capital markets along with government action that make me believe we are already entering a new phase. Despite the speed at which events are happening, the data sets we are constantly reviewing indicate we are entering a time that is becoming ripe with opportunities to reposition certain stocks and securities.
In 2008, the S&P 500 was already -40% before Congress passed the TARP (the $700 billion troubled asset relief bill), almost 7 months after Bear Stearns collapsed. It’s worth mentioning a quick side note that TARP ended up making the Treasury $14 billion as of its final accounting in 2014. In this case, everything is happening within weeks. On Friday, Congress passed the massive $2.2 trillion relief bill for businesses and individuals hit hard by the pandemic. A week earlier the Fed committed to an unlimited easing and liquidity program that worked to stabilize credit markets by buying massive amounts of Treasuries and mortgages. That’s serious firepower. So where does that leave us now?
- Our appetite for risk is still higher than average and that’s after the market had its best week last week since 1938. We are 25% in cash in our US tactical strategies after investing a little cash in Google last week. This type of repositioning is how I think we will work for the next several weeks – selling levered balance sheet stocks like ALLY and buying stronger stocks better positioned for economic recovery. Overall, however, I wouldn’t expect big shifts in market exposure. Investors with long-term horizons and sideline cash should be using these weeks to buy.
- Our framework remains the same. Use all the tools in the kit. Data sets from 2008 and 1918, along with our contemporary models, balance risk/return ratios on individual securities and markets. Experience also plays a role. We are the pilot of the plane but also the builder of the engine. We understand certain weaknesses given the speed of this market and wild intra-day moves. In addition to monitoring on a daily basis, we continue to conduct research that will help our investors improve their outcomes. Our research supports staying invested at current levels, while being prepared to increase or decrease exposure if market conditions suggest that is the appropriate course of action.
- As for an update on the big three uncertainties I wrote about last week:
- The medical crisis is still flashing red but with ever so slight improvement. Cases are increasing as expected but welcome news on testing timeframes and vaccine production facilities from JNJ help.
- The liquidity crisis is even a better shade of green. Credit prices improved dramatically on the Fed’s bond buying intervention. Fixed income ETFs that were mispriced by our estimation last week saw historic increases.
- The economic crisis is still yellow although it’s made some movement toward green due to the stimulus package for individuals and businesses. This combined with lower oil is massively constructive. Bankruptcies are sure to happen however, and jobless claims by the Fed’s estimation could rise to over 40 million which is still harrowing.
President and CEO