We promised you continued communication as the sell-off in equities continues. The Fed came out early last week and reduced interest rates by -0.50%. Typically, declining interest rates are positive for stocks. The equity markets continued their large swings last week, both negatively and positively, closing at an overall loss. Today, the Dow Jones closed down over 2,000 points recording one of the worst single day market declines since 2008. The Corona virus continues to be on the front pages. According to the World Health Organization (WHO), the virus has slowed in China (100 confirmed cases in the last 3 days compared to 3,000 in early January) but expanded in other parts of the globe. Travel in general has sharply declined affecting tourism, with many corporate meetings being cancelled due to the virus. This has had an impact on airline and hotel stocks that may continue going forward. In addition, OPEC met over the weekend with no agreement to extend or reduce oil production.
We acknowledge at times like these, declining markets are unnerving and uncomfortable. The sensationalism of the media is compounding these concerns and very little of that information is based upon fundamental facts. As emotions increase (fear, worry, doubt, etc.), so does your instincts to “do something”. As we have discussed in declining markets previously, selling out of stock does relieve the short-term pressure to act. However, that decision is the easier of the two. The more difficult decision is when to reinvest back into the markets. We have a few clients that got out and went to cash in 2008 that still have not returned to investing from their cash positions. They missed arguably what has been one of the longest Bull markets on record. However, there are still some positive points taking place that makes this different from 2008:
- Housing – The housing market is still robust pushing prices to all-time highs. Maricopa County is one of the hottest real estate markets in the country again. Demand is still very high with low inventory levels in many parts of the Valley. In 2008, the real estate bubble burst. That does not appear to be the case here and one analyst on a call we were on today pointed out that it may be real estate that continues to keep the economy healthy. In addition, due to the reductions in interest rates, more and more American consumers will use this opportunity to refinance to lower rates. This should reduce monthly payments and, if consumer sentiment stays positive, people will spend these dollars on more goods and services.
- Equities – Intra-year market corrections of -15% are very common. This is the situation we are in now with many of the indexes. Pricing corrections are healthy for the stock market in general. While 2020 thus far has performed negatively, many asset classes are still positive for a 12-month rolling average. There is also consensus that the stock market is expected to be “V” rebound and not a “U” which is a longer recovery period. The dividend yields of 75% of the S&P 500 companies are in excess of the 10 Year Treasury with dividends being about ½ percentage point better (Strategas). Lastly, as was the case during the tech or real estate correction in this century, there does not appear to be any “bubbles” per se at this point. Due to the decline, equities are as cheap as they were in 2011. Making a case for investing cash and increasing monthly contributions.
- Policy – The financial and monetary policies have improved since 2008. One of the reasons why the Fed reduced the rates so drastically last week was to try to change the course of the market back into a positive direction. We are expecting more rate cuts by the Fed in the future. Some estimates are between 3 – 5 times before the end of the year. Also, policies on healthcare across the globe have improved. Five days ago, the House of Representatives approved an $8.3 billion spending package for the Corona virus (CT Viewpoints). The government appears to be trying to get ahead and be proactive over the last week to what is happening on many fronts versus letting things play out and react to them.
- Election – Many tend to vote based upon their “paychecks”. Meaning if they feel secure in their jobs, their homes, the balances of their 401ks, etc., and see the same in those close to them, they typically will vote for the President currently in office. Whether you are a fan of President Trump or not, some analysts believe with a slowing economy and especially if it gets to the point of unemployment rates increasing, the Democrats could quickly gain momentum. While too early to tell for sure and still a lot a time between now and November, the Democratic leaders appear to be Bernie Sanders and Joe Biden. Favorable market conditions post an election are almost deadlocked between whether a Republican or Democrats becomes President. However, the more the market declines and the more momentum the Democrats rally, the closer the election becomes which could continue the volatility in the stock markets.
What does this all mean for tomorrow, next week, or next month? I wish we could tell you for certainty. As we shared last week, while everyone may have opinion on the market direction, it is purely speculation. We do know as things continue, things become more and more uneasy. These are common human emotions and should be acknowledged. At that same time, one of our roles as your advisors, is to do the best we can to prevent your emotions from overriding economic fundamentals and sound investment logic. At the same time here are some additional things you can do:
- Educate – Don’t depend on the evening news, Facebook, or Twitter for your information. If you need to, tune these out, or better yet off, for a period time. Recognize that news outlets get paid to sell stories and attract viewers which often comes with negative, versus positive or balanced information. Become educated on what is happening with your accounts by contacting us. We build portfolios in anticipation of these downturns, not in reaction to them. We also pride ourselves on working with you, your goals, and your visions. While the markets themselves may be volatile now, the goals your investments are built upon are not. There are no better times for us to communicate, than when things become uncertain. We welcome these conversations.
- Encouragement – We are keeping a close eye on what is happening and will continued to participate in as many conference calls and review investment company communications to determine the best course of action. While we are still maintaining discipline and courage to continue, we are gathering as much information as possible. We are more encouraged than discouraged at this moment. We wanted to get you the positive information above, because the media is only harping on the declines. We also don’t want you losing sleep or excessively worrying either. If you start to have concerns, we encourage you to pick up the phone and call us to discuss your situation specifically.
- Engage – If you have cash that you are willing to invest, and with stocks not being this cheap since 2011, now would be a good time to invest to take advantage of the decline. For those of you that are contributing monthly to your investments, now is a good time to increase those contributions. Also, with tax season upon us, you still have time to invest in IRAs and Roth IRAs prior to the April 10, 2020, our deadline for 2019. The markets work very similarly to retail purchases. If there are a pair of shoes you want, and the price goes does by 20%, most people would buy them if they really wanted the shoes knowing they were discounted. The stock market works the exact same way.
We are not trying to discount your emotions or concerns. They are very real and losing money is an emotional response. While your money to us is logical, my personal money to me is emotional. If it gets too much, or you want to talk it through, please feel free to give us a call. As you can see, we are wanting to be as proactive as possible and provide you the communication we find would be helpful. We will continue to invest our efforts towards those objectives. Your business, your wealth, your families are very important to us. Please feel free to call any member of our team if you would like to discuss your individual situation in greater detail. We are here to help you and will continue our commentaries until things slow down.
Until Next Week,
Todd C. Martin