Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
As much as I enjoy writing these market notes, I was hopeful that we would take break for a week as things calmed down and settled in. That said, the markets continue to show signs of emotion and panic so there are some relevant things to share. I would like to start by thanking you for your patience and mentioning that we are receiving very few calls from concerned clients. This is not the case across our industry. Why? Because people get jumpy when they don’t have a plan. You have a plan. Hopefully you remember that in unsettling times, but if you need a refresher, just say the word. This a crazy moment in history, but we are going to get through it.
As cancellations of various events around the U.S. pile up, it’s worth mentioning that High Note has a crisis management plan if any of us are unable to get to work. As part of our registration with the SEC, this is required of Registered Investment Advisors to be in place. When setting up High Note, we went through the steps of ensuring continuity in the case of a health crisis, natural disaster, etc. All of our phone and computer systems are securely cloud-based so the team can fully function remotely. Luckily, Minnesota is yet to see significant cases of the coronavirus, but if it gets here, we are ready to go.
In terms of high-level market moves, we are continuing to see selling that has taken us back to June levels. After the mess of the oil dip earlier in the week, the news yesterday that sent markets reeling (from our perspective) was the World Health Organization officially labeling the outbreak as a “pandemic”. It wasn’t the actual designation of it being a pandemic as I think most of us could have figured that out on our own. Rather, it was the accompanying message from the WHO that some countries were not doing enough in terms of preventive measures. They didn’t name names, so to speak, but it was loud and clear that the U.S. needed to step up its game. We finally started to see this late last night and throughout today as the message is finally sinking in, leading to an abundance of cancellations, increased work-from-home plans and even drive-through testing starting to pop up. With everything going on, this was inevitable. The market was making estimates on what the economic loss could potentially be but now it can deal with reality. We think this is a positive step as the market appreciates bad news much more than no news. Tackling this head-on will get us back to normal sooner rather than later. With the positive state of the overall economy heading into this event coupled with federal stimulus there should be some very nice tail winds on the other side.
I will get into a little more detail below for those who didn’t fall asleep reading above. 😊
Fed Announced Relief:
Last week the Federal Reserve cut rates. They are meeting again next week, and all signs point to them cutting again. Today the Fed announced they would expand the balance sheet and start a systematic plan of buying back securities from banks. Some market observers have been calling for this for a while now. This isn’t an end-all fix but the spirt of the move is to continue to provide liquidity to the banks so that the wheels keep turning. Yesterday Boeing made news by drawing down their line of credit as a precautionary measure. The analogy being like a homeowner maxing out their home equity line in case their home value goes down – take the money while you can. This takes cash out of the banks. By the Fed buying back securities, this backfills cash into the banks. While there haven’t been liquidity concerns with the banks, the Fed is trying to be proactive. Assuming we get through the brunt of the virus uncertainty, this will contribute to a growth friendly environment.
Stock Market Bottom:
As we’re sure you are sick of hearing, we have no idea. You can probably say it along with us by now! We have a couple of observations on where we are at today, but the point is that it really doesn’t matter. The cash and bond insulation are going to allow us to rebalance in a rules-based manner, setting aside the emotions that are stirred up in down markets. One dynamic that is easily lost in down markets is that they don’t bottom at the same time. This is one of the many reasons that we say there is not a bottom to call. Some sectors or individual stocks may have bottomed today and will soon start to recover while others still have not. This brings me to another topic…
Traders vs. Investors:
We hear these words and thoughts come to mind, but it is good to briefly discuss. When we hear “trader” maybe we think of the participants on the stock exchange floor or a person that we know that day-trades and goes to cash every day. What is less known is that there are massive institutional traders that exacerbate the volatility (e.g., hedge funds). We define traders as anyone in the market that is trying to beat the market over a short period of time – a day, a week, a month, a year. Their mandate is to generate positive returns regardless of global market circumstances. On the contrary, an investor is someone that invests in the market with a longer time horizon looking to achieve market-like returns (and hopefully doing so by taking less risk). They can sound like the same thing, but they are vastly different. Traders do not have time to ride market ups and downs. If they don’t have positive returns by a certain short-term date, it’s game over. Much of this recent market activity is not long-term investors running to the sidelines but rather traders scrambling to figure out what to do. This activity is what ties to the thought above that the components of the market don’t bottom at the same time.
Here’s a scenario…a trader is sitting in technology stocks when the reports of coronavirus start coming in from China. They anticipate a market pullback, so they dump all tech stocks and buy utility stocks that tend to be more stable. When they guess the trouble is gone, they sell the utility stocks and buy the tech stocks back. This behavior in group form causes the tech sector to bottom earlier and keeps the utility sector from bottoming until they move on. An investor holds the tech stock through the trouble (because they don’t need the money today) and comes out on the other side and eventually goes higher. What did the trader gain? As we like to say, they would do it for a dollar. Numbers will help with this. Trader and investor each own one tech stock that’s worth $100 when trouble starts. Trader sells it for $100 while the investor holds on to it. Stock goes down to $98. The trader starts watching for and calls a bottom. Trader buys stock back for $99 as it starts to move up. Three months later the stock is worth $105. The trader made $1 more than the investor by successfully timing the exit and entry (and taking the extra risk that they hit both points correctly). Now if you do this $1 trade with millions of shares you are doing something. A very simple example but this is a huge portion of the short-term moves we are seeing in the market today.
Other Thoughts & Musings:
- Senate Working Next Week [don’t shoot the messenger!]: Recess canceled. Sounds like they are now taking things seriously and going to try to get something passed.
- Consumer Liquidity: Money has to go somewhere. With people spending more time at home and not out-and-about, there is going to be a net savings by many consumers. I doubt this will go to long-term savings. Once we clear this period, there could be substantial pent up demand for consumer goods/services. After market close I received two marketing emails showing business flexibility. One from Chipotle offering free delivery for two weeks in March and one from a clothing company offering 20% for those working from home. Companies aren’t dead but they are evolving.
- “Safe Assets” Starting to Move: The last day or two we have seen gold and treasuries sell after they were bought heavily in the last month. In the past this is consistent with the selling of stocks being close to the end. Think of the “traders” discussed above selling these assets to raise cash to get in position to buy stocks on what they believe to be the bottom.
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