Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
Greetings from quarantine! We hope that everyone is making the most of the situation as we all do our part (of staying apart). Without further adieu let’s get to the market update…
As investors, we have seen a lot of craziness over the years, but this week will forever standout as unique with historical market moves, trillions of dollars in relief packages and a headline news flow that was dizzying. A quick recap is in order given that almost every day was a new adventure. Even with the stock market down today, the S&P 500 had a positive return of over 10% this week. That still leaves us 25% off the all-time high, but 10% off of Monday’s low. I know; it’s getting confusing. The takeaway is that after two weeks of more sellers than buyers in the market this week saw buyers return to create some stability. Bonds were also positive for the week with interest rates moving back down (rates down/bonds up). Without getting into too much detail, the bond market operated in a more “healthy” manner due to the injection of Federal Reserve liquidity. There haven’t been a lot of great things to report the last couple of weeks but the bond market operating efficiently is vital to the system so this is very nice to see.
In terms of our approach this week, you could say that we are using the old carpenter adage, “measure twice, cut once”. What can be observed in extreme market selloffs is something we refer to as dislocation. The concept is simple: sellers needing to raise cash sell their least favorites first, holding on to their favorites for as long as possible. This started occurring late last week. Early in the selloff, all the easy names were quickly dumped – oil, airlines, cruises – while more stable companies were held until the need for cash required those to be thrown in the proverbial pile. This indiscriminate selling can lead to opportunities for us as long-term investors, allowing us to “upgrade” the portfolios so to speak. We did add a few positions that we feel can weather the storm while being in a spot to gain marketshare on the other side. We are still maintaining higher than normal cash positions, while putting long-term dollars to work in spots that are appropriate. The next level of detail on this topic is favoring sectors like health care, technology, telecommunications and staples, and individual names like Walmart, Home Depot, Starbucks and Amazon. The work-from-home theme is prevalent in our holdings as we understand that this trend is being fast-forwarded every day as a new normal.
For our bond trackers out there we are still holding in the high-quality government credit realm. On certain days, corporate bonds are jumping around like stocks as investors start to estimate whether or not industries like oil, airlines, cruises, casinos, etc. will be able to repay their debts. Not if, but when, companies start to get their credit ratings downgraded there can be some pain in their bonds – a place we do not want to be. We will touch on real estate below.
With so much going on, we think it makes sense to hit on a few topics that we are monitoring while using some pictures/charts to keep it interesting. There is an immediate and historic amount of sea-change in the works, so navigating through relevant and irrelevant information is job number one. Whether Monday was a bottom or simply a level we will see again soon is really anyone’s guess. Typically the stock market will “retest” the lows it made before ultimately going higher, but there are cases when it did not. Safe to say these times are not typical.
As always, if you have any questions please reach out. If it’s overall market related, there is a good chance someone else has the same questions so we will address it for the group.
Get some fresh air. Take a deep breath. Hang in there.
COVID-19 Corona Virus:
- This week I heard more than once, “the stock market won’t bottom until the virus peaks in the US”. It’s a definitive statement that sounds logical for sure. However, it’s making a leap in correlation that is hard to make without any basis other than speculation. We do know that the outbreak spread in the US is still a couple of weeks from its peak. The headlines will get worse. The US now has more cases than anyone in the world and the trajectory is poor. That still doesn’t mean it is a direct correlation. We have seen many times in the past when the market overshoots to the downside, anticipating things to be worse than they actually end up being. Here is this morning’s case report from the Financial Times…
BREAKING: Since I started writing, I just saw the update that Abbott has FDA approval on a point of care testing device that can return results in 5 minutes and has the ability to complete 50k test in a day. This will be very helpful in relieving some testing backlog.
Unemployment:
- One of the many economic records broken this week isn’t a good one – unemployment. In the week ending Wednesday, the US had 3.28 million unemployment claims. Not only is this the most in history, it triples the previous record of approximately 660k. Minnesota had 149,443. Additionally, Canada had close to 1 million and Norway is reporting roughly 10% are temporarily unemployed. Most of these jobs lost are from the service and leisure industry, so the prevailing thought is that the relief package will help bridge the gap until they can get back to work. By the way, on Thursday when this was reported – the stock market was up 6.24% on the day as it was no surprise given the reports leading up to it.
Jobs:
- On the brighter side, many companies are hiring to meet demand with the shut down. Here’s a running list….
- Walgreens: 9,500
- Domino’s: 10,000
- Kroger: 10,000
- Dollar Tree: 25,000
- CVS: 50,000
- Dollar General: 50,000
- Amazon: 100,000
- Walmart: 150,000
Congressional $2 Trillion Relief Bill:
- DC finally got on the same page and passed a relief bill. While the details are still coming together, the spirit is to get money out to citizens to help bridge the gap. Additionally, the bill addressed small business loans through the SBA, airline bailouts and a whole host of other things the treasury can do to assist the economy. Seemingly, the lawmakers have decided that the loss of jobs from the airlines filing bankruptcy is too great to overcome, so they are going to help. There was no market reaction on the passing as this has been discussed for a week leading up to it.
Market Record:
- The three day market gain from Tuesday to Thursday this week is the largest such gain since 1928. Down markets are known to have sharp increases – this one is following the same plan.
Real Estate:
- In the portfolios we reduced real estate exposure down even more from already low levels (to almost zero). April 1st is going to be a very important date as many tenants are already indicating that they will not be able to pay rent. The restaurant industry is a large lessee of commercial real estate around the country. A recent JP Morgan study estimated that the average locally owned restaurant has 16 days of cash on hand. While many are trying to supplement with delivery and gift cards, it’s not enough. National player, The Cheesecake Factory, has already signaled that they will not pay April rent for their 300 locations. This is a long discussion, but the short story is: rent isn’t paid, landlords can’t service debt (or have to borrow more), bank has to consider forbearance, but that triggers credit default swaps. This is a long, interconnected flow that can go all the way to the government having to jump in. The point being, this is a lot of risk in the major commercial real estate market that we are avoiding.
- Also, we saw our first sign of residential housing weakness. This chart is a mortgage-backed security issued by Citi (think of hundreds of home mortgages bundled together, chopped into pieces and sold to buyers). The credit was highly rated two months ago and then suddenly dropped to 70 cents on the dollar. This price action is predicting one of two things – housing prices are going down or there is an anticipation of default with the disruption in employment. This is something that we will carefully keep our eye on.
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