The Northern Star Newsletter 3/13/20 - Rallies and Retreats
Message from Jon
*This is longer than normal*
These past couple weeks have been anything but pleasant. I just returned from securing a partnership to enhance our skills and abilities to look after and care for our clients and their needs, wants, and wishes. We had 5 different planes to fly what would have been a total of 5 hours round trip. Traffic was noticeably less on the return flights than on the trip down, to be sure.
Let me give a brief explanation of who Tyler is. Tyler Hardt has his CFA designation, an MBA from Wharton and worked for 8 years with Artisan Partners (Funds) before leaving and returning to his roots in Naples to start his own firm and be closer to family. Tyler's experience as an institutional analyst and trader for Artisan gives Summit additional insights into Wall Street. While Tyler still owns his own firm, Pelican Bay Capital, he is partnering with Summit to supplement and enhance our day to day portfolio operations and management.
On the final trip into Indianapolis from Chicago we experienced an hour of turbulence...and I have to say, my first thoughts were, "Man...this is what the market feels like right now!"
We are seeing extreme swings in the markets daily. The VIX is remaining above 40 and our indicators have weakened significantly but have still, oddly enough, remained positive.1 All last week while I was with Tyler nailing down the logistics of working with one-another, we were both modeling and talking and re-modeling the markets based on daily and sometimes hourly breaking news. Each day we asked ourselves the same set of questions.
- What do we know as fact today and has it changed from yesterday?
- What do we not know as fact but suspect will happen with a degree of certainty?
- What do we have no idea about?
While they are fairly simple in nature, they are very complex in reality when the news feeds and data seem to be changing rapidly by the day and sometimes by the hour. The key here is to remain in the moment and to think logically and place all emotion, suspicions and rumors on the shelf. Our ability to compartmentalize came in very handy this past week, to be sure.
Until Saturday evening, we were prepared to let portfolios ride and stay our course since the Coronavirus is what we considered a Black Swan Event, which is by its nature unknowable and unpredictable and therefore un-plannable. In our opinion, the correct course of action during these events is to remain calm and do nothing. That's right, DO NOTHING!
The shape of the timeline during black swans is V shaped. There are rapid declines followed by rapid rallies and both are so quick and sharp that trying to exit and reenter only causes more costs, locks in losses, and diminishes your long-term results.
Until Saturday evening, we were prepared to DO NOTHING. However, Sunday morning all our models changed because the answers to Question 1 changed. On Saturday evening, the Russians and Saudis who had been engaged in negotiations over Oil production were in discussion when the Russian delegates became upset and walked out (over what I do not know, since I was not there). As a result, the Saudis decided to disturb the Supply by changing the output rates per day and causing the Oil price to decline to between $30-$40 per barrel per day.6
Yes...what we knew as fact yesterday has now changed!
Here is what we now know and what with reasonable suspicion we think will happen as a result. Keep in mind here that what we know and what we think will happen is far and away different than what we know and what we know will happen. These are our professional opinions here, so we are playing with probabilities and possibilities while still continuing to ask ourselves daily the questions listed above.
What we know as fact
- We know that the Coronavirus is still spreading at about a factor of 10X.2
- We know that real risks still are with immune suppressed and elderly while all other populations are just going to get the flu on steroids, as it were.3
- We know that you can be carrying the virus for up to 14 days before showing signs of illness, and by then...well, who knows how many have been infected.4
- We know that there are now cases showing up beyond Florida, California, and Oregon. Cases in Indiana and other states are now popping up.5
- We know that the Saudis have increased production in oil and decreased the price to below $40.00 per barrel.6
- We know that they have no stated timeline to change this strategy.6
- We know that this approach is designed to encourage Russia to comply in a deal on oil production.7
What we suspect-but do not know as fact...yet
- We believe that the virus will spread rapidly and gain more fervor and ferocity by the day, producing even more of a panic emotion within communities.
- We believe that the virus will cause schools, companies, and venues to restrict, alter, or even cancel daily functions and operations and events for a short time that could go longer than expected.8
- We believe that the virus will impact travel possibly going into the summer.
- We believe that the virus will impact earnings of companies in the 2nd quarter due to the restrictions of the consumer.
- We believe that this oil decline will negatively impact oil producers initially and even put some into bankruptcy.
- We believe that the oil decline could negatively impact the Manufacturing and Industrial Sectors and send them into a mild or soft recession (depending on how long the oil issue lasts).
- We believe that the oil decline, coupled with the Coronavirus scare, could have a one-two punch that may have a more pronounced impact on the US economy (not saying recession here).
- We believe that this one-two punch could last longer than 30-60 days but that it will most likely last shorter than 1 year.
- We believe that in 1 year, we will not be talking about the Coronavirus at all.
- We believe that in 1 year we may also not be concerned about Oil being at $30-40 per barrel.
- What we believe is that soon, there will be some exceptional opportunities to invest into the markets that will make returns for the next several years.
What we do not know-and do not have any way of correctly modeling beyond simply guessing!
- What we do not know is how far down this correction in the stock market will go.
- What we do not know is how long this stock market correction will last before a rebound.
- What we do not know is how long Oil will remain artificially low.
- What we do not know is what impact on the US economy specifically the Oil decline will have.
- What we do not know is if the one-two punch referred to above will send the entire economy into a recession or only a few isolated sectors.
- What we do not know is what opportunities specifically will be present and when they will manifest for certain...yet.
Right now, we are staying in the moment, analyzing all known data and modeling our questions listed above to help determine the proper course of actions for our clients. That is what we do and have done for nearly 20 years. We have partnered with Tyler Hardt and have added and added additional staff and advisor to enhance our services and support we are already providing clients. This will deepen our talent pool, increase our service and response rates, and increase our long-term return potential for clients and prospective clients for the next 20-30 years in our opinion!
Tyler and I are working on a webinar series now that we hope to begin to offer on a quarterly basis and open it up to clients so that we can be even more transparent and accessible than we already are. When we are ready, we will be sending out notices for dates, times and instructions for attending.
Until we speak again...stay calm, remember what mom always said, wash your hands.
Rallies and Retreats
WEEKLY UPDATE - MARCH 9, 2020
The Week on Wall Street
Heightened coronavirus fears, falling yields, and Super Tuesday primary results sent stocks on a rollercoaster ride of sharp price swings, leaving stocks marginally higher for the week.The Dow Jones Industrial Average improved 1.79%; the S&P 500, 0.61%; the Nasdaq Composite, 0.10%. Outside the U.S., developed equity markets tracked by the MSCI EAFE Index rose 2.60%.
Securities offered through Regulus Advisors, LLC. Member FINRA/SIPC. Investment advisory services offered through Regal Investment Advisors, LLC, an SEC Registered Investment Advisor. Registration with the SEC does not imply any level of skill or training. Regulus Advisors and Regal Investment Advisors are affiliated entities. Summit Retirement Advisors, LLC and Summit Financial Group of Indiana are affiliated entities. Summit Retirement Advisors, LLC and Summit Financial Group of Indiana are independent of Regulus Advisors and Regal Investment Advisors.