The Northern Star Newsletter 3/26/20 - More Coronavirus Volatility
Message from Jon
What World Is This?
The reality of our current situation is that the markets are taking from those that underestimated the risk that was present previously and will soon be rewarding those who did.
Those that felt like they could take more risk in their investments because the market was doing better and not because their situation could handle it...those clients are the ones who are panicking and selling when they should be buying and preparing to buy.
What we believe we know
- We have seen the market as of this writing (Monday 3/23) decline by 33.52%, and while it is A LOT, during 2008, the markets declined 54%, so let's not forget that in this consideration. A quote from Scott Judds in the alphadroid newsletter sums this past month up pretty well though;
"A Black Swan Event
The market is indeed in the midst of a Black Swan event of epic proportions. Black Swan events are defined as rare, unpredictable, and beyond the realm of normal expectations. The market's fall from its high on February 19th to bear market territory was the fastest on record. It was about 3x faster than 1929, 4x faster than 1987 and 6x faster than 1990 - the three prior record holders. Just as the Coronavirus caught healthcare professionals without therapeutics or vaccines, so also did this never-before-seen Black Swan catch algorithms and investors unprepared."8
- We believe that the Bond Market is decoupling from normalcy and behaving in an unnatural state currently.
- We know that the FED is hyper aware of this decoupling and is resolved to asset the situation and bring it back to normalcy by any means necessary.2,6,7 Look, if I have a friend of mine that drops on my driveway due to a heart attack, do I argue with the medics about what they use to revive him? Don't I just tell them by any means necessary and then let's talk about how to proceed from there!? So for all of you that are the "Well, I disagree with the stimulus and the free money going to big corporations" and "How will we ever pay that back?"
Save it-right now, if the patient is allowed to die, what does it matter what kind of life he will have afterwards!?
Vanguard's Chief Economist indicates that they are seeing a "Deep but short-lived recession," and as of this writing, it's what our models have been saying is a possibility for some time.1 I have been saying that we have been long overdue for a recession, and "if I am a betting man, I think we see it between 2020-2022" in previous newsletters. Just because we are showing that in our forecasts, what we are not saying is what the catalyst will be and without the catalyst, you cannot know the details enough to time your exit and entry perfectly.
We are however, seeing many wealthy investors beginning to buy and have been buying for some time. Mark Cuban, Herb and David Simon of Simon Properties, Warren Buffett, to name but a few. The sad thing is that for many, they are panicking and selling only to have the "rich" get richer and continue the cycle once again.4,5
Why is my bond fund declining?
In our opinion, we are seeing an increase in the underlying credit risk of individual bonds held in many bond funds. We believe we are seeing where bonds are being sold to satisfy liquidity needs for investors, causing yet another behavior that is uncharacteristic. We believe this is short-term. Why? Because the FED is doing everything they can do to arrest this behavior and return it to normalcy. They are providing liquidity to banks, they are buying Treasuries, they are buying Municipal Bonds, and they are even considering buying corporate bonds directly to not only impact the yield curve but also to provide a back stop for investors to reduce their fear levels and risk levels back to a point where the market mechanics can operate normally again.2,6,7
If you were 100% in cash in Jan of 2020 and were still in cash today, would you be buying right now or still 100% in cash right now?
I would absolutely be buying (nibling more like).3
Maybe only at 2% or 3% increments, but buying for sure since what I feel like I know is that on the lowest side of the S&P 500 we could probably see around 1750-ish, and that is the most bearish models we could find that made any sense-and on the more rational side, 1960-ish and at present, we are at 2200 and seemingly holding. Could we decline more, yes. Are the odds we do, yes-but not much lower, and then it becomes the question of vaccine, testing, quarantine measures and spread rates that will help determine how long we stay in the acceptance phase before transitioning into recovery mode. For those who are in cash-congrats, but you better be good at buying in or you will lose any advantage you had of being in cash in the first place in my opinion!
Till we speak again-stay calm and keep your wits about you cause you're gonna need them.
More Coronavirus Volatility
WEEKLY UPDATE - MARCH 23, 2020
The Week on Wall Street
The stock market suffered through another volatile week as it wrestled with the health and economic fallout of the domestic spread of the coronavirus. Swift and decisive actions by the Federal Reserve and policy responses from the federal government did not keep stocks from recording losses for the week.The Dow Jones Industrial Average slumped 17.3%, while the Standard & Poor 500 lost 14.98%. The Nasdaq Composite index declined 12.64% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, fell 6.64%.
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.