Market Commentary for the week of March 16, 2020

Magic bullet

The markets are doing a terrible job of processing and evaluating the Corona virus effect.  For those who hope that there's a monetary or fiscal silver bullet coming to the rescue you are sorely mistaken.  Look, I'm neither a doctor nor a politician, but tell me this: is there any Presidential mandate, any law, that can truly contain the natural progression of pandemic diseases?   I thought not.  No one can truly fathom the depth of concern everyone is experiencing in the conscious and subconscious mind.  We are all trying in our own way to deal with this epidemic on a dual level: the medical and the economic.  Its effects might be felt for months.

Other than the tragedy of the disease itself, including the dreadful loss of life, the biggest misfortune is occurring in the failure to recognize that all things, good and bad, traverse a measureable path from birth, to life, to death.  That parabolic continuum is, in fact, the basis of quantitative market sciences, statistics, and a healthy mindset about the effects of all events upon our daily lives.

Remember, the economy and the markets were already hyper-stimulated by years of aggressive tax policies, unbridled monetary influences, and excessive greed and speculation in stocks.  Unfortunately, lowering interest rates and taxes to encourage people and businesses to spend their way out of a medical pandemic...as is currently being contemplated...is tantamount to ingesting an aspirin for a knife wound.

I have said it many times before, you can lead a horse to water but you can't make him spend!

Monetary easing will not work because the markets are already too swamped by panic and the need to "get out".  Trying to compel spending when everyone is worried about how much they have left in the aftermath of a panic-driven market collapse is folly.  No one is going to make additional financial commitments when their 401-k or cash reserves are dwindling.

The sad truth is that investors have been obsessive about a highly unrealistic decade during which asset valuations became so inflated and unsustainable that the Corona virus...or any other exogenous factor...had the power to derail both valuations and  expectations simultaneously.

There are no safe harbors during a crash.  One simply needs to allow a crisis to play out the string.

And that, again, reinforces the notion that somehow the markets got away from cyclic phase analogy  into linear progression.  Everything has a shelf life, a duration.  Everything has a beginning, a middle, and an end.  A stock can move from $25 to $36, then retreat back to $30...then begin moving upwards again.  This is how parabolic curvature explains the timeline of most phenomena.  Unfortunately, many of you got caught up in an unending linear spike in portfolio valuations that distracted you from the realities of economics, market studies, and life itself.  Nothing goes straight up indefinitely, nor does anything live forever.

The global economy is/was doing quite nicely in the aftermath of the last Great Recession (2008), but it had also become bloated and strained at the seams owing to fiscal and monetary strategies that encouraged all of us to spend our way into prosperity.  The financial and moral deficit those plans created meant that the wealthy got wealthier, the poor became poorer, and our vulnerabilities increased exponentially. 

Now that the medical pandemic has come to our doorstep, we are all encumbered with the uncomfortable residue of those laws and decisions made earlier and presently while metaphorically stuck at home, recuperating, looking for an aspirin to make it all feel better. 

Market Commentary for the week of March 9, 2020

Would you rather be right, or...?

As I've written in previous missives, we are living in unprecedented market conditions.  Of course, the Corona virus scare sent shockwaves throughout the financial markets in recent weeks, but consider that valuations and expectations had also been excessively high prior, and it didn't take much to catalyze a major downswing in both.  In fact, I would argue that irrespective of strong fundamentals...or perhaps as a result of them....the market was looking for a reason to sell off and recalibrate.

As a result, investors had two complex choices: to stick to the script and remain with their stated long-term allocation decisions; or they could panic sell into the fury and run and hide.  The difficulty of quantifying the net result of either choice is gargantuan.  Interestingly, the US Federal Reserve (the Fed) rolled the dice last Tuesday by playing their "interest rate card" when, in fact, interest rates are a miniscule part of the problem.

Many of you still remember the mental shock and reverberation of the 2008-2009 "Great Recession"....and perhaps the dot.com crash of 1999, as well.....but in every instance of exogenous influence  over the existing trend in financial assets all categories break down nearly simultaneously, as occurred last week and the week prior.  Diversification, whether by asset class or geography provides minimal safe harbor from the carnage.  Bonds, as well as stocks, are negatively impacted.  Very few money managers can stem the tide under those circumstances.

The events of recent weeks highlight the inherent risks of all investing, but most notably, doing so without sufficient safeguards to make unforeseen crises palatable, if not manageable.  Be forever cautioned, identifying an investors time horizon is crucial to achieving good results.  If you cannot bear up to the vagaries of the financial markets you must not  be participating in the game.  Period.

However, the key to withstanding the current Corona virus uncertainty is to modify your expectations about near-term performance into a cogent longer-term perspective.  This is one reason why I always include cash as an essential allocation element, not just a "default" decision in the absence of anything else.  I get asked that question most frequently by clients throughout our annual review, during which I am queried about why we maintain cash reserves "un-invested", as opposed to committing those reserves to securities choices.  My clients have come to appreciate the extra level of protection that keeping one's powder dry might afford.

Asset allocation amongst all asset classes, including cash, is so obviously the easiest thing to do, particularly during unanticipated events as we are experiencing right now.

Not just hyperbole

More importantly, a portfolio that is well sheltered avoids the erosion of net worth that a one dimensional account cannot offer.

Despite noteworthy percentage declines in securities that occurred recently, balanced accounts outperformed an all-equity benchmark by a significant degree.  The solution is to maintain an "uncorrelated" scale amongst various investment categories.  An avalanche of bad news makes this a daunting task.  Assessing these risks before  the blitz of negative news is a given, rather than waiting until the alarm arrives.

An illustrious contemporary of mine back in the early 1980's, Joseph Granville, was renowned for being the "Bear of Wall Street".  No matter the circumstance....including the encouraging factors which would ultimately lead to the biggest bull rush in history....he advised anyone who would listen to "sell everything" (I am paraphrasing his actual entreaties).  He typified the old adage that "even a broken clock is correct twice each day".

Joe stuck to his guns until, of course, he was no longer correct anymore.  The bull market of the 1980's exploded onto the scene.  Then, his fame and notoriety began to recede in the face of rising stock markets in favor of the next flavor of the month television market analyst.  Looking at events today, I do not believe we are on the cusp of a bear market or global recession.  Instead, we are caught up in a groundswell of dread whose origins have been fomenting for months.

When playing the "long game", the key is to focus upon economics (supply and demand).  We know that global data has been improving so that really wasn't as much a part of last week's volatility as was fear and panic.  Yes, there are interruptions in the global supply chain and manufacturing as a result of the virus.  But now our efforts are to try and find a mental and fiscal equilibrium that will stabilize the trends back to the upside.