The month of March seems to have been one of everything being in full motion with almost nothing seemingly nailed down or stable.  From fluid travel coming almost to a stop to schools closing, businesses being temporarily shuttered to most citizens remaining at home from some form of "shelter in place" or "stay inside" or at worse, under quarantine orders. Things seemed to have altered most peoples plans for the month of March and the investment world has certainly been no exception to plans having to change in a moments notice.  One of the things we enjoy about our mathematically driven models is that they show us change is likely coming so it is not really like a light switch going off with no notice.

     We will try to walk through a host of items in this newsletter.

AS OF LATE

     As you can see in our graph below, March shows us it was anything but a "picture perfect" world that we live in.  March came in like a lion and that start was king of the jungle all month long.  March  was close to being the exact opposite of picture perfect for most investors, particularly those who want to buy and hold.
 

 
     We see there was only one day above the 0% line early on during the month. Though the buy and hold markets were only "down" -16% by the end of the month, the ride got decidedly more steep along the way and at one point it was down -27%.  Remember, this is for the month. These falling numbers can be deceiving.  Often, without thinking through things, the brain will "decide" for us we simply need a 16% rise to get back on track for a month down -16%.  NOT TRUE.  It actually takes a 19.1% rise in a market down 16% to get back on track.  For the year, through the end of March, the S&P is down just over -20% which needs a 25% gain to "get back on track".

     Recently in a conversation someone mentioned that, "It's just one month, markets were doing pretty well before March slammed everyone weren't they?" Actually, no. January was a negative return month, just by a small amount though.  February was a noticeably down month when stock market indexes fell between about 6% and 10% last month depending on what index you are looking over. To this very point we stated in our February newsletter, "...still suggest that stocks continue to be overpriced. Once we begin to factor in business slowing down due to the concerns about the virus, the notion of stocks being overpriced is an even more critical situation."  So, before the virus was even a consideration, stocks were too highly priced (yes, they can always go higher) and now there is additional motivation or reasons for those prices to come back down. 

     Last month I mentioned business slowing down and now for many businesses instead of being faced with slow downs, they are looking at and are being shut down.  A much different and obviously dire situation for employees, cash flow, survival and in the end, markets.

     This current situation brings back memories of 2002.  So many people blamed the 9/11 terrorist attacks for a bad /down market that year but the markets had been going down hard for almost 3 full years when 9/11 happened.  9/11 did some damage to markets but they were already falling and in pretty bad shape pre 9/11.  So, we really have to look at so many different factors before we fully determine what causes lead to the current effects.
     
Safer or Better places to go?

     Some may wonder are their safe or better places to put assets during this time.  When will this begin to come to an end? What will work well from an investing point when this is over? If I make some changes now, is it too late?  These are truly questions I have been getting from non-clients lately. 

     The reality is, in stocks, there has been basically nowhere to hide.  As is easily seen below, mega sized companies, small companies, tech companies, etc., all have seen sizable downturns in these broad based stock indices.  Looking  at this chart below, we see indices down from about 15% to more than 30% across all of these U.S. based stock markets.
 

The S&P 500, Dow Jones Industrials, Russell 2000, Mid Cap 400 and the NASDAQ for the 2020 year to date returns through the end of March.

 

     The above phenomenon is highly related to correlation.  Due to this, there has largely been nowhere to hide in stocks overall currently.  Yes, some stocks have suffered broadly and have been beaten down much more than many others. Energy stocks beaten so far down. Yes, transport stocks are beaten down, not as much as energy, but certainly more than utilities which have faired better than the S&P or the Dow Jones Industrials. 

     But the great thing is, stocks are not the only place to invest and finding other places and ways is just some of what brings a lot of fun to the work we get to do.

     Just this morning I spent 45 minutes on the phone with a non-client and was walking him through some items he needed to think about and through.  He simply wanted the downside to end, that was all he was after.  He really wanted one of these, . Sad thing is, we don't have an easy button at our firm. It all takes work. So that is what I did, I went to work on helping him understand what he had, where he is/was and some options he might consider before making any changes. He needs a plan, a set of actions to execute and a destination. We have a ways to go but he is beginning to think differently, not put all of his thoughts into one basket and to realize he makes adjustments for all kinds of risks every day and his investments should be no exception to having a solid risk awareness.

 

US Stocks and Long Term Government Bonds during March.

     One of the areas we have liked for a long time and have reviewed here before are long term U.S. Government Bonds. With the downturn here in stocks as of late corresponding with the rise in long term U.S. Government Bonds, since the beginning of this century, those bonds have outperformed the S&P 500.
 

     So, while bonds performed very handsomely in February, they also continued their rise into March, offsetting some of the losses in stocks by about a 1 to 3 margin. Meaning for about every 3 percent the S&P fell in the month of March, bonds rose about 1% for the month.  Thankfully for those with some stock exposure in our portfolios last month, they also had some assets allocated to the money market and to bonds as well overall.
 
     The interesting thing is for the year-to-date through the end of March, S&P 500 stocks have fallen almost the exact same percentage as long term U.S. Gov. Bonds have risen.  Both are in the low 20+% range, stocks being down by more than 24% and bonds having risen by more than 23% through the end of the month.

     Another statement we made in February, in our view is, "No one on a broad scale is valuing risk so it enters the equation faster and it is still being pushed aside by many investors.  Thankfully the government bond market sees all this risk and is trying to get priced (upward) appropriately (bonds can tend to smell fear and bonds never lie)."
     
     Now it seems, most everyone wants to talk about risk.  While that is still a very worthwhile discussion and needs to occur, current conversations about risk do not address the issues or losses from previous market's downturns.  Risk conversations need to be in place as well as actual plans in place well before "risk happens", so that those needed actions can be taken and those taking those actions know why they are being taken.  An old adage in our industry states, "Risk happens a little and then, all at once!" (click the link).

     So, now we need to look at things and say, was the lack of earnings growth the real problem which caused the tumble we see so far and it all just got triggered by the virus or is the tumble actually caused by the virus itself and what could become of it in the future? Is that the real issue here? 

     Case in point:  2001. If you recall, in 2001, two planes struck the twin towers in NYC and another also hit part of the pentagon. Devastating to say the least and the S&P 500 closed negative for period of Feb to Feb, down about -17%.  Closing down that much actually had nothing to do with 9/11 though.  Look at the graph below and see that markets were already headed seriously down long before 9/11 occurred!

 

2001 S&P 500 showing market losses had little to blame on 9/11 attacks.
 

 

     As we draw this portion of this letter to a close, our outlook is this. We do not expect this downturn to end any time soon. Some have asked if this will be a V shaped recovery. Coming back up as fast as it went down. No, it will not. a U shaped recovery? No.  It is not going down like a U so it can't be like a U but rather will be a long lazy climb back out of the depths of where this unfolding set of events takes us.

     Yes, they passed a stimulus package (yawn) but in the end, it is almost a drop of water in an endless bucket.  Not being a dooms-dayer here but getting things back on track is going to take time, loads of hard work, well laid out plans (don't bet big money on companies having these plans), patience by a lot of lenders, borrowers, customers, suppliers etc.  and the like.  I would encourage you to be one of the patient, one of the tolerant, and one of the giving. Slow or fast, it will help all of us come back well from all of this.

 We remain watchful. 

Ken Graves, Chief Investment Officer

Mortgages- Just look at these Rates!