It’s not investor mania but Investor complacency about big stock and bonds moves that concerns me.

If you are not confused right now about what investment direction to take, you should be! Even market experts are uncertain about future market direction and volatility. A WSJ article from the other day said “Investors should get used to big stock-price moves, like Monday’s 600 point drop in the Dow, because they’re here to stay”. Well, after that Monday drop, we had VERY FEW calls of concern about the market. Now that may be because we have done a wonderful job creating confidence in our customer base, or possibly, people have already become “used to big-stock moves”.

The S&P 500 was down 13.5% in the fourth quarter of 2018. It had people panicking. So much so that on December 21st the SPDR S&P 500 ETF “DREW IN” the most money it had since February of that year (another dip period). And after the Monday May 13th 617 point drop, the market promptly went up by an almost identical amount over the next three days. So what’s to make of this?

After the Q4 correction of 2018, famous bond investor Jeffrey Gundlach of DoubleLine funds reflected on new money flows and said “… People have been so programmed, and feel so frustrated by selling when we get dips that this time they weren’t going to be fooled. This time they were going to buy the dip. I worry about that, though, because it reminds me a little bit about how the credit crisis developed in 2007 and 2008.” Whoever bought in December is “feeling good today” no doubt, but does the upward trajectory of the market continue?

So what’s an investor to do? On one hand, serious questions about global growth and geopolitical events are creating uncertainty which can make us want to sell on dips. On the other hand, the strong US economy and the Federal Reserve’s easy money policy make us want to take advantage of market dips! Well, Robert Shiller, the Yale University economist who shared the Nobel Prize in economics in 2013 reminds us “The professionals may be better at reading balance sheets and income statements and the like, but not at evaluating whether this is 1929 all over again” (or 2008).

So, as I said, we should all be confused. As articulated by Peter L. Bernstein, an economic historian and a widely read popularizer of the efficient market theory: “Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. …. The riskiest moment is when you’re right……. As incredible as it sounds, that makes you comfortable with not being diversified.” And he goes on to say “I view diversification not only as a survival strategy, but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it.”

Combining survival and growth requires real diversification (which is no longer provided by traditional stock /bond portfolios alone – a story for another day). What are the future growth drivers, Alternative Energy or Environmental and Social Governance (ESG)? And how do you survive economic contractions? We find that real diversification requires us to utilize market neutral, risk controlled and risk protected alternative funds in our portfolios to protect our clients during market volatility and from dreaded “market corrections”. In short, prepare yourself for market downturns before they happen, not after. That is how we manage volatile times like these.

To Our Clients: 

First of all, we hope you and your family are healthy. Here in Minnesota, our state has a “Shelter in Place” order for the next two weeks – and our public elementary and high schools for the most part have gone to “on-line” education until May 4th. I think this is a fairly common look across the rest of our country, so we’re in it with you. These realities point to the many adjustments in our social and economic life that containing the Coronavirus pandemic is requiring. Obviously, the questions we get most consistently these days are:

“Should we be buying the dip?”
“Should we be more in cash?”
“What should we do now?”

So, let’s be clear: we are living in a time dictated by a global health issue. “We all think of a recession as having an economic underpinning, but this has nothing to do with economics. This is literally about trying to stay away from people,” said Aparna Mathur, a scholar at the American Enterprise Institute. This “pandemic” has in its wake, however, also created a world-wide “economic slowdown” that is affecting our lives and our investments. Of course, it is the health issue that needs to be resolved first. In his initial appearance on morning television Thursday, Federal Reserve Board Chair Jerome H. Powell told NBC’s “Today” show that the nation “may well be in a recession” already, but making the country safe has to be the top concern. “The first order of business is to get the virus under control, and then resume economic activity,” he said. The Federal Reserve, and now Congress, have recently made significant moves to help stabilize our economy until social conditions themselves stabilize. What the recovery will look like depends greatly on how soon that starts. The good news here is that it appears our government will not be shy about further stimulus, if needed by our economy.

What sets this downturn apart is how rapidly the virus — and the economic pain — have spread. The question remains whether this will become a long-lasting slump or a short-lived flash recession. Markets try to estimate the future for businesses. Despite current opinions from media pundits, the future essentially relies on how long the US and the global economies will remain hampered by closures and restrictions of various business activities. Unfortunately, the question of when the virus comes under control remains unknown. And money and rhetoric only go so far. All this makes for an incredibly complicated situation for investors who are deciding whether to buy, sell or just sit tight. Two well-known investors (Leon Cooperman and Mohamed El-Arian) state that until the end of April, any statement is one of hope rather than knowledge.

As a result, despite the losses in stocks and bonds that have already taken place this year, our discussions with you will recommend continued caution. Market volatility won’t settle until we reach some sort of inflection point in the coronavirus crisis. It would be at this point that economists would be able to begin modeling the outlook for the economy with any degree of certainty. We then believe that investing in areas the government has decided to support, and companies with strong cash positions, will be attractive options.

Know that we are here for you in both good times and difficult times, to give you our perspective, to discuss your options, or simply to talk things through.