On April 2nd we held a webinar to address some of the questions posed by BFT Financial customers, as well as give an overview of the current market landscape. Below is a condensed version of the discussion with Stephen Tally, BFT CEO and Chief Compliance Officer. Please note, the information given reflects what was known at the time. If you would like to get the latest news and updates, please subscribe to our newsletter here.
Please feel free to also listen and watch the video version (run time of 36 minutes).
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WHAT’S THE CURRENT LANDSCAPE?
IS BFT OKAY?
WHAT’S THE IMPACT ON MY PORTFOLIO?
SHOULD I SELL AND MOVE TO CASH?
SHOULD WE BE DOING ANYTHING RIGHT NOW?
SHOULD WE BE BUYING STOCKS WHILE THEY’RE DOWN?
IS THIS GOING TO BE THE SAME AS 2008 OR IS THIS DIFFERENT?
HOW LONG IS THIS GOING TO LAST?
THE FEDERAL RESERVE IS TAKING ACTION. WHAT DOES THAT MEAN?
WHAT’S THE CURRENT LANDSCAPE?
The Virus
We know now that the virus is highly transmissible. Fortunately, we know that the mortality rate is lower than SARS, MERS and H1N1 and that the most affected are the elderly and the compromised. We’ve seen COVID 19 move from China to all parts of the world in a matter or weeks. This past week the US became the highest reported country and it’s escalated to crisis levels in New York from a care availability standpoint. New Orleans sadly may follow. But there is good news. China has seen cases drop over the last several weeks and that, for now, appears to be the result of quarantining. The numbers in Singapore, Hong Kong and South Korea support that. So, while we’re behind in the lifecycle of the situation, we have good news and evidence to draw from.
The Stock Market
This has been the most rapid market decline ever. It took 6 trading sessions to drop 10% and only 16 more to drop to 30%. We’ve recovered from the lows but have a lot of ground to regain. The thing to keep in mind is, if you go back to January 31 and take a market assessment, you’d say the economy is strong and prices are a bit elevated but within a range that’s not alarming. What has changed is clarity. The virus appeared and that caused a transitory shock to the stock market. It seems that the market reacts better to bad news than the unknown, which makes sense. You can model bad news and price in risk and future earnings. It’s difficult to model the unknown.
Earnings and Employment
What we do know now is that earnings will drop dramatically for Q2 and Q3 before they gather upward momentum and unemployment will increase as dramatically.
Gauging how far earnings will fall is tough. One economic model that I’ve seen estimate as much as a 15% decline in the S&P500’s earnings before beginning to normalize at the end of the year. That will have a negative effect on GDP. Keep in mind, not all earnings recessions are accompanied by an economic recession. That’s the good news. And, once the clouds break the market should start to price in a virus free run rate for earnings. That puts us back on an upward trajectory again.
Employment in the short term will be rough. Business closures are translating into lost jobs. Unemployment may hit 6% or worse by mid-year. No question this is a concern that’s been priced into the market. I have two positive comments here. First, we’ll be coming off a very low unemployment rate. In February it was 3.5%. As reference, the lowest in the last 70 years was 2.9% in January of 1953. Second, as the virus subsides or we develop a treatment, demand will pick up and business will need to rehire.
IS BFT OKAY?
Yes, we’ve well capitalized and most importantly we’re all safe.
Our structure builds in a safety net for you. We work with three big, great custodians, Schwab, Fidelity and TD Ameritrade. Our client’s assets are held at the custodian meaning we don’t have your cash or holdings on our register. That’s an added layer of security. If something terrible were to happen to us our custodians would be right there to help you.
WHAT’S THE IMPACT ON MY PORTFOLIO?
If your portfolio doesn’t look like the stock market it shouldn’t behave like the stock market. Meaning, if you have an allocation of equities and bonds your risk exposure is reduced. That said, there hasn’t been any place to hide.
SHOULD I SELL AND MOVE TO CASH?
If you participate in the downside don’t de-risk at the bottom. Be in a position to participate in the recovery. There are endless charts that illustrate the impact of poor investment decisions, namely selling low and repurchasing higher and the impact of missing the three best market days of the year. What you’re really saying is “I know that the market is going lower and I also know where that bottom will be.” The first part of the trade is the easy one to make, sell. The second, buy, is terribly hard.
SHOULD WE BE DOING ANYTHING RIGHT NOW?
From a portfolio perspective, the answer is most likely no and be patient. We’ve already put in the research and effort to build a solid investment portfolio and we model for good markets and bad markets.
What you can and should be doing is:
- Reduce your trading. When volatility is up it’s easy to get whipsawed in a trade. If you must trade, make sure there is enough liquidity in your trade.
- Review your debt load and interest rates on your debt. It may be a great time to refinance your home.
- Review your cash flow-If you’re in retirement can you lower any withdrawals? Try to not sell securities to generate cash.
SHOULD WE BE BUYING STOCKS WHILE THEY’RE DOWN?
I like the thought process but be careful. If you do have cash to invest this will most likely be a good opportunity. But I’d advise to do your homework and not be in a rush. We may be at a bottom or we may be near a bottom. My preference in a situation like this is it’s better to be a little late than a little early.
Ask yourself:
- “Would I have bought this 12 months ago?”
- “Am I only buying this because it’s depressed?”
That’s speculation and it may or may not work out. Stocks can be priced low for a reason and there needs to be a catalyst for them to reflate.
There are plenty of good deals out there and making bets on a single stock or sector probably aren’t necessary for future gains.
Also, be aware that things will most likely change once this has passed. So, there are a lot of questions to ask. How will business be transacted once we’ve become accustomed to virtual interactions? What solutions did we adopt and are they likely to stay in place? Business will resume once we get the all clear but it may not look completely the same.
IS THIS GOING TO BE THE SAME AS 2008 OR IS THIS DIFFERENT?
I don’t think so. We don’t have the baggage like we did in 2008. Bad debt, housing market in shambles, banks with loads of bad assets on the books, failed investment banks; all that is absent.
We also have better tools and regulations in place. I’m sure you’ve all heard “limit down and limit up.” In 2008 it was curbs and market halts. Limits are used to ensure proper trading and liquidity in trading. We’ve seen record volume and the processing has been very good.
Banks are much more capitalized.
You and I have less debt and more in savings than ever before.
And to my earlier point, the market didn’t have a fundamental problem two months ago. I can’t say we’ll pick up right where we left off but once we get past quarantining a great deal of demand will pick up and employment should follow suit.
HOW LONG IS THIS GOING TO LAST?
I wish I had an answer, but I don’t. If we follow the quarantine that will be helpful. But this one is up to the scientists. Fortunately for us, the world’s best is working in concert.
I KEEP HEARING THE FEDERAL RESERVE IS TAKING ACTION. WHAT DOES THAT MEAN?
This is an “at all cost” initiative for every country.
Monetary Policy
The Fed has been all in from day one. They were ridiculed at first for attempting to fight a virus with a rate cut while in reality they were signaling their commitment.
- Cut the overnight rate to zero
- Bond buy backs of treasuries $700 billion, mortgage backed $200 billion and first time ever some corporate bonds
- This puts more money in circulation and adds much needed liquidity
- Back stopping prime money market funds
Read the most recent updates on the Federal Reserve responses to COVID-19.
Disclosures:
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of BFT Financial Group. Neither BFT Financial Group nor the author makes any warranty or representation as to the accuracy, completeness or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall BFT Financial Group be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither BFT or the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
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