Greetings and a Happy Early Spring.
This is our first market note of 2020. The last several months have been extraordinarily calm in the markets so there hasn’t been much to write about. At LJI, we never want to become ‘noise’, relative to our thoughts on the market. We rarely let the calendar dictate when we send these emails.
The global financial markets never cared about Trump’s impeachment and, surprisingly, shook off the Iran threat in early January. Q419 earnings reports were solid and the economy continues to hum along in solid fashion. However, this coronavirus threat is very real, and the market has finally begun to discount that threat over the last few days.
Before we go any further, we should remind you we’re not healthcare/pandemic experts and will never pretend to be. We would also acknowledge that, tragically, thousands have died from the virus and many, many more are very sick. The whole situation is terrible, and we look forward to healthcare experts quickly finding a solution via a vaccine/better testing/etc. That said, in this note, we are trying to convey what we feel may play out in the financial markets and how we plan to navigate those unknowns.
Last November, as the market was hitting all-time highs, we pulled 10% out of equities and reinvested into short-term bonds. Heading into 2020 we felt the markets were ‘priced to perfection’. As the market shook off the Iran news and set new highs last month, we sold another 5% of our equity exposure.
We have discussed ‘Fear vs. Greed’ often in these notes. There is an index at www.money.cnn.com that tracks levels of fear vs. levels of greed on a daily basis. This index is represented like a fuel gauge and goes from 0 to 100, with 0 being max fear and 100 being max greed. When we sold equities in January that index was at 97, the highest we have seen. THAT is what we mean by the market being ‘priced to perfection’.
Obviously, in early January, we had no idea the threat of the coronavirus would lead to a potential economic slowdown by early March. However, experience and some common sense tells us….when Greed is very high, most have already bought b/c they expect markets to rise. So, we take some profits and wait. Now, after a sharp 7% pullback over the last few days, we’re in a solid position to take advantage of lower prices as fear picks up.
The exact opposite of last months’ Greed levels was December of 2018. The stock market fell 10% in October and The Federal Reserve raised interest rates the Wednesday before Christmas. The market fell 1000 pts that day and proceeded to fall by at least 800 pts per day over the next 3. By Christmas Eve that same Fear vs. Greed index was at 3, the lowest we’d ever seen.
In the midst of that 4 day, -10%, Dec ’18 selloff we bought stocks. We entered 2019 with the highest level of equity exposure we have ever had. Fear was high, which means prices were low b/c people had already sold. Entering Q418 our most aggressive growth portfolio was 65% stocks and 35% bonds. Exiting the quarter that same portfolio was 90% stocks/10% bonds, after an 18%ish decline. After hitting all-time highs in early January of this year, we’re back to 65% exposure to stocks in that same growth portfolio. Again, we welcome this current volatility.
Relative to the virus, we know it started in China and has spread rapidly since. The Chinese economy was already in rough shape heading into 2020. China represents a large amount of the global supply chain. Apple warned of slowing sales & earnings last week. Other companies are following suit. There are now outbreaks in South Korea & Italy, among other countries. No one really knows when or where it will stop. The ‘unknown’ is what spooks the markets…and ultimately presents opportunity.
Should we be concerned? Of course. Is this virus what will finally derail the 10-year bull market? Unlikely. Disasters typically have a way of not happening in the financial markets. There have been many types of global health scares over the years. They tend to get resolved over time and, again, provide opportunity to take advantage of market pullbacks.
The markets tend to move from ‘priced to perfection’ (high greed) to ‘priced for disaster’ (high fear). This cycle is as old as time. The reasons often change but the results are generally the same: volatility. And volatility provides opportunity – it is something we should all embrace. And it’s never going away.
Earlier this week a CNBC commentator described financial markets in a different way. He said, “Markets go from flawless to hopeless….and back again.” Let’s make sure we remind ourselves to be hopeful when the markets are hopeless and skeptical when things look flawless.
In the meantime, we hope and pray the coronavirus gets under control as soon as possible and those affected get well even faster.
Thank you.
Sincerely,
Your LJI Team