Yesterday marked the 11th anniversary of the current bull market, which started on March 9, 2009. Stock markets and stock investors have had many highs and lows during their 11-year marriage. Fortunately, the times good times outweighed the difficult times. Either side could have called it quits many times but working to preserve their marriage has proved beneficial. Even with the recent sell-off, the S&P 500 is up 306% since it’s low point 11 years ago. It seems to us this should be a time for investors and the stock market to be celebrating their relationship, not a time of turbulence. A quick internet search informs us that couples fighting on their anniversary is actually quite common. From a calendar standpoint, marriage therapists cite anniversaries as the number two inflection point in marriages, behind only the holiday season. Therapists say couples, or at least one person in the relationship, use milestones as a time to reflect on and assess their marriage. This often leads to questions about their future together. We are not marriage therapists. We are also not virologists. We should also mention we are not experts on the nuclear situation with North Korea or Iran, on constitutional law and the impeachment process, or the many other topics that have shaken this stock market along the way. We are investment strategists. Our degrees are focused in economics, accounting, history, and finance. As investment strategists, history tells us that the pundits in the aforementioned fields of study tend to be bit draconian in their assessments of events and their economic impact. This more often than not leads to the fear of an event being far greater than the reality of the event. While we’ve acknowledged our complete lack of medical knowledge, we are hard-pressed to see the economic impact of the coronavirus being as dire as some experts predict. There will undoubtedly be a material hit to economic growth, but assuming this virus somewhat follows the path of previous coronaviruses SARS (2003) and MERS (2012), the expectation would be it subsides over the next 2-3 months and economic activity would start returning to normal.
Our Bigger Picture Thoughts
Please be safe- You've undoubtedly received numerous emails from companies expressing their concern for your health, telling you what precautions they are taking regarding Covid-19, and urging you to wash your hands. Needless to say, we also care deeply for each of you and strongly suggest you follow the CDC guidelines regarding Covid-19. It seems that most everyone has become a virologist lately. As we expressed earlier, we have no medical background so we will resist offering health advice beyond encouraging everyone to follow CDC guidelines. We will offer the following. Here is a link to the coronavirus worldometer and the CDC, as of today there have been 729 cases and 27 deaths in the United States. The average age of death is 80. Of the 687 currently active cases, 678 are considered mild. According to the National Highway Safety Administration, (NHTSA), there are 102 deaths per day due to motor vehicle crashes in the United States. Please don't stop driving, but please drive safely. Driving in a motor vehicle is by far the greatest threat to our health. What’s really driving market moves - While the Covid-19 is the headline reason for current volatility in the stock market, there is simply no way this sell-off is a function of long-term investors selling all their stocks. Like in Q4 of 2018 when stocks plummeted 20% in 4 weeks, the Algo’s are driving these wild swings. Algorithm traders, aka day traders, feast off momentum trading. They don’t care whether stocks are moving up or down, they look for periods when stock markets are trending, and they can manipulate and profit from the trend by piling on. This is why we see markets not only moving violently down on certain days but also wildly swinging higher on other days. When long-term investors start shifting their focus and actions to the daily movements of markets, this is known as capitulation. Often this marks the turning point for markets. We are starting to see evidence this is beginning, as it did in Q4 2018. Missing the opportunity – With all the focus on stocks, the incredible drop in interest rates is being overlooked. The 10-Year Treasury yield, which fixed-rate mortgages are based on, dropped to 35bps this week. Not only has this greatly dampened loss at the portfolio level, it’s provided an opportunity for homeowners to refinance at the lowest mortgage rates in history. Longer-term fixed-rate mortgages are below 3%, if you have a shorter-term ARM (adjustable-rate mortgage) you should strongly consider shifting to a cheaper rate that doesn’t adjust. If you already have a fixed-rate mortgage, it is likely you can refinance and get a cheaper rate. Economic Benefits – Reading the headlines yesterday, our GreenPort team was a bit perplexed. “Dow plummets due to oil price war”. So now low oil prices are bad for the economy? The Fed has also done its part with an emergency cut of the Fed Funds rate. Money is cheap, assuming things get back to normal at some point, this should add fuel to the economy. Prospect Theory – If you’ve been to our seminars, you know we are big fans of behavioral finance. Behavioral finance is a field of study that challenges some of the main tenets of traditional finance. Importantly, it challenges the traditional finance notion that investors are rational and unemotional in their decision making. As an example, traditional finance states that someone investing for retirement in 20 years would design a portfolio that maximizes their probability of success 20 years from now. This would involve looking at the average 20-year return of various asset classes and combining them in an optimal portfolio. While this makes perfect sense, studies of actual investor behavior contradict this notion. It shows that investors view portfolio performance relative to their portfolio's high watermark. This has become particularly acute during the internet age because investors have access to their account balances on a daily basis. Traditional finance says if an investor’s portfolio goes up 30% and then retreats 10%, the investor views this a 20% gain. Prospect theory shows us that in reality the investor only sees the 10% loss. With that in mind, as of last night's close, the S&P 500 is off almost 19% from its all-time highs. Longer-term returns tell a very different story, averaging closer to 10% a year.
It’s not as easy as simply relying on long-term averages. That’s not what we do at GreenPort. We adjust portfolios based on our economic outlook and the current valuation of each asset class. Currently, while Covid-19 is going to have a shorter-term impact on economic growth, we see this as temporary. We don’t see the economy as changing its longer-term growth trajectory. With asset valuations once again neutral and The Fed and oil prices providing stimulus, we expect to see the stock market eventually start moving higher again. We will continue reaching out to you, please be sure to reach out to us if the current volatility has you feeling a little unsettled. Stay calm and carry on, The GreenPort Team