Do you remember Captain Sully whose plane, full with passengers, lost both engines due to a flock of birds hitting them at a low altitude? Under extremely stressful conditions, the pilot did the right thing, safely landing in the Hudson River and saving all the lives of the people on board. Proper training, a plan, and a cool level head literally saved lives that day. Though the stakes may not be as high for us as investors, the value of the process is equally important. After 38 years of experience, and going through many severe issues in the market, I have developed a plan for your investments that not only grows the assets but offers some protection for the downside. That is like a belt and suspenders approach. Planning ahead of time is important but during a crisis, just like Captain Sully, I must use my experience and make adjustments to safely land and prepare for the future.
I am going to talk about several issues:
- Your Income: How to maintain the income you have been receiving over the past year and growing your assets in order to be able to produce that income. How to move assets to the strength in the markets and away from positions that are a risk in the near term.
- What is happening with the markets and economy going forward and what the government should do about it.
- How you can help your friends and family
Let’s start with your income. My objective in adjusting accounts is to make sure that the income that you received last year remains the same and grows in the years to come.
If you hold Equitable and Jackson National, you will continue to receive your income as each protects both your principle and your income.
For those of you who have depended on High Yield Bonds for your income, we need to make some changes. As I said in my commentary on High Yield Bonds, the principle and the income fell with the downturn in the market. All the companies are solid and the managers are the best in the industry. The portfolios of the High Yield Bond funds are well diversified with over 300 bonds in each portfolio. The problem is that no one knows if there will be 2% defaults in the portfolio (which is normal) or 10%. Also, I cannot tell you why the income went down with the principle. That is highly unusual and something that a solid company and a good manager cannot protect. Since I am not certain what is going to happen to these funds going forward and whether or not they will recover and go back to last year's income, I am recommending that anyone with a high yield move to growth.
Why? Because we can maintain your income from last year and you will not have to suffer a decrease in income because the high yield income has dropped. Second, because I am certain that the stock market will eventually move up to its old highs and beyond. Tuesday of last week was a clinic in why it is impossible to time the market and why I have not moved money out of the market. The Dow had the best day in almost 90 years, up 11.4% in one day! Can you imagine what the market will do in response to a vaccine or the eventual containment of the virus? Markets tend to bottom three to six months before a recession ends. I believe we are already in a recession which is two negative quarters of gross domestic product. I believe that the first and second quarters of this year will be down. (More on that later.)
To continue my discussion of income... some might recommend bonds for that income instead of moving the money to the market. I am not recommending that and this is the reason why: Bond prices are up dramatically because the yields on Treasuries are down dramatically. This is not a good reason to invest in bonds. First, fixed income is fixed, meaning the income will not grow over time. Bonds rise when interest rates fall and fall when interest rates rise. Since current interest rates on bonds are low that is indicative of higher bond prices. When interest rates rise, bond prices will decrease. I strongly believe when this virus subsides, that the bond values will fall leaving those who invested in those bonds with both a low income and a lower value of their bonds.
My job is not only to get you the income you need but to grow that income to stay ahead of inflation. I cannot do that in bonds right now because the income will not grow in the next several months, it will fall and the principle will in all likelihood drop as interest rates rise.
I will talk to each of you to discuss your portfolios and what adjustments I want to make.
To summarize my first point and to address my second:
Bond values are inordinately high because of the virus and the drop in interest rates. Not a good time to invest in bonds because you will lock in low-interest rates and take a certain risk of losing principal as interest rates rise.
High Yield Bonds are a different animal than investment quality bonds. They don’t move with interest rates but rather with the stock market. The value of the bonds has dropped in value and the income has also dropped in value at the same time. I have never seen that happen before. I am recommending a growth strategy to maintain your income and grow the account so you will have a growing income in the future.
In addition, I am recommending an increased exposure to the stock market either through managed accounts or mutual funds due to the current valuations on the market which I believe are inordinately low and are certain to move up with the solving of the virus issue.
I would also recommend that if you have more cash on the sidelines that you don’t need over the next year, that you put that in the market as this is a rare opportunity to buy cheap. The last time we had this kind of discount on stocks was 12 years ago. There are few times that you can invest at this deep discount.
Again, I am calling all of you to discuss your unique situation!
Let’s now talk about the economy and our politicians:
The government-mandated shutdown of business, and the massive drop in economic activity it is causing, may do more harm to the United States than the coronavirus. Early estimates suggest the US economy will contract at a staggering 5% in the second quarter and the number may even be higher. Despite multiple recessions, global wars, the Asian flu, SARS, 9/11, and natural disasters, the US hasn’t experienced a quarterly drop in activity like this since the Great Depression.
Please listen further because I do not believe we are headed for a Great Depression despite these numbers!
The unemployment rate is likely to double from 3.5% to 7% in the coming months, representing a loss of more than 5 million jobs. And the longer the shutdown lasts, the further that number is likely to rise.
Tax payments to federal, state and local governments will fall precipitously, and many government entities will face serious financial challenges like Illinois which has billions in unpaid bills, not to mention a severely underfunded pension system. A 10% to 20% drop in tax revenue makes these problems that much worse.
The Federal Reserve has pumped trillions of dollars into the economy. Congress has passed a $2 trillion dollar “stimulus package” which will not actually stimulate the economy. It will simply help individuals and small businesses survive for a few months longer.
Fear is driving the models that the government is using. The data that we are gathering is showing how fast we are finding cases, not how rapidly the virus is really spreading.
The president is indicating that we have to open the country soon but is that realistic? We have to start trusting individuals as we do so many other areas of our lives. We have learned that our most effective measures to prevent the spread of disease are to wash our hands often, not touch our faces and stay away from others if you are sick. What individuals can’t do is fight a massive recession. You can reduce the odds that your family is affected by a virus, but when you lose your job because the government shuts down the economy, your problems are far more likely to multiply.
I believe that the sooner we open America up for business, the less the economic damage, and the better off we will be in the long run. Giving up our freedom due to fear is a price we will pay for generations.
I think we need to focus the minds of our politicians who are shutting down our economy. We should immediately stop paying them as long as the shutdown lasts. Government employees keep getting paid, while millions of Americans are losing their jobs. Politicians will only do the right thing if they share the pain. Only businesses that are shutdown can turn the economy around and politicians need to face that reality.
I could go on and on with what I think the government should do, but I want to focus on what I think is going to happen going forward.
I believe after the horrible second quarter, we will see a rebound of the economy in the third and fourth quarters. I believe we will bounce back to 3% GDP growth in the economy and that most of the jobs lost will be restored. It is critical that the government helps industries that are facing devastating losses such as airlines, hotels, and restaurants. Even when the economy opens up they will still be facing a huge reduction of business for months until all is completely clear.
On helping family and friends.
If you care for your family and friends and they need answers too, please forward the past two weeks' commentaries to them. You can find all of them HERE starting with the most recent.
I have spent many hours researching all the issues we are facing and I am here to help in this crisis. I have heard many of you say how comforting these commentaries have been to you. For that reason, I want to extend my hand to anyone facing these issues with information, facts, and advice for the future. I would also like to extend a free analysis of their situation without any obligation. The time to act is always when times are the toughest. So your help can mean the world to your friends and family. My first obligation is always to my clients. Second, to their family and friends. If I can help or comfort in any way let me know.