Advice for Investors and Analysis of the Current Market

Federal Reserve chairman Powell gave markets a big bucket of ice water reality this week, saying circumstances are dire, more stimulus will be needed, and it’s not a good time to focus on the federal debt, since federal executive branch stimulus is needed now.  Also, he basically said that we are probably looking at a protracted, Nike swoosh sort of recovery over the coming years.  No V.

The number one thing I have been saying is that patience is your friend, and this is no time to be in a hurry to put money to work, or be aggressive.  The average bear market takes 12-24 months, and we are month 3 in this one.  As we had such a steep initial decline, this may be shorter than average, but still likely to be many months.

Hiding out in megacap darling stocks has worked out much better than value stocks, small caps, or international stocks.  That may or may not continue to be the case coming out of the bear market.  Megacap darlings are priced for perfection, and value stocks trade at historic discounts to growth stocks.  One place to perhaps get aggressive is allocations – it makes more sense over the next 5 years to have more value and small cap and international versus a standard allocation that is more S&P 500-centric.

Watch for a comeback in natural gas by winter as long as we partially re-open and begin recovering.  There could be a demand/supply imbalance raising prices as soon as then, with billions of cubic feet of gas coming out of supply both this year and next due to significantly less drilling and the almost banishment of associated gas produced by oil wells, which are more and more being shut in.

Keep an eye on oil dependent states – there is the potential for unrest, riots, turmoil, and maybe even regime change in states that may turn from surplus account oil-rich states in the past to coronavirus-failed states – Venezuela, Iran, Iraq, Saudi Arabia, some of the UAE (keep an eye on Dubai and its real estate), Nigeria, Libya, Angola, maybe even Russia (!).  Putin’s popularity just hit new lows.  Many of these nations cannot stay solvent if oil stays sub-$40 for years.  So, it probably won’t.  But in the near term, U.S. shale isn’t the only actor facing solvency risk.  So are the many sovereigns who have oil and little else.  We will see dozens of bankruptcies across the American oil patch in 2020-2021, but we may see revolution and failed states too.

The Nike swoosh may extend out even further than Chairman Powell believes if Democrats run the table in November and control everything.  They are likely to keep spending at excessive or unsustainable levels, but raise taxes significantly (which is terrible for economic growth), resulting in slow growth off the bottom and protracted economic pain and misery.  We may see every bit as much an “L” as a swoosh if policymakers aren’t careful.

So what does it mean for the stock market?  Who knows?  The market has proven it can rapidly and effectively decouple from current day economic reality over the past two months, but the last two days have been a grim reminder that we have a lot of volatility ahead of us. 

The ability of much of the country to leave the bunker and partially reopen, the development of an effective treatment for coronavirus, the eventual development of an effective vaccine, and the ample access of protective gear, ventilators, tests, and the like, will all have their say in stability and upswing of the economy, and whether the market’s “crystal ball” 6-12 months out means a stock market that stabilizes by fall, or continues a wrenching bear market due to uncertainty or crushing economic data that resolves uncertainty the wrong way.

As the British slogan went in WWII, “Keep Calm and Carry On.”  And I would add to that, “make sure your full allocation to stocks is on at lower prices, similar to where we bottomed in March, and if we penetrate those lows, begin over-weighting stocks slowly, through regular buy-ins over time.  In the meantime, keep enough exposure in the markets that you participate on any upside, but can sleep soundly at night if there is more downside to endure.

Finally, keep a close watch on the real estate sector – really the largest swath of the economy if you include both commercial and personal real estate.  Although you can see cracks forming in tenants’ abilities to pay their obligations, the real estate dam has no leaks as of yet.  Getting the economy stabilized and in an upswing by fall will be significant in holding off a flood of defaults in real estate rent payments and the like.  Real estate can be prophetic – if tenants default, the economy is collapsing around real estate.

Patience, resolve, and cold-blooded execution of a well-mapped plan are the investor’s friend right now, and bridge to the other side.

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