Wow! In all our years as financial advisors, we have never seen a market like this. Prior bear markets (a decline of 20% or more from the last trailing high of the S&P 500 index—which was 2/19/2020) were caused by the collapse in fundamental economics, such as the banking and bad real-estate loan crisis of 2007-2009. Or the irrational tech bubble collapse of 2000-2003. To the best of our knowledge, this is the first bear market caused by a disease, since the impact of both the Spanish flu of 1918-1919 combined with WWI.
We are going to share our thoughts with you, and we have attached many of our reference points, not in chronological order, both above and below. We apologize for that, for it is above our pay grade. We are desperate to get this email out to you, and we apologize for any linguistic glitches. We normally have a brilliant staff to clean up these emails. We encourage you all to write back with your candid comments and questions:
There are 7 major parts to the mess we are in:
1. The humanitarian cost to the economy of illness and deaths is enormous. Our thoughts and prayers to all who have lost a family member or friend. Not to make light of that, but the economic destruction is epic.
2. Why is this impacting the economy and the stock markets? Here is where random thoughts begin. The attached article on the “manufacturing supply chain” shows major global ramifications. By example, the parts of an Apple iPhone come from 26 different countries. You only need one part missing, and no iPhones are shipped. Extend this concept to everything that is manufactured globally: TV’s, phones, computer gear, appliances, automobiles, tractors, medical supplies and big pharm, to name just a few. A statistic we trust more than the Fed is a recent survey by Dunn & Bradstreet of their Fortune 1000 customers, which shows that 94% of transportation management executives in those companies reported supply change interruptions. Even if you were motivated to buy something, the news is already reporting enormous lack of supply. Think of Samsung TV’s and phones from South Korea, computer gear from Japan, cars and trucks, appliances from South Korea, Japan, Mexico, China, Germany, Italy, etc. The math will make your head explode.
3. You need to listen to the following statistics from our federal agencies. 71% of US Gross Domestic Product (GDP) comes from consumers and small businesses. This spending is from the top 25% of US consumers and businesses. Not a statistic that we should be proud of, but 50% of consumers have a negative net worth meaning their liabilities are greater than their assets. 70% of Americans don’t have $500 in their checking account to fund an emergency car repair, etc. The economy revolves around the 30% of the wealthiest Americans, who are responsible for this 71% of GDP. In most cases, they have stopped spending money.
4. The Fed at about 3 PM on Sunday, as this is being written, dropped overnight rates to banks to the 0.00 to 0.25% range. Who will this help? More random questions and thoughts: Are you going to go out tomorrow and buy a new auto/truck because the interest rate is 1% less? Book a cruise? (They are shut down for 60 days!) Buy airline tickets to Disneyland?? It’s closed. Go to Home Depot or Lowes and buy a new $50,000 kitchen or bathroom renovation? The one bright spot is refinancing and new house purchases. The Fed rate cut should trickle down to lower mortgage interest rates. If you haven’t checked your home mortgage interest rate lately, do so right now. Caution, we understand their application pipeline is 2 to 3 months out. In many cases, they have stopped taking new applications.
5. The combination of decreased consumer and small business spending, combined with simple human fear, has taken a toll on all stock markets. A long time ago we learned the expression, “The trend is your friend.” Since 2/19/2020, the all-time high mentioned above, we have had 17 stock market days: 13 down, 4 up. End of game. Restaurants, retail, cruise lines and leisure travel have taken a huge hit. You have probably seen pictures on the Internet of empty shelves in grocery stores, Costco, Wal-Mart, etc. This is not going to be miraculously repaired over night because interest is cheaper. By the way, don’t expect those interest rate cuts to banks to trickle down overnight to your credit cards. The most credit worthy of the US citizens, about 25%, will get a better rate on an auto/truck loan or a mortgage. Per above, 70% of Americans were frozen in poverty before 2/19/2020 and will continue to be so.
6. There are a couple of bright spots. Student loan interest forgiveness and two weeks of unpaid wages to small business employees. And here is the big one (article attached). There are approximately 100 banks and lenders that have loaned billions to the small/medium oil patch producers, i.e., not Exxon Mobil. These small producers, who mostly do shale fracking, have an average cost to produce and extract at $31/barrel. Oil currently fetches about $30/barrel. You can’t make money spending $31 to sell something for $28. You don’t need to have a Ph.D. in Economics to figure that out. Will the Fed’s interest rate cuts make oil go back to $60/barrel? Most likely not! Supply chain disruptions in China and other manufacturing-based economies have reduced demand for oil. (Think G20, Group of 20, 19 nations and the European Union.) Add to that consumers, airlines, cruise lines, etc.
7. Now for the scary, gross part (references attached). 95% of the US consumption of 200+ varieties of fruits, nuts and vegetables come from California. The major West coast cities from Seattle to San Diego are suffering from a pre-2/19/2020 epidemic of homeless street people living in tents. These people are not the healthiest, cleanest and best cared-for individuals. COVID-19 will hit them hard. In the attached reference, you’ll see that there are approximately 12 to 15 million migrant workers in CA responsible for the harvesting of those 200+ fruits, nuts and vegetables. What happens to the food supply chain if COVID-19 hits the migrant workers in CA? That might just explain all the empty shelves in grocery stores this past week. Consumers get it.
We’re sorry if you think we are alarmists. Our number one job is to protect our client’s investments. We are doing that. All accounts shifted to defense on 2/27/2020 and are now 100% “cash” as of 2/27/2020 with a few accounts being partially “short.”
We have the greatest scientists, MD’s, and Ph.D.’s working on this pandemic. If you haven’t seen Dr. Anthony Fauci on TV, Google him. His team is the best, and not a bunch of TV talking heads.
Please email us with any questions or comments. We are doing our best to protect our clients. Our wives have commented how much different this is from the 2008 bear market when we were using Modern Portfolio Theory to justify a buy and hold process. Just like the fourth quarter of 2018, we have stepped aside from a major market decline.