Many are asking for greater detail around what exactly is happening in the markets and what actions, if any, we should be taking. Well-thought out investment plans are put into place for the very purpose of helping you move through times like this without making big mistakes that derail progress towards your financial goals. As is the case during volatile times, there are many moving parts to what is happening, and most aspects today are both highly technical and happening very, very quickly. That being said, I am going to try to add some color to hopefully start to shine some light on the end of this tunnel. There is no reason we won’t move through this.
Liquidity – Since companies are having to shut down certain aspects of business, they are scrambling to liquidate assets to raise cash needed for operations, so in essence all asset prices are falling together. This indiscriminate selling is by no means unprecedented. The overall plumbing of the U.S. economy is directly related to liquidity, which is largely driven by creditworthiness. The scale of response by the Federal Reserve, the European Central Bank, and the Bank of Japan demonstrates a commitment to provide much needed liquidity. Unlike in 2008, banking sector liquidity is not currently a problem, but it will take time to get dollars infused into the economy.
Earnings and Credit – We invest in stocks with little or no debt, good earnings growth, and rock-solid cash-flow – and I believe these companies are best-positioned to come through a difficult time such as this. The current price:earnings ratio for the S&P 500 has fallen from over 20 to around 13. I will be watching earnings very closely for the next two quarters to see if there will be any adverse impact to balance sheets (meaning will companies have to take on excess debt to fund operations). The current market is trading based on sentiment (fear), not valuation. Companies will quickly return to last years’ earnings, so later this year I will be using those figures to assess valuations. Over-leveraged companies will not survive this, but companies with strong financials will not only survive but thrive. I believe we will quickly see innovations that will catalyze the start of our next great economic growth cycle, especially within the healthcare and technology sectors.
Market Volatility and When to Buy – We started adding to stocks in late February for more aggressive clients. It is impossible to identify bottoms, but markets tend to overshoot. We came into this with a very solid economy – and currently the Leading Economic Indicators are still rising and the yield curve is steepening. While I expect those patterns will likely change for a very short time period, right now presents one of the best buying opportunities for stocks in history. I am watching for two things that, in my opinion, signal we are somewhere close to a bottom – two consecutive solid up days in the stock market, and some type of significant good news on the medical front showing successful results of a vaccine or treatment. I will also be watching how the economic impact of the shutdowns and quarantines moves through China and Europe, as we can expect somewhat similar trends here in the U.S.
We have been through difficult times in the past, but challenges such as this only bring us through to the other side as better and stronger communities. Please let us know anything we can do for you during this time. And most importantly, please stay healthy and safe. Thank you to our clients – we appreciate having your trust and confidence, especially during uncertain times like today.
Thank you very much,