Unfortunately, we see the market carnage continuing to pile up for now. We’ve talked about the increasing liquidity trap, where we get a massive “herd effect” of selling because of the technology-driven investment structure markets have created, for four or five years now (see Is the Passive Indexing Craze the New Tulip Bulb Mania?). The investing public is looking at their accounts on a more consistent basis, and when they decide to sell en masse it creates a liquidity trap with more sellers than buyers across different asset classes. Typical diversification does not work in these situations. The only thing that really works is to be in cash before any of that starts.
We are seeing a liquidity trap in bonds that really magnified itself. The most liquid and safest bond market in the world is the U.S. Treasury Bond Market. And this month we had the biggest moves up and down in Long Treasury (30-year-U.S. treasury), in history which led to back-to-back bad days in the treasury market.
On March 15, the Federal Reserve announced an emergency package to help the treasury market. The Fed’s intervention is something bigger than we’ve ever seen before. They moved very quickly to try to insulate the world’s financial system, and in turn, unintentionally created investor panic. I think it’s a good sign that they moved quickly though, and I believe this means they will back the mortgage-back market, and maybe the corporate bond market.
I’m pretty excited about the Fed’s response. They threw the kitchen sink at this thing and we’ll have to see where it goes from here. There is a lot of risk still out there. The risk is not abated, and we need to conserve and preserve every last dollar we can until the clouds clear and it’s safe to invest again.
Unfortunately, I think that the markets can go down quite a bit from here, and we’ll have some significant short-term pain. Everything is being sold, asset managers are trying to get as liquid as possible. And when that pressure abates, they’re going to try to get reinvested as quickly as possible.
The silver lining is that I believe we’ll see some dramatic fiscal stimulus, which we haven’t seen in this 11-year recovery cycle off the 2009 bottom. Once the fallout from the coronavirus outbreak starts to recede, I’m hoping we’re going to see such a tremendous economic recovery with the most supportive fiscal stimulus and monetary policy ever put to work in the world’s financial system. I think there will be a lot of companies that will struggle, but for those that do come back, the return set on the other side could be unbelievable.
The important thing is to protect client assets from another 20% or 30% decline from here, which we think is reasonable to assume on a short-term basis and position them with someone like WBI who seeks to take advantage of the recovery. At the end of 2008, we got very quickly invested. In 2009 off the bottom, we were able to get reinvested very quickly. Our process is designed to reinvest very quickly when value is present. Markets have been in an overvalued state for the last five years, and growth and momentum stocks have been the byword. We’ve made recent adjustments to our policy, and we expect to go from full cash to fully reinvested faster than we ever have before. We look forward to that opportunity.
The public tends to sit on the sidelines after taking losses for way too long and in the past have missed very powerful, very fast market-relief rallies off the bottom. In March 2009, no one thought the market was going to recover. I personally didn’t think the market was going to recover. I was wrong. Our process drove us back into the markets. The process was correct and the process has been right so far about avoiding a catastrophic loss here, and I believe it will be right in terms of getting us reinvested to pick up historic gains on the other side.
It is the responsibility of the advisor and the money manager to do the right thing for clients. I don’t believe that clients should follow low-cost, passive-indexing, buy-and-hold strategies and take huge losses. Losses of 20% to 25% on a historic basis are easy to overcome with the bull market rallies. Losses of greater than 20% or 25% become very difficult to recover from. And this could be a market event where we see down 50% or more.
We do think there will be sunshine and a silver lining to this negative investment cloud. Without the fiscal stimulus, the world’s financial system and economy were going to stay fragile. With the massive fiscal stimulus, we have a chance to come out of this much stronger than we were before we went into it.
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