We want to tell you what we are seeing, and what we are thinking. This will be an overview, and we likely will follow up with additional communications as matters evolve. We have a core investment process we have built, and believe in, to help us manage assets in all markets – “Intelligent Risk Management.” Intelligent Risk Management means that we constantly seek to preserve savings and build financial security for the long-term. We will be cautious or aggressive as we judge appropriate. And, based on the current market situation, we have a broad but flexible plan for managing assets going forward.
We’re seeing some history here, but we have been through markets like this before – such as 2000 and 2008. Most media are saying this was the fastest decline to a bear market ever (down 20% from the peak – somehow 1987, with a single day down over 20%, never comes up). At this point, you really can’t trust prices to reflect the value of what you own. Some people are liquidating assets because of emotional panic; some people are being forced to liquidate assets because of excess leverage and resulting margin calls. When everything is getting hit, there’s probably opportunity there, but we want to let the market sort things out a bit first. To take advantage of opportunities in a sensible way it helps to have some cash, discipline, patience, and flexibility, along with having the intellectual and emotional strength to be able to make tactical adjustments as the situation evolves.
What would make me put more money to work? Signs of stabilization. I thought we could get it on Wednesday when we tested lows intraday, but instead the market broke down below those prior lows. I’d like to see some sign that the trend has shifted a bit to the upside, if only briefly – when we start seeing higher lows and higher highs. It would help if volatility settled down, as that’s really making it tough for people. On Thursday, the Fed took a major shot at stabilization by announcing something that looks a lot like the restart of Quantitative Easing – massive purchases of Treasurys and other government securities to inject cash into the markets. There will be more information to follow, but right now it looks like something in the range of $1.5 trillion to $4 trillion of added liquidity will be provided through the Fed’s one-month and three-months repurchase market operations.
In every adverse scenario like this, you expect to see a bounce at some point, so that’s what I’m looking for. Given illiquidity (people can’t sell at the price they want), I think a bounce could be surprisingly big. We will see. Ideally, at that point, we may sell some of the safety stocks we currently hold and buy some stocks that have been hit, but that have risks we’re comfortable with. People are now rushing to Treasurys and cash (they may be getting forced into cash through liquidation). In our Asset Allocation strategy, potentially that portfolio adjustment could mean we sell some Treasurys and buy something like a healthcare ETF. In our equity strategies (Symons Value and Symons Small Cap Value), we could use some of our current cash to buy healthcare. Again, at some point we expect a bounce will come, but I just want to see some sign.
As has happened before in market panics, it can be chaotic. Earlier in the week two leveraged energy funds got liquidated. Wednesday, it looks like a macro fund may have been liquidated, or there was sudden deleveraging, probably due to volatility. Big risk exposures can cause such life-changing events for some investors. My best guess as to what happened Wednesday is that, because Treasurys got hit hard at the end of the day (rates jumped and so prices dropped, perhaps because so many people were desperate for cash, and when that happens you sell your most liquid assets) in a situation where Treasuries should have been doing well, and that looks like liquidation. You don’t need to liquidate if you just held Treasurys, but you might if you hold stocks on leverage as well as Treasurys.
To review what we’re seeing and doing, first, in January we saw some valuation gaps that were as big as we saw in 2000 in terms of growth areas (e.g., tech) versus value (e.g., energy), so we started to get into some more of the value spaces. As the coronavirus concerns hit, we thought we could use those prices to get in. The sudden oil price war was a bit of a surprise, and it hit energy stock prices more than expected. Nothing we thought about long-term values has changed, though. We believe value stocks still are at historically good prices compared to growth, and I still think it makes sense to concentrate on Value. I think a bounce is still likely, based on history, though we’ve gone down more than I expected we would, and I still think we should see a rotation towards value and away from growth in the months ahead.
As always, I’m perfectly happy to change my mind as the evidence changes, but even with all this chaos, I don’t think the basics have changed. I’d also add that we hold what we believe are high quality assets. The single bank stock we hold, in our opinion, is probably the best run large bank in the nation. Our energy producers are the low-cost producers, and should still be profitable even at these oil price levels. There are clear problems, but we view our stocks as “last-men-standing” class.
There are certainly problems, but there should also be opportunities ahead. China and South Korea already appear to be improving with the coronavirus and turning the corner on economic activity, but it will be slow. Coronavirus outcomes for the U.S. may not be as bad as we’ve seen in the more densely populated areas elsewhere in the world that have been hit hard so far.
Right now, people are too focused on panic, and I think this is a particularly lousy time to follow along with the herd. For now, we will stop here.