Whatever you want to call it: unprecedented, challenging, historic, uncertain, or much worse, investors have seen nerve wracking volatility this year as a result of the global pandemic Covid 19. In March the market had its most rapid descent ever into a bear market, as investors panicked and tossed everything out except for US Treasuries. The market hit a low on March 23, some 30% off of the all-time highs set just in February.
Now, with markets up over 25% since that apparent market bottom less than four weeks ago, investors are of two minds. Many remain wary of the market; after all, some of the direst economic news is ahead of us and there is still no definitive timeline for reopening the economy. On the other hand, there is consensus that Covid-19 cases are abating, and leaders are making plans to open the economy back up.
What is the investment strategy now? Is this the time to take advantage of this rebound, or should you move to the sidelines and see how things play out?
Our Investment Call
We believe you start by reviewing your investment objectives. Is the portfolio destined to be used to pay off a debt or buy a home any time soon? Is so, you should not be in stocks.
More typically, the investor does not intend the portfolio for specific short-term needs. The key here is how much and when. If the plan is regular withdrawals of say 4% a year, then a portfolio should continue to include risk assets like stocks.
A good rule of thumb is to divide that 4% per year into the portfolio’s percentage of non-risk assets like cash and fixed income. Let’s say you have a 60/40 portfolio, meaning 60% of the portfolio is in stocks, 40% in fixed income. If you take out 4% per year and stocks continue to stay weak or worse, you’ve still got your next ten years covered from your fixed income.
Ten years certainly takes us past even the ugliest prediction of the impact of Covid-19. While not guaranteed, history indicates your odds are good of seeing significant profits on your stocks over a ten-year holding period.
Some want to move to the sidelines because we’re sure to give back some or all of these recent gains. That’s true, but when and how will you get back in? To be sure, there’s never a time when you can add money to the market and be sure it won’t be lower the next day, indeed much lower. The problem is, it might not go lower, or if it does it’ll be accompanied by such gruesome headlines that you won’t take advantage of it until the situation stabilizes, which is likely to be at still higher levels.
The best strategy is to acknowledge that you can’t make short term market calls. Rather, design a careful balance between risk assets, like stocks, and low risk assets, like bonds. Tilt to stocks. That way you’re positioned to take advantage of stocks’ long-term proclivity to outperform, but hedged in case of a reversal. If markets fall, your loss is less, due to the fixed income, and you can take advantage by rebalancing your portfolio from the fixed income into cheaper stocks.
What’s the Bullish Case After the Market’s 27% Rise Off the Recent Low?
Markets look forward, not backward. We have seen an understandable market response to a natural disaster with ensuing lock down. The bullish case is built on the Covid-19 pandemic receding. This will happen. After all, we have never seen a health care scare that hasn’t abated, whether you want to examine the Spanish Flu of 1918 or more recent scares with HIV/Aids or SARS.
In addition to the natural tendency of pandemics to move through a population and then wane as resistance builds up, researchers are pursuing testing, vaccines, and therapeutics. Market bulls see sooner rather than later plentiful test kits that can tell quickly and definitively whether someone is carrying the virus. Deployment will allow safe zones to be established and people to return to their normal lives. Given recent news that new cases are coming with less intensity, ten states are making plans to reopen, accounting for close to 40% of the economy.
While not being able to solve the underlying problem, the Government’s willingness to do whatever it takes to mitigate the financial fallout is without historical precedent. Our Federal Reserve dropped its key lending rate to zero with two surprise cuts between meetings, actions never before seen. It moved quickly to restore order in the commercial paper market and provide support to money market funds. Not only has it bought exchange traded funds of investment grade corporate bonds, it has bought up ETFs of junk bond funds. We see no limits to its resolve.
Meanwhile, on the fiscal side of things, in short order Washington enacted a $2 trillion plus stimulus bill, providing grants to small business if they retain workers and beefed up unemployment benefits to those laid off. We believe there’s more stimulus if needed and little regard for the deficit implications. The mantra is clear that this is a war and during a war costs just don’t matter.
The Bearish Case
The big headwind remains the Covid-19 virus. While we have seen abatement overseas, it’s possible it will remain in this country much longer, with rolling recurrences. Even areas that are on the rebound get new cases as people from “hot spots” return to the healing regions, reigniting fears. Many worry about a second wave coming next winter. However, the more the second wave is delayed, the more time there’ll be to develop testing and antidotes that could make it much less fearsome. A key question is whether we have the testing or tracking to pull off a reopening and ensure the public that venturing out is safe.
How are US Q1 Corporate Earnings Shaping Up?
Earnings are projected to be down 10%. All eyes, however, will be on the outlook, which is no easier to forecast for managements than for our elected officials. Big banks like JP Morgan and Wells Fargo struck cautious tones in their recent earnings, with reserves boosted up to six times what they reserved for a year ago. Not surprisingly, consumer products companies’ results have stayed strong and the outlook is upbeat. Both Johnson & Johnson and Procter & Gamble recently hiked their dividends.
How Does the Value of the US Dollar Play into It?
Market participants are now asking: “Is the US Dollar a leading indicator or a lagging one?” Certainly, grim news leads to US Dollar strength, while better news could lead to a pull back. Market participants will see any US Dollar pullback as adding to the “risk on” case, and vice versa. At the end of the day, US Dollar traders are keying off the same health data everyone else is.
Views on IMF World Economic Outlook
The International Monetary Fund (IMF) released a painful forecast, but from a contrarian perspective that may be a positive. The IMF says there will be only “partial” recovery and not until 2021. Its forecast calls for a global slowdown deeper than the 2008-9 crisis.
This disappointing outlook keeps expectations low, allowing for upcoming events to more easily exceed expectations. It did note that there are more avenues for assistance now than in the 1930s. It is placing a 6-month moratorium on debt repayment by 25 smaller countries, now facing a perfect storm. However, some argue that won’t be enough and call for full debt cancellation.
Current Investment Strategies
There are really two approaches. One is to buy what’s held up best, the other is to buy what’s been hit hardest. If you believe this ends sooner rather than later than maybe the latter approach is best, and vice versa. Certain businesses that have been hard hit but seem likely to rebound could be good bets:
Restaurant Brands International (QSR)* has many tried and true low cost restaurant chains, like Burger King, Tim Hortons, and Popeyes. As a franchisor, it’s less capital intensive. The stock yields 5% and is down by half from its 52-week high. Private equity king Bill Ackerman is a big holder.
Live Nation Entertainment (LYV)* is down by 45% from its 52-week high. It’s the premier concert promoter with over 570 million fans worldwide. LYV controls over 235 iconic venues like Spark Arena in New Zealand. Ticketmaster is part of its operations, which sells close to 500 million tickets annually. Its artist management agencies have over 400 clients. Famed investor John Malone, via Liberty Media’s Formula One tracking stock, owns about 35% of the stock.
Federal Express (FDX)*, part of the package delivery duopoly with United Parcel Service, seems well positioned, down by 2/3 from its all-time high. It’s poised to take advantage of three trends, namely more online ordering, the retreat of Amazon from trying to create its own delivery service, and the fragility of the US Postal Service.
Anheuser Busch (BUD)*, down by half from its 52-week high, is the largest brewer on the planet and one of the world’s top five consumer companies. BUD controls five of the top ten beer brands and has 18 brands with sales of over a billion. BUD sells one out of every two beers sold Stateside. BUD is a defensive holding.
The Walt Disney Co. (DIS)* is a quintessential contrarian play for these uncertain times. The stock is in the penalty box, as its theme parks are off limits for those under quarantine. However, with the stock down by a third from its high, you are compensated for the uncertainty of when the parks open again. Disney is a content king, while its new Disney+ service has already garnered some 50 million users in the few months since its release. The acquisition of the Star Wars franchise accesses new audiences, while Disneyland Shanghai gives it another foothold into the Chinese market.
*DG Dietze and his family own DIS, FDX and BUD, while one or more clients own all stocks mentioned.
Note: David Dietze is President and Chief Investment Strategist at Point View Wealth Management.
Point View Wealth Management is an SEC-registered investment adviser and part of Peapack Private Wealth Management. For over 25 years, Point View Wealth Management has been providing customized portfolio management services and comprehensive financial planning solutions for individuals and their families to develop and achieve their financial goals.
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