We are certainly living in interesting times. I genuinely hope all is well with you and your loved ones.
Last month’s investment update was longer than normal, but hopefully you found it to be informative and helpful. If you didn’t get the chance to read it, I would recommend going back to it for reference… as many of the concerns I had at the time–regarding COVID-19, a recession, and an associated “bear market” in stocks–have unfortunately come to fruition.
Current Market Conditions
The S&P 500 remains down -21% since the beginning of 2020 and down -25% since its closing peak on Feb. 19, 2020. While our portfolios sustained some losses before selling out of stocks in late-February, our extremely defensive positioning has shielded us from catastrophic losses and extreme market volatility that many of our friends and neighbors have experienced.
Based on my research, US GDP and inflation are rapidly decelerating at unprecedented rates, which bodes poorly for near-term stock returns.
As you probably heard or read in this week’s news, weekly unemployment claims surged to their greatest level EVER (3.28 million!)… crushing the old 1982 record by five times.
A profound earnings recession for US and international companies is imminent. And the likelihood of a US recession having already begun (as I anticipated in last month’s update) is nearly 100%.
The now infamous coronavirus is indeed the proverbial “black swan” event that pushed our fragile and over-leveraged economy over the edge, taking the world’s stock markets with it.
Investment Strategies in Such Times
Here’s an excerpt from my update last month:
—–
Some stocks (like utilities, consumer staples, healthcare, and REITs) tend to outperform other stocks (like technology and energy) when the economy and inflation are slowing. However, when the economy is really awful–as in 2000-02 and 2008-09–then it is usually best to just avoid stocks altogether. I think we are at such a time.
Some asset classes that actually make money during these market conditions generally include “safe haven assets,” such as:
- The US dollar
- US Treasurys
- Municipal bonds
- Gold
- Short stocks (betting they will fall)
- Bitcoin (non-correlated to stocks) —–
Given the extreme fear and market volatility, several traditional (and one new) safe haven assets did not perform well, including: US Treasurys, Municipal bonds, Gold, and Bitcoin.
Historically, this phenomenon is not unusual at the beginning of a bear market, as numerous large hedge funds and other institutional investors are forced to sell massive quantities of anything that is available, in order to meet their margin calls. In short, when the market drops precipitously, these highly indebted fund managers must quickly raise cash because the overall value of their underlying assets no longer supports the debt levels they employ. (This is similar to what happened to over-leveraged home owners in 2007-2010, who were suddenly exposed when the price of their homes dramatically decreased.)
When this unfortunate situation occurs, the panicked fund managers are forced to sell anything they can to meet these margin calls, which partially explains the associated drop in the above-mentioned “safe haven” assets.
The good news is that these assets tend to be the first to recover and are statistically likely to outperform stocks if the recession drags on.
Our plan
As expected, our portfolios remain extremely defensive. Many friends of mine in the investment world are starting to buy more stocks at these levels. However, based on my research, I think that we are due for several more months (at a minimum) of decelerating GDP and inflation, which makes it a dangerous time to be invested in most stocks.
As fear subsides and market volatility decreases over the coming weeks and months, I anticipate that we will start to venture back into our safe haven assets from our historically large current cash positions.
For now, our separately managed accounts are allocated in the following extremely defensive manner:
- 0% US and International Stocks
- 0% US Bonds and Preferred Stocks
- 0% US and International Real Estate
- 90-100% Cash (earning interest)
- 0% Gold and Gold Royalties
- 0-10% Bitcoin
If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and notice how your own portfolios are positioned! (It’s a good idea to log into your accounts occasionally, just to make sure your settings and demographics are up to date.)
Conclusion
Based on my research, I believe that there is more COVID-19-related pain ahead for US and international citizens, as well as their respective equities markets.
Rather than risk losing an additional 20-50% of our savings from today’s market levels, we will be content to watch the chaos from the sidelines–sitting in interest-earning cash and, for some, bitcoin–until fear and volatility have subsided.
Once the dust settles, we will be able to scoop up long-term positions in stocks, real estate, and other assets at previously unimagined bargains!
Until then… if you have any questions, or know of a friend or family member who may benefit from Vailshire’s innovative investment techniques, please let me know. I would be honored by the referral.
Investing wisely with you,
Jeff