Marketline Monthly – March 2020
The pandemic took center stage in March – all else was pushed aside as humanity focused on the uncertainties involved in fighting a new disease. Lockdowns, closed businesses, social distancing, shelter in place… these are our new watchwords. Markets reacted badly, as they always do to uncertainties. The Dow sank 13.7%, the S&P sank 12.5%. The Nasdaq held up relatively well with a 10.1% decline. As we write this, the market has rallied. Rallies inside bear markets are common, and so should not be taken as a permanent change in direction. Bear markets simply take time to resolve, and that will involve revisiting the lows of March. Encouragingly, we have seen a few days of very poor news culminate in higher stock prices; that means the market has started to look forward to the end of lockdown. But the journey will be rocky. We will have new days when the market focuses on the negatives again.
A few clients have asked about waiting out the storm by holding more cash. This would be great, if anyone knew how to do it. Very unfortunately, good long term returns depend on being invested when the market has excellent days, and those days tend to come after extremely bad days. You could be correct about missing a bear market but then miss the bull market that follows it.
We handle volatility by trying to make it our friend. We have a short list of stocks that we think should be pared or sold completely. Kroger is one of those. Kroger is benefiting from a surge in grocery shopping now. But this will fade. In fact after all the stocking up, Kroger could experience a slight depression in demand once lockdowns ease. Meanwhile, Kroger is captive to some enduring issues in its industry that have caused it to spend more money just to maintain its position. Being a grocer has become more expensive, and it has forced all participants into the technology space, where they do not operate particularly well. Kroger is near the high point of its long term trading range, making this a good time to consider cutting it back. Similarly, we have eyed Garmin, the navigation company, for some time. The stock has always been on the expensive side – for good reason. But with markets so volatile, we were able to put in an order to buy the stock if it hit a much lower price than the prevailing trading range, and sure enough, a downdraft one day enabled us to buy shares where appropriate.
Overseas, stocks markets have been just as rocky as at home. This phenomenon is one of our primary gripes with international and particularly emerging markets exposure: in a crisis when you want diversification, everything acts the same.
The bond market has been astonishing. We have had days in which we have been able to purchase bonds at steep discounts to par, only to find twenty minutes later that the same bond has been marked up substantially. A furious process of sorting out is going on, largely driven by what the Federal Reserve is willing to buy. The ‘haves’ are bonds with Fed support; the ‘have nots’ are lower grade or small issues, some of which face defaults. So while it’s easy to see from news reports that stocks have been volatile, bonds have likewise, in a manner atypical for this more staid market.
It’s worth considering the aftermath of this crisis. The one month Treasury bill yield sits at barely above 0%. If you didn’t like your money market fund yielding 0.5% before, just wait. It’s going to zero. The long Treasury sits at 1.31%. A retirement portfolio utilizing high quality government bonds will need to be restructured to produce the same historical income – not an impossible task but definitely challenging. Meanwhile, stock market dividend yields, even accounting for suspensions as we move through this crisis, will exceed bond market rates for some time to come, and with an ever wider gap. This is not so unusual. In much of market history, stocks were considered so risky to own that their dividends had to be significantly more attractive compared to bond yields, in order to draw capital to businesses. We may be moving back to that as the norm, which will turn asset allocation on its head. Stocks may more routinely be viewed as the ‘income asset’ in portfolios but with a risky twist in the form of volatility.
Marketline Monthly is produced by Cascade Investment Advisors, Inc. We specialize in value investing for individuals. We apply our approach across markets, looking for low-priced securities that offer above-average potential. We use imagination and hard work to bring performance and personal service to our clients. To learn more, contact Michelle Rand at 1.503.417.1950 or 1.888.443.9015; email to Michelle.Rand@cascadeinvestors.com. Our website is www.cascadeinvestors.com. A full list of stocks we invest in is available on request; mention of specific securities is not investment advice; such investments may or may not be profitable. Index returns quoted are price only.