Days go fast and nights are slow. It has been two weeks that I work from home and not everything is in a bear market: my work hours went up +50%. Part is due to our company network that is not design to sustain such a traffic, so sometimes even to access a file takes hours, most is due to the fact that I work in Treasury: firm has to re-assess all financial plans, market volatility demands contingency plans, daily reports, daily meetings (cannot be more specific than this, given that it takes you three clicks to understand where I work). With all the things going in the market, I was surprised that I did not have anything to write about this week. On Friday I went to run and reflected on it, I was deep in solving my firm specific investment issues or looking for investment opportunities, which are quite different from the topics I write here; without any commute or gym time, I listen to few podcast compared to before; I did not have time to read any article about personal finance, only a quick glance at p2p platform emails on how they (say they) are coping with the turmoil. Add the fact that I have a 10 months old daughter and I want to use this opportunity to spend as much time as possible with her and here we are.
As you can imagine now, my confinement is different from yours. Someone on Twitter wrote that a recession is when a friend loses a job, a depression is when you lose your job. I have to work hard AND I am happy about it because the alternative is worse. This virus probably feels like a flu if you are safe and do not know anyone affected by it, it is a plague if you have someone close that died. Every measure seems like an over-reaction or not enough, depending where YOU are; every decision taken in the past is right or wrong based on your convictions NOW. The same happens for investing and is the reason why is so hard: a year from now, investment opportunities during this crisis will all be obvious…do you feel the same now? Stocks had the fastest fall ever and this week bounced 20%: is it a bear market bounce or we already experienced the bottom? Both scenarios are plausible, but only one will materialise…and next year lot of people will explain you why it was so evident.
I watch closely the situation in Italy not only because my parents live in the epicentre of the catastrophe and given their age are vulnerable, but also because I think the curve flattening there means the beginning of the normalisation process in Europe…or not? Each country closed its borders and the crisis is managed at local level, but once you have no more cases what you do? You are safe only if no one enters, otherwise you risk to be back at square one. But can you live with close borders after decades of international trade? The possibility of a second wave is real, but will it happen? And if so when? It is also possible that technology will find a vaccine in record time given the concerted effort and how laboratories around the globe are connected now.
Last week I read that some US senators sold lot of stocks around mid February because they had closed door meetings on how the virus was aggressive and which restrictive measures they were going to take; people obviously went crazy about it. But then I thought, did we ordinary people not had the same information at hand? The virus was already killing thousands in China, cities and entire regions were experiencing the lock down we now live in, was it really ‘insider trading’ what the senators did? Or the outrage is more linked to the fact that now we know where the stock market went, so the impact became obvious? Why did I not sell back then?
Also some weeks ago (1 week ago? more? time perception is so hard right now) the UK Government declare a very low chance that UK was going to experience riots and social disorders. Back in the days I thought, “well yes, why people would go crazy about it?”. I also read reports that during past crises, like wars, people are more likely to become more empathetic and careful about others (not about the other side they were in war with). Then think about all the people that lost their job or are self employed and have no income: what they will do once they run out of money and have to eat? The UK Government Aid Program is planned to distribute funds in JUNE, more than two months from now. Would this people wait patiently until then? I am starting to be glad I do not have a car parked outside: is it obvious is going to happen or I start to be paranoid?
Talking about Government Aid Programs, they are clearly a needed measure, also because in this case the recession is due to an exogenous event: there is no one that took excessive leverage or risk to be ‘punished’, there is no risk of future moral hazard. But what would politicians do during the next standard recession? Still there will be workers losing their job, will they resist the pressure to print more money to put in their pockets? The moral hazard issue is also 99% accurate: take US cruise liners. They never paid taxes or followed US labour laws, their ships have Panamanian or other fiscal paradises flags, and still they got bailed with US taxpayers money, is it fair? In crisis time, it is hard and dangerous to go slow and contemplate cases like this one because if you do, you risk to delay even more the help the rest of the economy needs…but still does not feel right.
During the 08-09 crisis folks were afraid that Gov deficits would have created rampant inflation, which in fact never materialised. But no one came out with a good explanation why. What if this time is different? Asking for a friend who recently signed a floating rate mortgage 😉
Value stocks underperformed for 10 years, their proponents repeating: you will see during the next bear market. And yet, so far the best performing stocks are still the FANGS and growth stocks that were thriving during the bull market. At least the guys at GMO, who were basically seeing only cash as fairly valued for years, got partially vindicated (for the occasion they even re-designed their website after…twenty years? Every time I was reading their research it felt like I was using Netscape again). International and EM stocks are also performing in line with the US, despite starting from materially lower valuations.
More questions than answers so far, as it should be, but if you have cash to invest, there are good news. Stocks are now valued in line with their historical average:
No one knows where the bottom will be but if you can hold for at least five years, you have good chances to achieve positive results from here. I suggest you have a look at this article about the 60/40 portfolio: what happened this month was really unusual (and painful) but if you are able to stick to your plan, and even rebalance from bonds to stocks, the future should be bright, at least according to similar past cases.
Months ago I was definitely sure the bond bull market was over, yields could not go lower…and yet: in the US, the 10yr Gov Bond yield touched new lows and I think the possibility of seeing negative rates in US as well in not zero.
Sounds like a joke to say that you invest in bonds for capital appreciation but this the reality we live in and up until today bonds have offered a good protection to stocks dives. It is hard to be invested in something that produces zero yield but given how high yields and even IG corporate credit got hammered this month is difficult to give up to this asset in your portfolio. The lis of money gurus that called the end of the bond bull in recent times is endless, and yet they were wrong as I was: this is a hard job.
A good trick that works in this chaotic period is to put a buying order for an ETF you like at a level extremely lower than previous day close, like -30%. When liquidity in the market is poor and volatility high, sometimes ETFs experiences ‘flash crashes’, prices go very low for a limited time because market makers cannot effectively arbitrage between the ETF NAV and seller volumes. This happens more frequently the more ETF assets are illiquid, like HY bonds or real estate, but in the recent past it worked for all kind of fixed income instruments. If you get filled, you will have assets you wanted to buy at a real discount; jus remember to re-adjust your order at the close each day, one thing is a flash crash, another is the very real possibility the market will go down another 30% in the next months.
And yes, there is even a Coronavirus top podcast list out there, if you thought you could not get surprised anymore.
What I am reading now:
Follow me on Twitter @nprotasoni