March 22, 2020, Weekend Market Thoughts by Matthew Somberg

Dear Friend,

First and foremost we hope that you and your family are well. We want to take a few minutes this Sunday evening to review what happened in the financial markets last week, what we think will happen this coming week and what we are doing about all of this at the office.

Last week

Let us get the bad news out of the way immediately.  Last week Wall Street had its worst week since the financial crisis began in October 2008.

  • For the week, the Dow Jones lost 17.3% and is now down 32.8% since January 1st
  • The S&P 500 lost 15% on the week and is now down 28.7% since January 1st
  • The Nasdaq declined by 12.6% for the week and is now down 23.3% since January 1st

The Dow Jones has lost more than 10,000 points or 35% over the past month. On Monday alone, the Dow Jones lost nearly 3,000 points or 12.9% on its worst day since the 1987 Black Monday crash.

Americans are starting to stay home, work from home and hopefully practicing social distancing.  With this change in consumer behavior the worst hit sectors of the economy include energy, hotels, restaurants and of course airlines.  In fact, if you add up the market value of all of the major airlines at this time, cumulatively they are worth less today than Disney stock.

Why was last week so bad?

The cliché is markets do not like uncertainty.  A rapidly spreading health pandemic will create a lot of uncertainty.  Several states (California, New York, Connecticut etc.) have already ordered non-essential businesses to close.  We believe it is better to shut an economy down for a few weeks of economic pain than to allow the virus to spread and incur months or quarters of extended economic turmoil. By flattening the curve, it also gives our health care system a chance to try to treat patients without exceeding health care capacity. Thousands of Americans have filed for unemployment and there will likely be millions unemployed within a few weeks.

While each American has a different set of financial circumstances, investors were selling last week for a few reasons.  First, a sense of panic and uncertainly always brings out sellers.  Second, those who may be losing their jobs will need to sell investments to build up their liquidity.  Third, businesses as well as institutional investors need to de-leverage their balance sheets and build up their liquidity.  It is likely the few buyers last week were long term investors who have slowly come into the market to think beyond the short-term health crisis and are looking several months down the road.

Advice for Investors

Each client’s situation is different and assuming a client has cash, bonds and stocks in their portfolio, there isn’t much point in getting out of stocks now, with prices down almost 30% from their all-time highs. This assumes of course there is sufficient cash and bonds to take care of the client’s income needs for the foreseeable future. Some investors may try to sell stocks now hoping to buy in at a lower price, however that strategy has proven to be extremely difficult, as timing the ‘bottom’ of the market is purely a function of luck rather than skill. Those investors will often wait for the market to settle down before re-investing, which often leads to being late to the inevitable stock market rally.

Why not sell stocks now?

Certainly, each business faces its own challenges.  We mentioned sectors such as restaurants and airlines that have serious challenges in front of them and a long road to recovery.  But let’s think about a company like Disney for example.  Disney stock a month ago was $133 per share.  Today it is $85 per share.  That’s a 36% decline in the share price of an iconic brand in 30 days.  Yes, they’ve closed their theme parks and yes, consumers won’t be shopping at Disney stores in the mall.  However, consumers will be home logging on to Disney+ and watching ESPN.  Yes, there will be a significant decline in revenue while Americans practice social distancing, but Disney had $6.8 billion dollars of cash on hand at the start of this quarter.  That’s plenty of cash for the company to get through a slowdown while the Coronavirus changes consumer behavior over the next several months.

Let’s do another example: Netflix.  The company began the year with their stock price at $329 per share.  Tonight, the stock price is $332.  While the stock markets as a whole are down approximately 30% year to date, Netflix price is flat.  Two years ago, Netflix had net revenue of $500 Million.  In 2019, their net revenue was nearly $2 Billion.  Now, with 330 Million Americans staying home, working from home and needing to find new ways to entertain themselves, you could argue for Netflix to show a massive increase in subscribers and potentially their stock price.

I mention Disney and Netflix not because each investor should buy the stock tomorrow or at all.  Rather to bring to your attention that while the stock market as a whole is being sold off, it is comprised of companies that have the brand and the cash to weather a financial crisis.  The market is also comprised of companies that may actually benefit from a change in consumer behavior during the Coronavirus scare.

What is going to happen this week?

Over the past two weeks the Federal Reserve has stepped in to provide massive liquidity to our financial system.  We’ve also had an ‘all hands-on deck’ approach from the private sector to work on Coronavirus testing and vaccine development. The health crisis has clearly created a financial crisis and we expect this week for Congress to sign a bill called the CARES Act (Coronavirus Aid, Relief and Economic Security Act).  Congress will support American businesses to meet payroll, provide loans and provide significant support to owners and workers who have been impacted by the Coronavirus economic slowdown.

Will the CARES Act help stem the tide of investor selling in the stock market? It remains to be seen as the market seems to still be searching for a bottom. We are getting closer and closer to reaching where the market peaked all the way back in 2007 prior to the financial crisis when the Dow was at 14,100 and then suffered an approximate 50% decline by March of 2009.  If we do get to Dow 14,000 then this crisis will also have brought the market to a 50% decline.

What are we doing at the office?

Like many other businesses our firm is also working remotely as a health precaution.  Emails and phone numbers work the same for us irrespective if we are at the office or working from home. I alluded in last week’s email that at some point we will look to rebalance model portfolios back into their original targets.  That will likely entail a rotation out of bonds and into stocks. Right now the volatility is too high for us to pursue a rebalance across the board, so we continue to be patient, digest the news and communicate with our clients as appropriate. 

Two Final Thoughts

As a professional, this is the third financial crisis that I’ve been part of.  First was the dot.com bubble of the early 2000s, followed by the Great Recession of 2008 and 2009 and now this Coronavirus Crisis.  While each crisis starts different, there is a common theme in the midst of any financial crisis where it ‘feels’ like the world is coming to an end.  I remember that feeling in the two prior crisis and it is certainly ok for someone to admit that they feel that way now.  It will take some time and not happen overnight, but this too shall pass.

Finally, to bring a small bit of perspective and levity, it has been a change for all of us to be spending more time at home and working from home.  I have explained to our youngest child, a six-year-old, how to interpret the data he sees when I have the television turned to CNBC during the day. He understands that if the numbers are colored green it is a good thing and the market is positive, and if the numbers are colored red it is not good and the markets are negative.  Several times during the day he will peer into my office at home and give me a ‘thumbs up’ if the numbers are green or a ‘thumbs down’ if the numbers are red.  Last week, I saw a lot of thumbs down from him.

We all look forward to a few days of ‘thumbs up’.

Regards,

Matt

 

Matthew A. Somberg, AIF®
Co-Founder and Principal
Accredited Investment Fiduciary®

Gottfried & Somberg Wealth Management, LLC
148 Eastern Blvd. Suite 201
P.O. Box 776
Glastonbury, CT  06033
p. 860.430.9104