Well…we knew we didn’t have any kind of monopoly on rogue waves, but this one...wow. Iceberg ahead, Captain.
In early March, when stocks were down 15%, we wrote that if you were asking yourself “should I be selling stocks?” our answer was “yes.”
Apparently, nobody listened.
Shelter-in-place orders turned people to day trading in a big way. E*Trade, TD Ameritrade, and Charles Schwab all saw record new accounts in the
first quarter of the year, with Schwab alone reporting 300,000 just in March. All 22 trading days in March were among Schwab’s 30 most active days
ever. For the new hundreds of thousands of you that will soon be asking “should I sell my stocks?” we will reiterate: yes.
The Fed may have removed the concept of risk/reward from the economy, but it still very much exists in the market. As of writing, the upside back
to market highs is about 12%. On the downside, it’s a 21% drop back to the March lows and probably 30% down to “bad case fair value.” Not “worst
case,” just “bad case.” That’s not a tradeoff we find particularly compelling, especially with an economy that has sprung a serious leak.
The driving force behind our economy is consumption. We buy a lot of stuff. It makes GDP go up. It makes the stock market go up. And there is a
lot of evidence to suggest that consumption will be depressed for a long while. First quarter GDP growth came in at -4.8%, with really only two weeks
of virus impacts, so second quarter will be worse. There are whispers of -30% or lower.
In March and April, about 30 million people lost their jobs. That’s close to twice as many jobs as were created in the last decade. The worst week
of job loss during the Financial Crisis was 665,000. The worst week all-time? 695,000 back in 1982. We’re at 5 million a week for six weeks, and
we’re not done yet.
Sure, states are starting to phase-in a reopening, but with what kind of restrictions? Can restaurants be profitable at 10 people per 500 sq. ft.? Can
theaters be profitable with social distancing? Retailers with capacity constraints and increased servicing costs? Will people even show up? And for
how long - does everything get shut down again for another two months if there’s an outbreak in the fall?
The past decade has conditioned us that Fed stimulus programs make the stock market go up, and $4T is a lot of stimulus. However, with the entire
economy shut down, this $4T isn’t really a “stimulus” so much as a “bail out” that is keeping individuals and companies afloat. Afloat, but still taking
on water.
Meanwhile, the bailing starts going away this summer. The federal unemployment expansion of $600/week expires in August. The PPP loans
become forgivable at the end of August, which means companies are free to fire employees in September and still keep the money. Currently, 7.5%
of mortgages are in forbearance, with speculation that number could double or even triple. What happens there when government stops bailing? For
reference, the peak of the subprime crisis saw 10% mortgage delinquency rates.
If you want to hit the panic button when stocks are down 15%, hit it. Down 15% is not a
long-term low, and your allocation is clearly too risky for you to maintain a long-term investment discipline. You will save yourself and your portfolio
a lot of pain by selling to the point where you’re comfortable sleeping at night.
TYBEE BEACHCOMBER | JUNE 2020 13
Rogue Waves By Russell Robertson, CFP
TIME TO BAIL