Chief Investment Officer Scott Martin, CIMA®
- The current situation is a unique one in that we are experiencing a medical emergency coupled with a market downturn.
- Clients need advisor direction now more than ever. Advisors must be the steady hand as well as the expert that guides through these troubled times.
- We are one day closer to getting back to normal. Advisors need to take this time to focus on client service and remaining present and calm.
Senior Vice President Paul Nolte, CFA®
- As of 3/20/2020 there is still a lack of data and a ton of speculation.
- Jobless claims jumped significantly this week.
- Will not be able to synthesize data for the next 3-4 weeks, which is why the market has been acting as volatile as it has been.
- At some point in the in the next 6 months to a year, we will return to what passes for “normal”.
- Based on graph provided by S&P Dow Jones Indices, anything above a 12 P/E (S&P500), 5 years from now, returns will be in excess of the 5yr treasury.
- This is the 6th time since the Great Depression in which we have seen the market drop in excess of 30%
- Outside of the Great Depression, the average recovery rate to all time highs has been 5 years
- Assuming that 5-year recovery stands, that means an annualized rate of return of 7.5% (equity only)
- Should we recover back to all time highs in 3 years, that equates to an annualized return of 12.25% (equity only)
- As bad as things look today, as long as we get through the summer months and get back to business as usual, we expect to see earnings and stock market returns pick up and begin to realize reasonable rates of return.
Chief Technical Analyst Buff Dormeier, CMT®
- Fundamental data is being met with tremendous uncertainty.
- Following the big institutions employing the sharpest minds leads to a clearer path.
- Since testing previous resistance level of 2725 (S&P500) a few times last week, the market sliced though resistance level like “a hot knife through butter” and dropped another 10%
- Most critical event was the trend of money flow, which turned negative as of last week.
- Only have to go back to August of 2019 to see similar capital flow levels, but back to August of 2016 to experience similar price pull back.
- Capital flows, although trending down and negative, indicate the “smart money” (large institutions) are waiting out the situation.
- Patience is what the market is calling for
- Advance Decline line is holding up and still above trend. This means market still has the liquidity, or fuel, to trend higher.
- Fed is throwing everything they can at the market. If we take a step back and look at the strong economy we had coming into the market decline, the stimulus provided by the Fed can act as rocket fuel when the market rebounds and the cloud of uncertainty transfers to rays of hope. “Blink and you will likely miss the run up.”
- Big money may be nibbling but have not stepped in yet.
- TAKEAWAY – Be patient. Work in cash slowly until we have a clear sign from the larger institutions.
Managing Director – David Summer, CFA® Arkadios Capital
- Illiquidity is the major driver if market dislocation.
- Historically, municipal bonds are supposed to be more of a safe haven relative to corporate bonds.
- 10-year municipal bond began 2020 yielding 1.5%. By March 9th, .81% (AAA Muni). As of March 20th, AAA muni yielding ~2.9%. 43bps wider (spread) on the day and around 100bps wider (spread) over the last 3 days.
- Why is this happening? LIQUIDUTY. Large amount of bonds being put to market (funds/ETFs/money managers) and nobody is on the other side to buy.
- Banks are not doing a lot of buying and individuals are not buying due to net outflows. More bond sellers than buyers
- For a buy and hold investor, there is opportunity to buy quality municipal bonds and corporate bonds at yield levels that we haven’t seen in years.
- Hopefully the actions of the Federal Reserve will go a long way towards helping this liquidity situation. If they are successful, I think we will see bond bid/ask spreads narrowing, and bond ETF price discounts reduced.