Hello, it’s time for our weekly market alert video, and this is the video for the week ending May 15, 2020, and another week full of action and excitement on the markets; some of it good and some of it bad, but overall a down week. And so, I wanted to give you some perspective, and our thoughts, and what we think is going to happen going forward.
So, the first thing that we want to talk about is the old expression that says that if you don’t learn from history you are doomed to repeat it, and I discovered today that is actually a quote from George Santayana. Never heard of the guy but, man, what a great quote. And so, if you look at bear markets, the recessionary bear markets that we’ve had over the last 100 years — and we’ve had 33 of them — a bear market is a drop of 20%, or more in the S&P or the Dow or whatever index you’re looking at; if it drops by more than 20%, it’s a bear market.
So, we’re talking about the S&P here, but if you look at the way that those developed, it starts off with a realization that something bad is about to happen. And, so, you know, it’s the realization in Y2K that the dotcoms are actually not worth what they’re worth or in 2008 that the sub-prime mortgages are actually going to collapse. So, there’s just this realization of something really bad is about to happen. Here recently, the realization that we’re shutting down the economy that could bring on another depression. So, there’s this big realization. When that happens, of course, investors immediately say, “Oh my gosh, I gotta get out and protect myself.” So, there’s a big sell off and we see that initial, you know, big drop in the market. Then what happens is that the bad news kind of has played itself out, or that initial phase, and we see people get used to the idea of the bad news and start to say, “Well, how are we going to solve this bad news?” And then a lot of times, as we saw in 2008, and the Great Depression, and Y2K, the government comes in with a big stimulus package, lowers interest rates. You know, puts $700 million into the economy as they did in 2008, or $2 trillion as they did this time. And that gives everybody hope that everything is going to work out.
According to an article in Market Watch, one third of the time of those 33 bear markets — one third of them that reaction that, that new rise in the market that happened because of that was correct. Meaning that it went on, and it kept on going. So, this could be that. We had a run in the market that was pretty significant, and maybe the market is right. The people that invested, they’re right, and it’s going to keep going. However, if you look at the big bad bears as we call them, the ones that happened where they were really significant, more than 40%, in most of those what happened was that there’s a second shoe to drop on the information, which means that there is a new set of information that reconfirms the original thought which was, “Oh, my gosh. This is really bad.” And then the efforts that we’re putting in right now to make it better are not going to be enough, and you get that second down, that second shoe to drop in the big bad bears — in the Depression, the Y2K, 2008, 1974. When you look at those bear markets, it happened at about the halfway point on the way down. So, if that’s the case this time, and this is not a pleasant thought, but if that’s the case this time, we could see the Dow bottom out at 14,000. So, that’s our concern right now, is that this could get a lot worse before it gets better.
So, what could be that second shoe to drop? Well, right now, what we think the second shoe to drop is, is the realization — the first thing was the concern about liquidity. Okay? Which means there is no money in the system. Nobody can borrow money. Nobody is going to be able to pay their loans or get loans. And so, the Federal Reserve recognized that immediately, and they came to the rescue and said there is $2 trillion, plenty of liquidity. So, that made people feel better. The concern, I think, that’s starting to permeate into investors’ minds now is to go from liquidity to solvency. So, what that means is a business can borrow money. We made money available to you to borrow. It hurts, you know, to borrow $100 billion or $100 million. We’ve got the money for you. But, if they have no business, if no customers are coming in the door and they have no revenue, then it becomes a solvency issue because then they just go out of business. They go bankrupt. And that loan that they got is not repaid. So, we’re starting to go into what we see as a solvency question. And what that means is, all our business is going to be — yeah, they have access to money, but who is going to lend it to them, No. 1? And No. 2, if you do, are you ever going to get it back? And if you don’t, that’s going to create a problem. So, we think the solvency issue is now going to be more and more what people are going to be talking about, and we think there’s going to be incredibly bad quarterly earnings reports coming up here soon, in a couple of months. Nobody is giving guidance. Companies are not telling you what’s going to happen. We think those numbers when they come out are going to be so bad that that’s going to freak the markets out, and we think that we’re going to see that second shoe drop, and the next thing happens. So, that’s where we sit. Not a pretty picture but, again, we’re of no value to you if we paint a rosy picture for you. We plan for the worst, hope for the best, and if we’re okay under the worst-case scenario, or the bad scenario, then we should be okay under that better scenario.
So, right now, the fact that we are not in bonds, and not in stocks is where we are very comfortable being. We have no desire to buy anything at this point. We want to wait this thing out as long as we can. As we sit, we’re still lower, as I record this, we’re still lower than where we were when we got out in early March. So, from that perspective we feel good about that, too. But really, the important thing is we want to sit out all this risk and wait until we have more clarity, wait until we know what’s going to happen. And at this point, it’s all happened so fast; we don’t feel that we have any of that. So, we’re still sticking to our game plan of staying out until our buy signal comes, and when our buy signal comes, we’re still planning on only going in with 10% of the equity allocation that you might have. So, we’re going to be very, very careful, tip toe, conservative. It’s all about protecting from big losses. You know, as one person I spoke to said very well, “Ken, I am less worried about missing out on gains, as I am wanting to miss out on losses.” So, I thought, “Wow, that is well put.”
Now, because we see this big storm coming, in many ways we feel like we are Noah with Noah’s ark. And you’re on the ark if you’re a client or if you’ve followed what we’ve said. You’re out of harm’s way or you should be to a great degree, but many people are not. If they’re not on the ark with us, encourage them to come visit with us. Encourage them to talk to our people and see if we can show them what we see, how we’re addressing it, and maybe they will find a fit that might work for them. So, please — family, business associates, friends — this rise we’ve had in the market was a godsend. Have them take advantage of that, and de-risk their portfolio now. And if they don’t know how to do that, have them talk to us, and we’ll try to help them do that. Okay?
So, thank you for being our client. We appreciate you so much. We hope you have peace of mind; you’re not worried about this stuff. One of my longer videos, but we’re in strange times. We’ll talk soon.