Relax, Analyze, React

Summary

  • Stop looking at the world as if it changes every day, things more slower than that.
  • We will find a bottom when the markets decide we have found a bottom, watch the technical indicators.
  • When we see signs of stability in the market coming off oversold on the daily, weekly and monthly, then it will be time to get back in.

People are asking me: “Kirk, do I think we still the stock market with another leg down?” My answer is yes. Could I be wrong? Sure, absolutely. 

Monetizing Trillions

The Federal Reserve has basically joined with Treasury, a branch of the Trump Administration, to nationalize around half of the bond market. It’s not legal technically, but they created a “special funding vehicle” to do it. So, basically the same thing that the administration told the Europeans not to do to get around the Iran sanctions. Life is ironic. 

In any case, the end result is that price discovery in bonds is non-existent. If you can sell bonds for par, then you should soon, because an end result of all of this monetization is going to be inflation (or I think stagflation for a time) and then higher interest rates. Bonds will be among the crummiest investments in history as we normalize rates via a sudden shock to the monetary system.

There is a bright side. We are going to see a massive equity boom in stocks and industries that actually make money. For folks without investments, they won’t be able to keep up short-term unless wages keep up, which they haven’t since 1981. For investors, we have to build a good asset allocation that excludes the zombies in the economy. There will be many zombies soon.

Coronavirus Today

More people are infected. More people are dead. Hospitals are becoming overwhelmed. This won’t peak for about a month.

If we don’t do a 30 day national travel advisory with stay at home except for essentials order, then we are very likely to get a second wave and longer recession.

Retirement Plans And Unemployment

One of the biggest inflows for the stock market is from 401(K) contributions. With unemployment set to hit over 20% and likely 30% for at least several weeks, how much less will go into retirement plans weekly? 

If a few percent of people lose jobs permanently and demand doesn’t pick up again until next year, then how many of those people cash in their retirement plans or at least start pulling income? 

This Is Not A Spring Storm, This Is A Hurricane

We don’t know if this is a category 5 hurricane only because of the massive government and central bank interventions. Clearly it would be if not for the massive injection of capital. 

As I said well before all of this, the markets were headed for a large correction anyway. Valuations were at 3rd standard deviation levels similar to 1929, 2000 and 2008.

Stocks have barely reached the 1st standard deviation after a few more weeks of correction since this was measured March 3rd. In recent webinars you heard me say the stock market was roughly at fair value. That is taking into account that being overvalued might be the new norm.

As you can see, other substantial corrections took the stock market below fair value. Without massive government and central bank intervention I think we certainly would have seen a price on stocks below fair value. I’m not so sure we will see that this time.

Valuations

The Buffett Indicator of corporate equities to GDP is extremely high as well.

Buffett Indicator

This stock market remains weak. Federal Reserve and U.S. Treasury firepower is aimed primarily at rescuing a bond market that probably should have had a 2008 like seize up. The relief bill out of Congress will take months and years to get into the economy. We are in a recession that we can probably pin to a specific day for the first time in history: Monday, March 9th, 2020, the first business day after the healthcare emergency was made official. 

As for investing right now, if you have FOMO, and not FOGYAK, you are a braver soul than I. For those unfamiliar with FOGYAK as of yet, that’s “Fear Of Getting Your Assets Kicked.”

I am waiting to see concrete signs of coronavirus peaking and falling, the stock market having falling volatility before I invest the rest of my dry powder. 

The only other thing that would make me more aggressive, is if we saw the S&P 500 get to about 1700 as that is a major support level. It’s not that it could not go lower, but at that point there’s undoubtedly even more government and central bank support. 

My limit orders on ETFs have not changed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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