Clients and friends of our firm:
Stocks Take the Stairs Up, and the Elevator Down
As an old market adage says, “Stocks take the stairs up, and the elevator down.” Starting in late 2019, we mainly sold into strength during the market’s step-by-step rise. As a result, the full impact of the “elevator down” stage of the last two weeks has been greatly mitigated. On January 27 we published a note warning of the risks of the new strain of Coronavirus (now called Covid-19) that we felt was a an inevitable, serious threat to the world economy and the U.S. stock market. You can read that blog here: https://www.blackwellboyd.com/2020/01/27/outbreak/). In response to the developing risk, we adopted an extremely conservative position, sold stock positions into strength, and now hold the highest level of cash in our firm’s history. We were preparing against the likelihood of a market correction. That likelihood has now become reality.
CDC: “It’s Not a Question of If But When “
The Center for Disease Control (CDC) in Atlanta currently says the following: Imported cases of COVID-19 in travelers have been detected in the U.S. Person-to-person spread of COVID-19 also has been seen among close contacts of returned travelers from Wuhan, but at this time, this virus is NOT currently spreading in the community in the United States. That is of course, great news. But as the CDC moves from the current situation to its near-term expectations, it’s more concerning. As to what is likely, the Director of the CDC, Dr. Nancy Messonnier, says Americans should, “prepare for Coronavirus to spread in US and cause major disruption. It’s not a question of if but when. We are asking the American public to prepare for the expectation that this might be bad.”
The CDC on its website goes on to the say the following in a section it labels “What May Happen”: More cases are likely to be identified in the coming days, including more cases in the United States. It’s also likely that person-to-person spread will continue to occur, including in the United States. Widespread transmission of COVID-19 in the United States would translate into large numbers of people needing medical care at the same time. Schools, childcare centers, workplaces, and other places for mass gatherings may experience more absenteeism. Public health and healthcare systems may become overloaded, with elevated rates of hospitalizations and deaths. Other critical infrastructure, such as law enforcement, emergency medical services, and transportation industry may also be affected. Health care providers and hospitals may be overwhelmed. At this time, there is no vaccine to protect against COVID-19 and no medications approved to treat it.
As you read this note today, you are probably not wearing a N95 surgical mask. And although you have probably thought twice about booking a cruise or traveling to Asia, it’s unlikely you are avoiding dining at a restaurant, gathering at church, sending your kids to school, or taking a domestic flight. But what will the next several weeks / months bring?
The Starbucks Indicator
Now that we have you on edge, let me provide you with some potentially good news. There are a few data points emerging from China that support a view that the disease may have peaked there. Notably, Starbucks has reopened 85% of its stores in China. Along with other indicators, reliable data from Starbucks will be a metric to watch. If people are going back for their coffee, mask or no mask, it’s an excellent indicator that China may indeed be on the downslope of the fight against Covid-19. Good (and reliable) news there is good news for the world and the potential fight we may face in the U.S. So we’ll keep an eye on Starbucks’ store status in China.
Opportunity? We Are in An enviable Position
For the past eleven years, since the market bottomed in March 2009 after the Financial Crisis, every market dip has served as buying opportunity that has been rewarded. A little over a year ago in December of 2018, the market had a mini-panic plummeting nearly 20% from its peak and becoming the worst December since the Great Depression. Pessimism was rampant during the Holidays of 2018. But we saw that dip as a compelling opportunity and as a result bought heavily through that period. At the beginning of 2019 we were essentially all-in with committed investments and less than 1% cash. As a result we profited richly through 2019 and early 2020 fully benefitting from the market’s rise.
But now our view is that it would be imprudent to buy heavily into this dip with conviction. Not yet. We are selectively nibbling at some securities we feel are compelling after the sell off, but the emphasis is on nibbling. With our view that Covid-19 will ultimately have a significant impact on 2020, there may be some more pain to come before we collectively get through this crisis. The market entered correction territory today (defined as down 10%). That’s not all bad for us as we sit with the highest level of cash we have ever had. As a result we have the luxury of being relatively anxiety-free and clear headed as we evaluate the risk / reward of making new investments. For making new investments in the period, our focus will be twofold, in descending order of importance:
- Securities that are likely to withstand a recession without cutting their dividend. In the event of a recession, securities generating a consistent, safe, cash flow for our clients will be paramount. It’s just one example, but Verizon (VZ) is a security that currently fits this parameter. Even in very difficult economic times, people pay their mobile device bills… in some cases ahead of their utility bill. They may not upgrade to the newest version of the iPhone, but they keep their service on. Verizon pays a 4.3% dividend currently and we note that in the Financial Crisis of 2007 / ’08 it declined only about 15% (the dividend further offset the impact of that decline) as compared to the market’s 58% decline from peak to trough. Again, VZ is just one example. There are numerous others securities that meet that criteria and are on our radar. And as the market drops further, they are getting cheaper and providing more compelling value.
- Securities that are in the “eye of the storm” and are getting hit hard. An example of this is Lyft (competitor to Uber). The ride sharing service has sold off about 30% in the last two weeks. It makes sense as avoiding sharing a car with strangers is seen as an obvious way to avoid putting yourself at risk of catching Covid-19. But we now see it as a compelling recovery play when the world moves past Covid-19. With an eye to returns over a 3+ year period, Lyft fits the bill. Again, we see no rush to immediately buy anything in great volume, but Lyft is an example of one security we are evaluating for using a portion of our elevated cash levels.
Here’s a quote from Warren Buffett that applies: “I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.” To heed Mr. Buffet’s counsel, we sold into a period we thought was a bit greedy. And now we are clearly seeing fear emerge. Before the Covid-19 Crisis is over, it may get uglier. As disconcerting as that is, it provides an ideal environment for those with cool heads and ample cash.
As noted, our current positioning is very conservative across the board. As a result, we have fared significantly better than the general market through the last two weeks of turbulence. Still, if you simply do not have the stomach for seeing rapid changes in your account through this volatile time in the market, please contact us and let’s review. We can change your risk level to be even more conservative. No judgement or pressure from us on that decision. Everyone needs to be able to sleep peacefully at night. We believe our moves this year will be rewarded over a 3 -5 year time frame, but the tunnel may get darker before we see the light from the other side.