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Larry's Client Update - 2020 #5

Economy Investment

Here's an update I emailed SecondHalf clients that may be of interest to others reading this blog. No investment or strategy mentioned here is specific advice or investment recommendation for non-clients. If you'd like to explore becoming a SecondHalf client, feel free to get in touch.

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Continuing with the more frequent general updates for clients….

In Client Update #4 on March 16, 2020, I shared roughly how much stocks were down from their most recent (adjusted) closing high prices in January and February. Stocks rallied (at least temporarily) this past week and retraced some of that decline. Here are the March 27 numbers in bold compared with the March 16 numbers. 

  • US large cap stocks (symbol SPY): down around 29.1% to March 16; down around 24.5% through March 27
  • US small cap stocks (IWM): down around 38.9%; down around 33.2% now
  • Global developed market stocks excluding US (VEU): down around 32.5%; down around 26.2% now
  • Emerging market stocks (VWO): down around 31.3%; down around 28.2% now

And it’s not just stocks. After several days of seemingly indiscriminate selling, various types of bonds and precious metals also rallied this past week. Most SecondHalf clients will see a portfolio increase in Sunday’s weekly email update. You can check your portfolio’s performance here on Blueleaf.

Given the reduced prices, I’ve “nibbled” on some purchases for most discretionary management clients: 

  • On March 23, I bought a block of a closed-end municipal bond fund (symbol: EOT). Clients with taxable individual, joint, and trust accounts who already owned EOT now have about twice as many shares as before. The fund had not only been dragged down with municipal bond prices generally, but it was also trading at a significant further discount to the net value of its assets. Arguably a bargain opportunity. 
  • On March 24, I bought a small block of a high-dividend emerging markets stock fund (symbol: DEM). Most clients now have about 2.5% of their portfolio allocated to this. Before COVID-19 was even on the radar, emerging markets stocks were already priced far more favorably than US stocks as well as other global developed markets. Though quite volatile, arguably emerging markets stocks represent one of the likely better value opportunities looking out a few years. Recent dividend yield on DEM is around 5.5% (which can change, of course). I anticipate further “nibbling” in adding to this position. 
  • On March 25, I bought a small block of a preferred stock fund (symbol: PFF). Most clients now have about 3.5% of their portfolio allocated to this. Recent dividend yield is around 5.5% on this fund. It’s likely that I’ll add to this position for clients as well.

Why have I only nibbled at these reduced prices? Because I believe the most likely path forward is another leg down in markets. 

Bob Farrell’s Rule #8: “Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend.” 

Financial markets—and particularly stocks—move in fits and starts. They are a melting pot of fear, greed, hope, individual and institutional investors, high frequency trading, opportunities and calamities, government and central bank intervention, truth and lies, and so on. COVID-19 has knocked everything for a loop. And we’ve just gone into the fastest bear market and the fastest 30% drawdown in stock market history. It’s normal that we’d now have what’s called a “bear market rally.” Though nobody can precisely predict these things, the historical pattern is the initial bear market rally usually is followed by another leg down. Again, fits and starts.  

Bear markets usually end when despair has set in and that typically never happens in the early innings of a market and economic downturn. We’re only about 6-8 weeks in, it just feels kind of like it’s already been months. Once there’s been prolonged record unemployment and devastated corporate earnings get reported in a few weeks, it seems likely that’ll trigger another leg down in stocks. And if so, perhaps another so-called generational buying opportunity. 

Of course, nobody knows…especially given the extreme monetary and fiscal response of global governments and central banks. It’s possible those actions will move the goalposts somewhat from what could otherwise be expected to unfold. 

So the nibbling purchases I’ve made for clients should provide at least some benefit if market prices don’t decline further from here. But if we’re in for another leg down (which I believe likely), the purchases are small enough they won’t significantly harm portfolios. And in that event, I’d expect to add more—and buy other investments too—at even better prices. Most discretionary management clients still have a significant amount of cash and equivalents (“dry powder”) to do so. 

That’s it for this round. Please let me know if you have any questions. As always, thank you for the opportunity to be of service.

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If stress in the financial markets is causing you concern about your portfolio or broader financial picture, feel free to reach out.

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Disclosure: positions mentioned that I or my clients hold include EOT, DEM, and PFF.