(Publisher’s note: InsiderAdvantage founder/chairman Matt Towery posted on his public Facebook page on February 13th, while the stock market was at an all-time high, that he sold all of his and his family corporation’s holdings in the stock market. As the author of the book Newsvesting, he recently discussed his decision on The Sean Hannity Radio Show. The following is his assessment of where we go now.)
Here is a warning. This is a longer than usual article, but you might find it helpful.
While President Trump said Monday that no “quarantine” is currently considered, NIH Director Dr. Anthony Fauci hinted on Sunday at a 14-day national lockdown on “Meet the Press.” It would not be surprising to see that in the near future.
Already many governors of large states and mayors of large cities are restricting access to restaurants, bars and shops. By the end of this week, any governor or mayor who does not take such strict actions will likely not be re-elected to office if he or she has another term to seek.
Beyond the tragic loss of life, suffering and terror the nation and world are enduring, there are economic, financial and governmental impacts which we must consider. We have not, in modern times, endured any jolt to our economy like what we are experiencing now. Yes, 9/11 and the Great Recession were huge, but one was sudden and an act of terror and the other slow and an act of ineptitude on the part of leaders who didn’t see it coming.
This one is different. Financial markets fear the unknown. When you have no way of knowing whether your next outing to a store or to your gym might expose you to a highly contagious virus, that “unknown factor” is through the roof.
Here’s a best guess as to where things are headed:
The Economy: A slowdown in productivity, prolonged and ultimately nearly complete in its nature, will have both a short term (that is obvious) and a more long term impact.
Even if the virus is seasonal (no one knows yet) and infection rates decline as we approach mid-April, the fear for the average American will continue. It is likely by then that many of us will know someone who contracted it. It will become very real.
The obvious economic victims at first will be the hospitality and travel industries. Some may not survive the loss of revenue. The result will be some bankruptcies of publicly-held companies and default on commercial bonds, which have been a mainstay of many investors in recent years.
That could extend to many other sectors of the economy. While most casual observers of the financial markets focus on publicly-traded stocks, there is another crisis taking place in the bond market. That is why the Federal Reserve just cut interest rates to near zero. It was necessary to free up capital in order to stabilize the commercial credit markets. Whether that has worked or not remains to be seen. If we see major declines in corporate bond values that do not recover or, even worse, substantial numbers of defaults, the economy could be in for a long and painful haul.
And the “Fed” has run out of bullets to stimulate the economy. Most people don’t really understand the concept of “negative interest rates.” But they have proved to be losers in other nations and would be a disaster here.
Of course, small businesses don’t have the luxury of corporate bonds to finance their operations. Many larger privately-held companies have lines of credit. There is good and bad news when it comes to those lines. The good news is that the interest rate for them, upon renewal, may well drop substantially. That means more money the business gets to keep in its “pocket.” The bad news is with revenue falling, companies may have to borrow more on their line and hope they don’t bump up against or exceed their limits. And qualifying for the same amount of borrowing power could become far more difficult.
For small businesses that have no line of credit, a long shutdown (whether ordered by the government or just a natural one from customers disappearing) will be extremely challenging.
So, it is likely that we will be headed toward a near recession and more likely an all-out recession. This is, in part, because of other issues such as supply chain interruptions, labor shortages and a dramatic reduction in overall consumer spending.
We have not reached the true panic level that we are likely to see in the next few weeks as testing becomes more available and we begin to see the impact of governments (state and local) taking the actions as earlier described– the closing of restaurants, bars, non-essential stores and ultimately potential lockdowns. But the alternative, spiraling daily numbers of infection, would be crippling and could put us into another Great Recession.
For my own part, after selling before the crisis hit, I have over the past few weeks slowly re-entered the stock market based on predetermined levels of decline and, as of Monday morning I was up about 4% in my equity accounts. But by the end of the day’s 3000 point route on the Dow I was even at best.
I completely expect there to be more serious declines when ”true panic” hits. There are estimates that over a million jobs could disappear in the month of April alone. So, I am holding a lot of my powder for deep declines I expect in the coming weeks and perhaps months.
I need to point out that my family corporation has the sole business of investing, thus my willingness to sell everything and buy back as we decline is more ambitious than individual retirement accounts. For individuals who are long term investors in 401Ks there is good news. Hold on to your accounts. When we reach a leveling out of the infection rate, markets will start to recover. Even then there will be bumpy setbacks. Until then, we will continue to see the violent swings in the market, both up and down. Don’t panic. It may take quite a while to get back to where we were on February 13th of this year. But much of the losses will be recovered within the next year.
I would suggest that if your investment advisor has you in bonds, particularly high yield corporate bonds, that you ask the duration and quality of those bonds. Shorter term bonds are less vulnerable to default. And while the value of such bonds are dropping now, they will be heavily sought after when investors realize there are few other alternatives for the delivery of decent returns on investment.
Then there are the strong publicly-held companies with strong cash reserves that pay a high dividend to owners of their shares of stock. For example, Coca-Cola has returned a higher dividend for some 50 years in a row. While the company’s shares may fluctuate, that’s a record that begs a long term investment on a short term discount.
Government/Politics: This is fairly simple. Revenue for states and municipalities will plummet, potentially for a long period of time. Budgets will have to be cut and creative ways of raising revenue will be essential.
In recent days many state and local efforts to issue new municipal bonds have been scratched ($7 billion worth as of March 13). The positive for Georgia is that
the state has an extremely strong credit rating and, when the muni bond market heats up again, the state will be able to issue bonds at less of a cost at lower rates.
As a former legislator I know firsthand that elected leaders come from many fields and not all have significant experience in business and finance. At this moment they should be seeking the very best minds who can help them assess the situation and take appropriate, and not politically expedient, responses.
We are all vulnerable in this crisis. But we will recover and even exceed where we were as the year 2020 began. It will just take time, courage and decisiveness.
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