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Castle Financial Special Update, Sunday March 15th 2020

March 15, 2020
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Our hearts and prayers go out to all those affected by the coronavirus (COVID-19). Many of our clients are senior citizens and we would strongly encourage everyone to be especially considerate of our seniors’ risk to the virus and make every effort to provide assistance in any form, if possible. Sometimes even a simple phone call to “check in” goes a long way in these difficult times. 

Fear and panic sells newsprint and I am sure you are overwhelmed with the news regarding the coronavirus, but I thought it would be helpful to provide you with another update on how this crisis is affecting your investments and our strategy to overcome the hurdles we are facing and actually capitalize on market dislocations to make money. I have been advising clients for over 4 decades and have experienced many market corrections and bear stock markets. The worst being the 1987 stock market crash, in which the DOW declined 22.6% in one day, so the current 5% to 10% daily markets swings do not rattle me. In fact, history clearly demonstrates that the best time to invest in stocks is during a crisis when people overreact.

As noted in my prior update, some investors are panicking and reacting emotionally which is the wrong thing to do. If you are an investor, write this down: “Be greedy when others are fearful and fearful when others are greedy”. The coronavirus will run its course, and fade into the history books. Yes, there are the scary unknowns, especially if this global pandemic continues to grow, killing people and further slowing global growth. However, after the coronavirus abates, the global economic expansion will ultimately continue and, in my opinion, there will be an explosion of activity from people who have been stifled by a global social distancing and dramatic curtailment of social interaction people of the world are now experiencing at this scope and scale. On a personal note, I am now realizing how good things were before the virus hit and our many other blessings. I for one plan on thoroughly enjoying the coming summer months if we are all blessed and this virus is behind us.  I am sure there will be an explosion of social interaction with billions of people playing catch-up and more appreciating life.

With regard to money, many savvy investors will take advantage of any further stock market declines to make wise longer-term investments. I am actually receiving calls from our more seasoned and astute clients who have money to invest and will be adding to their accounts in order to pick up great company stocks at bargain prices which is precisely how Warren Buffet became one of the most successful investors of our time. Old Warren is sitting on a pile of cash right now and is getting more and more inclined to invest and pick up bargains as stock prices tumble. I would not be too surprised if Berkshire Hathaway (Warren’s holding company) bought the Boeing Company to add to their portfolio of world class companies. Boeing is at great risk now with its stock price plummeting and the company will likely require a major bailout. Up until the 737 Max Jet disasters, Boeing was a darling stock for investors.

With regard to other investment legends, there is a picture hanging in my office with me and Sir John Templeton (renowned global investor knighted by Queen Elizabeth II) that was taken decades ago when I collaborated with Sir John’s group in the Bahamas. Sir John Templeton was one of the most wonderful human beings that I was privileged to meet and he was a major influence on my money management capabilities (I am an awarded 5 star ranked institutional money manager by Morningstar which is the premier money management ranking and information investment company in the world). I would highly recommend that you Google “Sir John Templeton quotes” to gain invaluable insights into the investment world. 

Progress and Good News!

There is an unprecedented collaboration taking place now with the public and private sectors to overcome the coronavirus with Google, Walmart, Target, CVS and other major companies joining forces to assist health officials in combating the outbreak and helping with procedures and testing. It is a little late in my opinion, but we are seeing improving leadership and collaboration by our elected officials for this global health crisis. I think we also need to not get too mired in all the negative press and take notice of the improving situation in China and South Korea that are now seeing a decline in new cases of the virus. Hopefully, the USA will see better results moving forward. On a positive note, the collaboration of China, South Korea and Japan towards defeating the virus may lead to improved relations between the countries. In addition, there is an unprecedented global collaboration of companies and countries around the world to come up with a vaccine. I have read many articles in this regard and just this week a Canadian company reported a cure for the coronavirus.

News.com.au reported a Canadian company has claimed it has found the cure for the deadly coronavirus. Medicago, a biopharmaceutical company in Quebec City funded by the Pentagon, said that it has produced a COVID-19 vaccine just 20 days after receiving the coronavirus’ genetic sequence, using a unique technology that they soon hope to submit for FDA approval. The company’s CEO, Bruce Clark, said his company could produce as many as 10 million doses a month. If regulatory hurdles can be cleared, Mr. Clark said on Thursday, March 12th that the vaccine could become available as soon as November 2020.  The following chart notes past epidemics and the ensuing stock market rallies that followed.   

Looking Forward and Our Investment Strategy for Clients 

In our prior update, we believed that bond prices would be the next bubble to burst and we were correct. Bond prices are now dropping for multiple reasons. Fortunately, we have liquidated all bond funds in client accounts and now have ample liquidity for our clients cash needs and to also take advantage of current and future market dislocations. I do not have a crystal ball and there is no way of knowing when a crisis or negative events will hit the markets like the unexpected oil price war going on now between Saudi Arabia and Russia. However, as your financial advisor, I can add value by making wise tactical decisions like selling bonds before they enter a prolonged bear market with prices potentially declining for an extended period of time.

You see, interest rates are nearing zero in the USA and, in many overseas markets, interest rates are actually negative meaning the investor pays the financial institution or government money to hold their money. Yes, you read that correctly and there is currently about 20 trillion dollar equivalent of foreign debt issues now with negative yields. Accordingly, going forward it is going to be near impossible for retirees and other investors seeking decent income on their bond holdings until interest rates move higher again. However, I cannot see interest rates going up for a long time because nations globally are in unprecedented debt and require near zero or negative interest rates in in order to be able to make the interest payment on their debt and remain solvent.

Our solution to this problem is to utilize our proprietary mutual fund, the All Terrain Opportunity fund. At Castle Financial, we take a unique approach by employing a tactical overlay for client portfolios which includes the All Terrain Opportunity Fund, symbol TERIX. Castle Financial is co-advisor on the fund which is designed to potentially make money in all market conditions and preserve capital in periods of uncertainty. The fund is rated 5 Stars by Morningstar and a full prospectus on the fund can be found at www.allterrainfunds.com   

With the All Terrain Opportunity Fund, we plan to attempt to take advantage of dislocations in the financial markets to generate profits as opposed to holding bonds which are now declining in price. This past week alone, we have seen corporate, municipal and government bonds all decline in price resulting from the impacts of a global pandemic of epic proportions and also the oil price war and weakening balance sheets of many bond issuers. Unfortunately, I think bond prices will likely decline after the Caronavirus pandemic passes as money flows out of bonds and into stocks as economic conditions improve and central banks around the world will try to move interest rates higher so they have the ability to lower rates again for future challenges.

Going forward, the financial markets will likely continue to react on the future path of the coronavirus with stocks further declining if current efforts cannot reduce the spread of the virus. A drop of 20% from current levels is not out of the question in my humble opinion. However, from my experience, stocks prices will eventually stabilize and begin to move up during the height of the crisis perplexing many unsavvy investors who are panicking and selling their stocks. Simply read the history books to validate this observation and the above chart of past epidemics also corroborates this observation. Unfortunately, for now uncertainty reigns with regard to the coronavirus and its negative impacts on the global economy will escalate. Equity markets will continue to be negatively affected by uncertainty, so expect more volatility and buckle-up.

I have tried to simplify my observations on current market conditions, but a more complex observation follows:

Some market experts believe a primary low for the major stock market indices may have been made on this past Thursday. However, like 1987, 1998, 2011 and 2015, you typically have a primary low with shock and awe and then a rally and a testing phase follows.  In 1987 that was about six or seven weeks later. However, with all of the unknowns facing us with the coronavirus I think all bets are off and the pendulum may swing to even greater extremes on the downside before recovering. In that case the point of the heights of panic selling will likely be the best time to buy stocks near their lows. The S&P 500’s best days typically occur right after its worst ones which we saw this past Thursday and Friday with a decline of 10% on Thursday followed the next day with a rally of almost 10% to finish out a wild and volatile week.

Since the 1930s, if an investor missed the ten best stock market return days per decade, their investment returns would be just about 91% compared to 14,962% returns had they not missed the ten best return days. Aside from not panicking, I firmly believe investors need to exercise patience. While bear stock markets can be short in duration, such as 1987 and 1990-1991, both of which lasted for only about a quarter, the median drawdown since 1929 has persisted for about a year and a half and produced a drop of 34 percent, according to Bank of America. At last Thursday’s close, the S&P 500 was down 26.7 percent, but rallied almost 10% the next day to finish down about 16% YTD in 2020 as of 3-13-2020. 

If you are a valued client of Castle Financial, you are in good hands and we always look forward to hearing from our valued clients. If you are not a client of our firm and are reading this update, feel free to contact us at 732-888-4994 or visit us at www.castlefinancial.com