Castle Financial Special Update, Sunday, March 29th 2020
As the stewards of our valued clients' wealth and financial future, we made preemptive and tactical moves in clients’ accounts to preserve capital during this ongoing Pandemic crisis. Unfortunately, many investors and their advisors were drawn into investing for higher yields while not fully understanding the risks associated with higher yielding financial instruments. As I have warned in past updates, the traditional balanced portfolio of 60% stocks and 40% bonds may not hold up well in a crisis and, at this time, this combo of stocks and bonds is still down about 20% from its peak value. This is the fourth time in 75 years that a 60/40 strategy has suffered such a decline as we saw in August 1974, September 2002 and January 2009. Historically, investors who rebalanced back to 60/40 enjoyed attractive returns in subsequent years, but with interest rates near zero the bond component will be fighting an uphill climb to preserve principle while paying an interest rate that will likely not equal future inflation rates.
In the past few weeks we saw many bond funds essentially blow up because of redemptions by panicking fund shareholders that forced the managers of the funds to liquidate into a market with limited buyers. Once again, the Fed and other central banks around the world created fiat currencies out of thin air and commenced with buying bonds in order to stabilize the markets. Central bankers call this quantitative easing, but if ordinary citizens create currencies out of thin air it is called counterfeiting. And now ladies and gentlemen we are all going to be on the hook for more bailouts. The national debt was historically high going into this crisis, but now it will be off the charts and impossible to pay when interest rates rise unless nations can grow out of this crisis which now appears even more challenging. Accordingly, it is now in the interest of all nations to keep interest rates near zero for as far as the eye can see. Low to zero interest rates are not good for pension funds or retirees, but great if you need to borrow money at low interest rates. The investment landscape has dramatically changed going forward and note the increasing Fed balance sheet in the chart below.
Financial assets rose in value last week as a result of governments flooding the markets with liquidity which led to a rally in both equity and bond markets, especially lower rated or “junk debt”. Fortunately, for our valued clients we sold clients’ bond holding prior to the implosion in bond prices. However, we have tactically bought back into select bond funds that are now positioned to benefit from the central bank purchase of bonds that were dramatically marked down in price. Some bond funds had to mark down their senior tiered bonds as a result of lower tiered bonds dropping in price, but now those bond prices are coming back as a result of central bank interventions whereby they are buying just about everything in order to stabilize the credit and debt markets.
Last week, the equity markets staged a dramatic approximate 12% rally to lessen the impact of the prior weeks’ approximate 15% selloff for the major market equity indices. Expectations for the $2 trillion coronavirus relief bill, which received bipartisan support in Congress this past week and was quickly signed by President Trump on Friday, provided encouragement to many investors looking for bargains amongst the rubble of the most rapid drop in stock prices since the 1930s’ depression.
The historic bill provides funding for U.S. individuals and corporations seeking relief from the dramatic loss of income and revenues from the coronavirus pandemic. The Dow Jones Industrial Average led all major indices for the week gaining 12.8% which was its largest one week gain since 1938. The Russell 2000® Index rose 11.6% followed by the 10.3% rise for the S&P 500® Index and 9% Nasdaq gain, its largest weekly increase in 11 years. However, last week’s impressive gains still leave the major equity market indices more than 20% below record highs set in February with many investors uncertain about the likelihood of a meaningful recovery in the absence of encouraging news on the coronavirus.
The coronavirus has attacked and devastated countries around the world and virus came from China. I think the Chinese Communist Party (CCP) leaders are completely responsible for this global tragedy and should be held accountable by the world. China’s leaders intentionally silenced physicians and prohibited medical professionals from publishing findings that could have saved countless lives. China is the arsonist that has set the world ablaze and now their propaganda and public relations machine is trying to paint them as the firefighter. I think the USA should keep the over one trillion dollars that China holds in US debt as a down payment for the monetary cost to America, not to mention the loss of life which is priceless and has devastated many American families. I also believe that other countries around the world should follow suit and take action against China. I actually believe that this was a pre-meditated action by China to further their agenda to dominate the world and this crisis is far from over and there will be other shoes that will drop.
What also concerns me is that at the inception of this crisis, Saudi Arabia and Russia decided engage in an oil price war and is it obvious to me that this too is an intentional act to take down America’s energy independence by bankrupting America’s oil and gas companies that have recently propelled the USA to energy independence. Oil prices are plummeting and Russia and Saudi Arabia know that American oil companies require higher oil prices to remain profitable. Make no mistake about this dear reader, the USA is under attack and we are engaged in a new type of war on many fronts from many enemies. I normally try to shy away from expressing my personal views on such matters, but American is in trouble and we need to all join together to fight our enemies on all fronts. Their goal is to collapse our economy and they will succeed if we do not open up our economy and defeat the virus.
The coronavirus has brought American life to a near standstill, closing businesses, cancelling large gathering and killing our economy which is driven mostly by consumer spending. I have read that things may begin to get back to normal when enough of the population is resistant to the virus to stifle the disease’s spreading. However, at this point nobody really knows how long it will take to get there and the recent government bailout will only carry our nation into possibly early May at best if the country remains locked down. Government leaders seem to be aware of the consequences of keeping the economy closed and I think they will have no choice but to allow people to go back to work in May regardless of how things stand with the spreading of the virus. The government will run out of resources if we do not open up the economy and I am concerned that the US economy will collapse and we will then be fighting the pandemic while in a depression which will lead to other crises.
Please don’t shoot the messenger. I am hopeful that our leaders will make the right decisions and we are blessed with medical breakthroughs that will thwart the virus and save lives by easing symptoms. There will also be a vaccine for the coronavirus, but we cannot wait for a vaccine which our government is fast-tracking. In a month, we have gone from a political circus in Washington politics to a collaboration of our elected officials to fight the Pandemic. The case count in the U.S. is now the largest in the world. Overall, the impact of the coronavirus has been severe, but some businesses which provide important products and services are actually benefitting. For example, both Walmart and Amazon are hiring staff and offering higher wages and bonuses. Trucking companies are reporting increased volumes as businesses rush to replenish inventories and the U.S. government has acknowledged the demand on truckers by temporarily waiving the mandatory rest periods. I am truly grateful and appreciate our truckers- thank you and be safe in your travels!
Investors and analysts will anxiously await the upcoming first quarter corporate earnings releases and attention will focus on the developing trends and any outlook provided for future quarters. Analysts will undoubtedly revise price targets based on the commentaries and financial results for individual companies. Looking ahead, the markets’ volatility will likely remain elevated, but patient, long-term investors will continue to seek bargains. You see for every stock trade there is a buyer and a seller and as stocks change ownership, shares are being transferred to stronger hands that have longer term investment horizons. We do not know how this crisis will play out and the permutations that will evolve from this pandemic are mind-boggling and to believe that things will go back to where they were prior to all this mayhem would be foolish.
Accordingly, I believe the markets will remain extremely volatile and at this point I think a “V” shaped recovery is highly suspect and I am having a very hard time envisioning how the markets get back to their previous highs anytime soon because there have been so many changes from when we entered this crisis. However, we now have an additional two tremendously powerful forces of unlimited quantitative easing and the Fed’s plan to give $4 trillion in loans to businesses and they have enlisted BlackRock as manager to help expedite the bailouts. There is also an unprecedented guarantee by the Fed to provide capital to just about anyone who needs it. These numbers are astronomical and off the charts, so the future reactions by the financial markets may be off the charts if we can come together as a nation to fight the wars we are in with the virus and our other enemies who would love to see our nation collapse.
On a positive note, there were more signs of a return to normalcy in the currency and bond markets last week which is a needed first step and we are making progress on many fronts and let us hope and pray that it continues. I cannot understate how positive it is that we do not have a funding or credit crisis on top of an economic and health care crisis. We are also witnessing a continuing return to normalcy in the Treasury securities market, which is a necessary ingredient to any eventual recovery (not just in stocks, but also in the broader economy). One step at a time coming out of this crisis. . . .
If you are a valued client of Castle Financial, you are in good hands and we are making tactical moves to preserve capital and are also attempting to positon clients for future profits. 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. We offer a free portfolio review and valued second opinion. Castle Financial serves as co-advisor on the All Terrain Opportunity Fund which we employ as a tactical overlay in client portfolios to help preserve capital and the fund is also managed to potentially make money in both up and down markets. A full prospectus on the All Terrain Opportunity fund can be found at www.allterrainfunds.com. The fund is rated 5 Stars by Morningstar.
Our hearts and prayers go out to all those affected by the Coronavirus (COVID-19). Many of our clients are senior citizens living throughout of nation 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. We owe a lot to our senior generations. They were there for us and now it is our turn to support and keep them safe.
Castle Financial Special Update, Sunday, March 29th 2020
March 29, 2020