What the Fed Just Happened?

Sunday the Federal Reserve took the extraordinary measure of cutting the federal funds rate to 0 – .25%.   Along with other steps.

The markets subsequently sold off as soon as the futures markets opened at 6PM E.S.T. Sunday, as they interpreted the move as a move indicative that things were worse than they were.

Normally, we have become trained to think a rate cut will equate to the markets recovering….but why didn’t they?

Simply put, the markets are telling the government this is the wrong tool for the job.

As I mentioned in a previous note, the markets are worried about getting money in the hands of people, not people spending it.  Therefore a fiscal (policy drive) response is more appropriate than a monetary (Fed-driven response) one.

So please contact your Congressional representative to demand one.

Now, the markets loathe uncertainty, and right now it wants to know specifically how employee X is going to be paid and for how long.  How long a quarantine will last, etc.  This way it can get back to what it does, estimating earnings, etc..

We have been told there will be sick pay for employees who don’t otherwise have it, protection for small businesses, and support for impacted industries; yet the Senate hasn’t even scheduled a time to vote on the initial corona virus bill.

This drives markets NUTS!!!

The actual election may be in November, but the markets decided to vote early – way early – and they are voting with volatility.

This week will be an interesting one, and I firmly believe as Congress goes, so will the markets.

Now, I have no idea of whether or not we are or are going to be in a recession; however, looking at what has transpired, my opinion is this:

– 1st Quarter #’s will take some hit, as will Q2.  However, that will not tell the whole story.

– I believe that this is a time for some businesses to shine.  I liken this to the mobilization of American industry after World War 2.  When all bets were off, American businesses helped drive the country to victory.  Right now there are countless scientists, researchers, and medical professionals throwing everything they have at this virus to help us.  And as John Adams once said: ‘Every problem is an opportunity in disguise’.  I firmly believe the contributions of these selfless individuals are going to pay humanity a dividend whose value we may never truly realize.

– Reinvention in how society operates.  Sure you may not go to the grocery store in a traditional sense; however, through the use of technology, I believe the Walmart’s, Target’s, & Costco’s of the world will continue to function in an essential way, albeit different for the time being.  I believe this, supported by logistics companies, will have an impact.

– There will be pent up demand from the possible national quarantine, and with it will come a flood of expenditures from consumers.

So, what could calm the markets?

I am going to borrow the following analogy from Mohammed El-Erian in reference to how he described ending the financial crisis in 2008, by referencing the ‘four bazookas’.  Essentially what he said, was employing simultaneous policy initiatives (bazookas) and firing them all at the same time would have the greatest impact.

However instead of applying it to monetary policy, I believe we need to apply this towards fiscal & legislative policy.

I believe that if the Senate came back and expeditiously took a vote on the coronavirus bill, as well as rapidly implemented other legislation to support impacted workers and industry, it could signal a change in the winds for the markets.  That, along with the eventual coupling of a decrease in positive tests, I believe lead to smoother waters ahead for the markets.


Goldman Sachs referred to this as a Black Swan event.  Simply put black swans are unpredictable events that have severe impacts.  The housing crisis was the most recent one a lot of us can relate to.

The simple fact is that my underlying investment methodology lies rooted in the principles employed by Buffett, Bogle, & Graham which we have discussed many times before.  Specifically Bogle’s paper Black Mondays and Black Swans in which he wrote the following:

The point is this: Over the very long run, it is the economics if investing—enterprise—that has determined total return; the evanescent emotions of investing—speculation—so important over the short run, have ultimately proven to be virtually meaningless. In the past century, for example, the 9.6 percent average annual return on U.S. stocks has been composed of 9.5 percentage points of investment return (an average dividend yield of 4.5 percent plus average annual earnings growth of 5 percent), and only 0.1 percent of speculative return, borne of an inevitably period-dependent increase in the price-earnings ratio from 10 times to 18 times, amortized over the century. Despite the Black Swans of market history, ownership of American business has been a winner’s game.

This event is just another dot on the chart:


Source: @DividendGrowthInvestor

Control what you Can Control:

First, please read this important article from the Washington Post, and share it with everyone you know.

Second, if you are feeling pandemic panic, Adam Grant has some great tips:

For anyone feeling pandemic panic, evidence-based emotion regulation strategies:

(1) Labeling: naming anxiety helps us control it

(2) Reappraisal: reframe isolation as family time

(3) Distraction: set goals that redirect attention

(4) Amelioration: take protective action

Finally, step away from the news cycle.  Focus in on the things that you can control: Read a book, play with the grand kids, or take care of that spring cleaning early.  The reality is that right now is the time for inaction.  Logging in daily or focusing in on your statements is doing more harm then good, and will lead you to be frustrated and quite frankly, doing something you will regret.

Please know that I say this to you because when I built out your portfolio, I did not believe the performance in the last 10 years data nonsense, as that is the same as saying you will get wet in a pool.  Completely opposite to that, I looked at back-testing the portfolios so as to incorporate what would happen if we ever again had another 2008, another Black Swan. 

And as Mr. Bogle’s research has shown there are times when the portfolios will bend, but whether they break or not, that is your decision.

Finally, I leave you with these words from Ben Carlson, Director of Institutional Management at Ritholtz Wealth Management (Courtesy of Tony Isola’s A Teachable Moment Blog):

Here’s something I can say with 100% certainty — every bear market in the history of U.S. stocks has led to new all-time highs at some point in the future.

Source: A Wealth of Common Sense Blog

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