Was Monday a "Selling Climax?"
US stocks faced a climactic sell-off Monday, dropping 7% on the day and 18.5% from the record close of February 19th. Tuesday morning, US stock are up 3.5%, oil has rebounded to $34/barrel, international markets closed higher by 1-2.5%
Watch David Edwards with Liz Clayman of Fox Business News discussing whether Monday marked a "selling climax" and what Heron Wealth is doing for clients right now.
6 weeks ago, Edwards interviewed with Clayman about the markets. At that time, Edwards' message was, "I have that ‘walking on thin ice’ feeling. I’m not buying anything right now, not US, not international, not emerging, not excited about bonds either."
Since January 1st, we told clients that if they had significant cash expenses coming up, let us know now, and we’ll take the money out of the markets now.
For new clients of the last 6 months, we invested a 1/3 or perhaps half of their money, told them we would invest the reset around June, UNLESS we got a correction of 10% or more.
Now that we are neck-deep in freezing cold water, our firm is aggressively moving cash into stocks, and also into corporate bonds and preferred stock. The ONE asset class we won't touch right now is US government bonds with maturities of 5 years or more. The entire yield curve is currently under 1%, which means that if you buy a 30-year bond today, you will receive less than 1%/year for the next 30 years.
You can’t make any money net of inflation in those bonds, but for sure you will lose principal value when interest rates back up.
Last week, we did multiple bulletins to our clients and held a conference call Sunday night. Many of our clients are putting cash into their accounts, which we will invest by the end of March, and indeed are investing today
A number of market prognosticators noted that last week was the worst seen by US stocks since the 2008 credit crisis. An interesting comparison, but that bear market was driven by a banking liquidity crisis, the second-worst since the Great Depression (1929-1939). The more appropriate model is how investors reacted after the September 11 attacks in 2001. Investors were blindsided by a terrorist assault that literally came out of the blue. Prior to September 11, most Americans knew nothing about the Middle East, nor could understand why 19 Sunni Arabs would commit such an act. By year-end, we were all experts.
When markets reopened the following Monday (9/17/01), stocks took just 5 days to fall 11.6%. However, by the following week, investors had obtained enough information to understand that while 9/11 was a human tragedy, it was not an economic catastrophe – stocks surpassed 9/10/01 levels by 10/11/01 (one month), closed out the year 19.3% ABOVE the 9/21/01 low.
Don’t forget that the last 20% pullback was only 5 quarters ago – Q4 2018. It took only 4 months for markets to make new highs in April 2019. We think that by July, the pain and suffering we're experiencing today will well be in the rearview mirror.