Last week in the markets was in a word – DREADFUL.
Stocks fell with the Dow Jones Industrial Average declining more than 10% and the broader S&P 500 Index declining nearly 9%. Precious metals shared in the tough week that stocks endured with gold falling about 8.5% and silver plummeting nearly 16%.
US Treasuries fell as well with yields on the 30-Year bond rebounding to about 1.5% after (remarkably) falling below 1% on March 9. Financial markets are in turmoil.
If you’ve been a long-time reader of this blog, you know that I have been forecasting a major stock decline. Obviously, predicting what the catalyst for such a decline might be is impossible, but inflated stock valuations have been there for all to see.
Stocks, even at these levels remain overvalued in my view. Market volatility remains extremely high. From my experience, volatility of this magnitude signals more rough days lie ahead for stocks. Incredibly, the volatility that existed in the market last week has not been seen in nearly 90 years. This from “Bloomberg” (Source: https://www.bloombergquint.com/markets/the-s-p-500-had-its-choppiest-week-since-hoover-was-president) (emphasis added):
swings in the U.S. equity market this week were more extreme than they’ve
been since Herbert Hoover was president. The S&P 500 Index moved at
least 4% in each of the five days, falling three times and rising twice. The
last such stretch of moves of that magnitude occurred in 1929.
Investors were whipsawed this week amid growing angst over the coronavirus and an oil price war that sent crude prices plunging. The benchmark index jumped 9.3% on Friday after President Donald Trump declared a national emergency to help combat the virus. That followed a 9.5% drop the previous day, when his travel ban and tepid fiscal measures disappointed traders. The last time a 9% rout gave was in 1931 at the height of the Great Depression.
So, if you’re invested in stocks, what should you do? My advice hasn’t changed. Use the two-bucket approach for managing your nest egg. One bucket of assets contains investments that are insulated from market fluctuations. It’s this bucket from which you’ll pull needed income. The second bucket contains assets that you may not need for income. Some of these assets can be in stocks or stock derivatives but I’d suggest strong hedging in this environment of extreme volatility.
While markets typically don’t go straight up or straight down, it would not be surprising to see more ultimate downside for stocks, I expect it. I have long predicted a Dow to Gold ratio of two and I am of the belief that recent price action in stocks is the first step toward that ultimate scenario.
Also, as I’ve been suggesting would be the case the Fed responded by cutting interest rates by a half percentage point a little more than a week ago and then printing money last week. I forecast a rate cut to zero within the next week or two and then more money printing; a.k.a. quantitative easing.
As I have been discussing periodically in this blog, the Federal Reserve has been supporting, a.k.a. propping up the repo market since September. For new readers to this blog, the repo market is the overnight lending market between banks. At an ever-increasing rate since September, the Fed has been printing money and acting as a lender of last resort to some banks. As I reported at the time, this was a red flag and likely a harbinger of trouble to come.
Seems that trouble has now arrived in earnest. While the coronavirus is taking all the blame just like the terrorist attacks of 2001 took the blame for the tech stock bubble imploding, market crashes don’t occur unless conditions are ripe for a correction. This correction has been catalyzed by the coronavirus but, as I have been commenting, stock valuations have been stretched to levels that were even greater than prior to the great crash that occurred in 1929.
Back to the Federal Reserve action of last week.
On Thursday at 1:12 PM, “The Street” reported that the New York Fed would inject $500 billion into the Treasury market. This from the report (Source: https://www.thestreet.com/video/stocks-federal-reserve-injection)
All three major U.S. stocks indexes were down more than 8% at one point on Thursday, before the New York Fed announced it will inject $500 billion of cash into the treasury market, buying securities across the duration scale to keep interest rates low and banks flush with cash.
Then, a piece released about an hour later by “Business Insider” reported that the Fed would be injecting $1.5 trillion into the markets. This from the article (Source: https://markets.businessinsider.com/news/stocks/fed-repo-trillions-added-to-fight-coronavirus-economic-risk-recession-2020-3-1028991278)
The Federal Reserve Bank of New York will start adding fresh capital to money markets on Thursday to pad against coronavirus risks and ease stresses on the Treasury-bill market.
The extraordinary funding measure first involves a $500 billion injection at 1:30 p.m. ET on Thursday, the bank said. The cash will be added to money markets through a three-month market repurchase agreement, or repo operation.
One-month and three-month repos for $500 billion each will be conducted on Friday and continue to be offered weekly through the calendar month, the bank added.
The massive stimulus measure was made in accordance with the Federal Open Market Committee and in response to unprecedented liquidity issues in the Treasury-bond market, the New York Fed said.
This from “Forbes” (Source: https://www.forbes.com/sites/sarahhansen/2020/03/12/fed-injects-15-trillion-to-prop-up-crashing-markets/#6c71536b6adb):
As stocks headed for their worst day since 1987’s Black Monday Crash, the Federal Reserve announced further measures to prop up liquidity including a potential injection of more than $1.5 trillion into the market; stocks responded immediately, cutting losses in half on the announcement, before dropping back down 8%.
- The Fed said it will ramp up its overnight funding operations—buying “repos,” or repurchase agreements—by $1.5 trillion over the next two days.
- “These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said in a statement on Thursday afternoon.
Note that in the “Forbes” piece and the “Business Insider” piece that the phrases “highly unusual disruptions” and “unprecedented liquidity issues” are used to describe the US Treasury market.
What does this mean?
When stocks are declining hard, one would expect to see investors who are concerned about preserving assets flock from stocks to bonds. That demand for bonds would have bond prices rise and yields decline. That’s what happened through the 9th when the yield on the 30-Year US Treasury fell to under 1%.
Then, within a few days the Fed had to inject $1.5 trillion into the repo market where a lot of bond buying and selling takes place. What happened?
Perhaps no buyers.
This from Bank of America strategist, Mark Cabana as reported by Reuters (Source: https://www.reuters.com/article/usa-bonds-bankofamerica/u-s-fed-treasury-may-need-to-buy-treasuries-to-stop-broad-sell-off-bofa-idUSL1N2B50UN)
“In a risk-off environment it would be expected to see (Treasury) yields decline; yields appear to have been overwhelmed by liquidity concerns yesterday.”
The Federal Reserve induced stock market bubble is now unraveling. The $1.5 trillion injection into the bond market likely ensures a similar outcome for bonds.
Protect yourself. Diversify and own some tangible assets.
That is one of the core characteristics of using the two bucket approach to managing assets. The two-bucket approach has an investor diversifying out of the traditional one-bucket stock and bond approach.
As history teaches us, eventually a one-bucket approach will fail when central banks begin the practice of money creation. It happened in 1837, it happened in 1873, it happened in 1929 and it’s happening again presently. We are now on a very slippery slope and past the point of no return when it comes to money creation.
After the financial crisis, the Fed engaged in quantitative easing to the tune of $85 billion per month, or about $1 trillion per year. Last week, in one day, QE totaled $1.5 trillion. If you’ve been procrastinating or waiting for the market to recover before you look into the two-bucket approach, I am of the strong conviction that the time to act is now.
While I try to keep this blog commercial-free, this week I am going to make an exception given the current circumstances. If you are not yet a client of Retirement Lifestyle Advocates and would like to learn more about using the two-bucket approach to manage your assets, you may call the office and request a free meeting to discuss (be patient, we are busy) at 1-866-921-3613.