Crash! Money markets tank, but some Portlanders don't blink.
As the markets went into meltdown Thursday, Portlanders were wondering where their money had evaporated to, and if it would come back.
Thursday marked the official end of the longest bull-market run in history. By markets' close, the three major U.S. indexes ended up more than 9% lower. The S&P 500 and the Nasdaq went into bear market territory, something not seen since 2009. They finished 20% under recent highs. The Dow Jones industrial average, whose bear was born on Wednesday, also closed down further.
The 20% drop over the last three weeks has been the fastest 20% decline in history. The U.S. stock market has now wiped out the entire $11.5 trillion of value it gained since Donald Trump's 2016 election victory
In the opening minutes of trading Thursday, a circuit breaker halted trading for 15 minutes. Losses continued when it reopened.
Trump's vague comments Wednesday evening about an economic stimulus package and a 30-day European travel ban seems to have left traders unsure.
As the COVID-19 virus or new coronavirus panic widened, the Fed said it would offer at least $1.5 trillion worth of short-term loans to banks Thursday and Friday of this week.
Trillions and trillions
Financial advisor Ralph Cole, director of equity strategy and portfolio management and Ferguson Wellman in Portland, said people were calling him Thursday.
"We're telling clients today that we're holding through this crisis," Cole told the Business Tribune. "We were already pretty conservatively positioned going into it, and we're pretty close to starting to buy. We haven't been buying on the way down."
Most of the company's clients, be they individuals, foundations or nonprofits, have an allocation of 65% stocks and 35% bonds. Usually, as the price of stocks falls, bonds, which as are safer bet, rise.
"We thought news flow would be a little scary," he said. "You get to the greatest moment of panic before you buy. And we just didn't think we were there yet. Today feels a lot closer though."
The first calls he got three weeks ago when the selling began were "What's the buying opportunity?"
"That's not the calls we're getting now," he said. "Now the calls are, 'Should I go to all cash? Should I sell stocks?' or 'I can't take this anymore.' This usually occurs towards the tail end of these events rather than at the beginning."
No dramatic life changes … yet
Cole said he sees the economy's fundamentals as good and thinks the stimulus packages from governments around the world mean that, going into the second half of the year, the economy will be "doing pretty darn well. It's trying to get through the next three months that are going to be very difficult for the markets and for the economy," he said.
Cole's colleague, Mary Lago, executive vice president of portfolio and wealth management, added: "From a wealth management perspective, it's always a good time to have the right asset allocation. Hopefully, our clients were well-positioned and appropriately positioned coming into this in terms of how much risk they had in their portfolio. But if they weren't this isn't a time to panic and try to overreact."
They should talk to their adviser, "But don't start making dramatic changes in life," Lago said.
Cole said the oil price drop will hurt states that produce oil or oil industry equipment, but gas prices dropping 50 cents per gallon will benefit all Americans.
He said that, after the Sept. 11, 2001, terrorist attacks, there was talk that no one would want to fly any more or buy property in Manhattan. "When you look back 20 years that seems kind of silly now," he said. "So, don't overreach into the near term. Truly try to understand what is transitory and what's more permanent change."
He sees Saudi Arabia and Russia's desire to take more of the oil market, by producing more, as a long-term game changer.
"We are underweight oil stocks before this crisis occurred. And we're not jumping back in. That's not where we see an opportunity."
Lago talked about having to figure out demand deferral and demand destruction. Demand deferral means things like people putting off upgrading their technology for a few months while they are unsure of their wealth or paycheck. Demand destruction is more like the effect on the hospitality and travel industries, which will lose business they can never get back. Demand deferral can give the economy a boost when the new coronavirus is under control and consumer confidence returns.
"People might not buy 30 lattes on the first day of next month because they didn't buy them this month, but they probably are still going to make whatever technology purchase were going to make," Lago said.
Ferguson Wellman is looking at buying cruise line stocks because that business is about to take a huge hit. "The stocks have sold off massively," Lago said. "Now it's something we think, yeah, people are going to start traveling again. We're going to use hotels again. So that demand will come back."
Another piece of guidance they give to high-net-worth individuals is, if their objective is to transfer wealth to another generation, without pain, now is a good time.
"We're looking at every opportunity to make lemonade out of lemons here," Cole said.
People who are retiring are training themselves to become dependent on an investment portfolio rather than a paycheck.
"It's particularly scary to see this type of volatility in the market, and we train our clients: Volatility is the price of admission," Lago said. "You can't get the kind of market participation that you've had last year, with over 30% upside, without participating in events like we're experiencing right now, the downside. Hopefully you're properly positioned."
"I was talking to one of the portfolio managers who was there on Black Monday in 1987 and he said that was a little worse, because it was all in one day and this has been over time," Cole said. "There's something a little different with the coronavirus and I can't quite put my finger on it. Because they worry for their personal safety or of others, along with their portfolios, it's making it weird or different from 2008-09."
He says that, as an investment, the 2008 crash was scarier because the fundamentals of the financial system were in peril, with overleveraged banks and overstretched homeowners.
"When you saw Bear Stearns and Washington Mutual closing their doors, that was much worse than something like this that is temporary and will pass."
Added Lago, "The thing we value more than our wealth is our health. This has that combined impact of health and wealth. And so, for that reason, it feels worse."
But it's not because there are bailouts on the way and circuit breakers to stop crashes. "We have a 50-year low in unemployment coming into this, and because of the rules passed after 2008-09, banks are much, much safer, they have more reserves and much more liquidity," Lago said.
"The markets stop panicking when the government starts panicking," Cole said. "The panic that you're seeing from individuals will have an effect on Congress, and Congress will be much more likely to make a dramatic fiscal stimulus available. I think that's pretty predictable. They might do their job and work together."
Make no mistake though:
"The economy is going to be terrible in the second quarter," added Cole. "People aren't going to be going out as much, people are going to be hunkered down. That being said, it does have an endpoint, we will get this under control. We'll move on to the second half of the year and at that point, lower rates, lower oil costs, and more stimulus will get us back on our feet rather quickly."
Far to go
Ric Luyties is Wells Fargo's regional investment manager for Oregon and Washington and is based in Portland.
Luyties has been in financial services for 28 years, most of that time directly managing client portfolios. His clients have from $5 million to hundreds of millions in investments, which Wells Fargo manages.
People have been calling him. "They're wanting to know if we're entering a recession," Luyties told the Business Tribune. "If we are, what's the duration going to be? Is there some sort of impairment to the economy? What is the government going to do?"
In general, he says his clients are cool. They've ridden cycles like this several times over the last 20 years
"We prepare their portfolios for events like this," Luyties said., "No one likes to see their portfolios decline but our clients take the longer view and understand that whether it's a few weeks or a few months or a couple quarters, we're likely to reverse this and be in good shape."
He says Wells Fargo's opinion is that the United States is not going to have a recession this year. "But we're getting closer every day as the impact of the current coronavirus percolates throughout the economy. We're getting closer to that point where we could enter a recession but we don't believe that we are there yet."
Having the oil price crash and the coronavirus pandemic at the same time is a new experience.
"I think the larger problem is the virus right now," Luyties said. "We we've been through oil shocks like in 2015, which did cause earnings for the S&P 500 to go negative for a couple of quarters. But the economy was strong and it wasn't enough of a shock to throw us or the global economy into recession. The coronavirus alone was likely to have tipped the global non-U.S. economy into recession. And now that we have both together, that seems highly likely. And it makes it makes it a little more challenging for the US to muddle through this."
However, Luyties said he doesn't anticipate it will be a long type of recession, like during the global financial crisis.
"We consider the U.S. economy to have been in a recession if it persisted for two calendar quarters," he said. "So, the weakness that we found in March is unlikely to make the first quarter recessionary. Perhaps it'll happen in the second quarter. At this point our base cases that will avoid it, but we're getting closer."
His team has eyes on the two forms of intermittent government action. One is financial: The Fed cut interest rates by a half a percentage Monday and the New York Federal Reserve injected one and a half trillion dollars of liquidity into the financial system. "So, the government, from a banking standpoint, is committed to keeping the financial markets functioning. This will keep those wheels and gears turning so that it doesn't seize up."
As for the fiscal intervention, "That's the president discussing directly addressing the coronavirus by a tax cut," Luyties said. "Putting money in the hands of consumers who could spend to support economic growth. It was done many years ago (under George W. Bush), in the form of a tax rebate."
Luyties also said President Trump's talk of an infrastructure plan might resurface, although that won't have a quick economic return.
He watches general news but, minute-by-minute, his eyes are on the markets.
"We're looking at the fundamentals and the fundamentals of the economy are good. This is hitting us at a moment of strength, not a moment of weakness. This is a glass half-full. We're being hit with this exogenous event (coming from outside the system) at a time of strength, not of weakness."
"This virus has really nothing to do with the economy, it's like a meteor hitting the planet."
An endogenous problem (coming from inside the system) would be like the global financial crisis in 2008, when the housing market was overheated.
"The economy is resting on a much more stable foundation," Luyties said. "Our banking system in particular is really strong, pretty squeaky clean from an asset standpoint."
He said he U.S. economy will recover.
"In terms of in the financial markets, we're likely to get through this and return a prosperity perhaps later this year."
Luyties's clients are not worried about retirement, he said. "They're retired or could retire if they wanted to. Anecdotally, I had a colleague asked me yesterday if it was time to start investing her cash in her 401(k). I think if you have cash to invest, and you have a reasonably long-term time horizon, events like this almost always been great opportunities to be investing."
U.S. indexes at market close on Thursday:
S&P 500: 2,480.64, down 9.5%
Dow Jones industrial average: 21,200.62, down 10% (2,353 points)
Nasdaq composite: 7,201.80, down 9.4%
A bruising day for US stocks. Bad for many; but what if you were planning on retiring this year? Some advice from Ferguson Wellman:
• As stressful as this might be, now is not the time to panic. Going to all bonds now could be permanently damaging.
• Revisit spending goals and overall budget.
• Consider using bonds for cash flow for the next few months; rebalance when the dust settles.
• Consider a Roth conversion
• Stress-test your portfolio in advance of your retirement to understand bad timing risks.
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