Market Strategy

April 8, 2020

Current Overall Investment Advice: The equity markets have risen substantially from the lows set just two weeks ago. The sharp rebound took most by surprise and even long-tenured market strategists are scratching their heads. We at Peterson Wealth Services believe that we aren’t totally out of the woods with this uncertainty but we are starting to see the lights peeking through the fog.  There will likely be another period of selling pressure before we reach the old highs. We have long believed that the media is very bad for your wealth. They spin stories to accomplish their own objectives – that being the number of readers and viewers they can attract. They have no business guiding investors and are outrageously biased in their reporting. Beware of the crowd at extremes! These concepts are all discussed in my book. If you haven’t read it yet, I encourage you to do so.

As to the advice we are giving, we have always encouraged investors to maintain up to six months of living expenses in an emergency fund. Over the next couple of months try to take advantage of any further selling pressure and invest amounts beyond that. Establish a dollar cost averaging program to defer dollars from your paycheck or transfer dollars from your checking account into your investment account.

Conservative investors: Fixed income should represent no more than 50% of the total. Look to re-balance now that assets have drifted apart. Of this, maintain stable value holdings of 10-20 percent of portfolio. This can include money market funds and short-term bonds or bond funds. Stocks are much more attractive than bonds over a one plus year holding period.

Moderate or Balanced Investors: Stick with your plan – consider allocating slightly more to equities. Add some high-yield fixed income in place of government bonds. Consider dividend stocks for those who need income from the portfolio. Dividend yields, on average, are much higher than a 10 year or even a 30 year government bond at this point.

Growth Investors: Overweight growth equities over value equities and large companies over mid and small sized companies. Maintain international and emerging markets as part of your long-term strategy. Increase contributions to 401(k)s and other retirement accounts like Roth IRA’s and SEP IRA’s. Reduce fixed income holdings to no more than 10 percent. Maintain focus on long-term and avoid day-to-day market news.

 

Industry Outlook

Energy: Neutral to slightly bullish

Price of oil unsustainable at $20, level look for rebound. Weaker companies will wash out. Some of the majors may have to cut dividends to preserve capital. Big bounce back in share price expected soon for the survivors.

Real Estate: Neutral

Liquidity constraints, missed lease payments and the retail industry changing to more of a virtual world will be problematic. Low interest rates a plus.

Health Care: Slightly bullish

Vast sums of government money getting thrown at this industry- hospitals, drug companies, services, medical equipment, labs all expected to see large upswing in sales and revenues. Long lasting benefits are expected as the COVID-19 pandemic has put the spotlight on treating and caring for people on a mass scale. Much of this attention is unfortunately attributed to scary headlines and sensationalistic journalism. We believe the number of deaths will be much smaller than originally predicted (100k to 250k) and the mortality rate will be closer to 1% after considering the millions of asymptomatic individuals and cases not reported.  While not in favor of this sector making money on this pandemic from a practical standpoint, we believe people are now going to demand tests for nearly all conditions (coughs, sore throats, body aches) and will want any type of vaccine or potential treatment recommended by the pharma industry. All of this boils down to more money for drug companies, lab companies, equipment manufacturers, hospitals and physicians

Technology and Telecom: Bullish

This sector has the strongest earnings potential considering both near term and long term sustainability through the upcoming cycle of cloud computing and artificial intelligence. We are just now entering the social acceptance and adoption of computer learning and how we will communicate, shop, commute and work going forward. Most of us are in for a big change in how we live our lives. The strongest companies will take market share through innovation, mergers and acquisitions. Paid subscribers will allow cross-selling and be extremely valuable to service companies.

 

Industrials: Slightly bullish

Pent up demand should provide a nice 3rd quarter pop to the supply chain companies. As an industry, earnings fell sharply with the shut down – (except for health care equipment products). We like this sector and feel many companies are trading below intrinsic value. Stock selection is very important however as some companies will not bounce back from this forced consolidation.

Financials: Neutral to slightly bearish

Companies in this sector have faced a significant headwind over the past 12 years starting with the real- estate collapse and great recession of 2007 and 2008. The Federal Reserve has had to inject liquidity into the economy multiple times in this time frame by cutting interest rates. This effectively reduces profits that the banks can make by compressing the spread between interest paid to the savers and loan interest charged to the borrowers. And even though valuations are cheaper than they’ve been in years, there are more attractive areas for current investments. Longer term, we can begin to allocate more dollars to this area very slowly. Existing positions should be reviewed for quality and liquidity coverage ratios. The strongest will survive and do fine as the economy improves and rates move higher.

Consumer Staples: Neutral to slightly bearish

This sector held up very well for the most part during the pandemic – think disinfectants, toilet paper and packaged food. Clorox, Kimberly Clark, General Mills all significantly outperformed the large market indices. As I write this, the S&P 500 is down 22 percent for the year while those stocks are up anywhere from 5 percent to 15.6 percent. Having exposure to this industry is important when we experience bear markets and recessions, as people still buy these products. However, the large spike in earnings for these companies is temporary and as soon as the “crazies” realize that they now have a full year of food and toilet paper stocked up, as well as a couple years’ worth of bleach, the sales surge will evaporate. Don’t expect great gains going forward, but stay diversified and own the best quality companies with strong business models and positive cash flow.

 

To summarize, this has been a trying time and has proven to be one of the most violent and volatile periods in U.S. market history. In times like this it is helpful to remind yourself that investing requires patience and an eye toward long-term prosperity rather than short-term price changes. For every sale order, there is an opposite buy order. Put another way, when an investor makes a decision to sell his or her shares, a different investor is gladly purchasing those shares. In my opinion, the first half of 2020 will prove to be one of the greatest transfers of wealth in a generation. Sellers will most likely miss the majority of, if not all of, any potential market recovery- thereby transferring the wealth they once had to someone else, who will experience those gains for them.

I further believe that in general, policy makers are throwing the entire kitchen sink at the economic recovery. The money will be extremely beneficial to the recovery of corporate earnings and it will have a multiplier effect. In other words, $100 put into the economy should have a stimulation impact 60 to 80 percent more than the original value. The concern in my mind is how we will eventually extract this newly borrowed money from the economy and how we will pay down our ballooning national deficit. As we all know, politicians are not the best at fiscal policy. They are typically unwilling to collectively stand up and recommend a cut to spending or an increase in taxes in order to balance the budget. Once exposed to this pipeline of funds and government aid, people come to expect it, and in general, will not concern themselves with fiscal responsibility. This is a problem.

As to the coronavirus itself and the chaos, confusion and, in some cases, hysteria it is causing, I offer this: Keep your immune system strong by staying positive, doing things you enjoy, and laughing. Isolation truly leads to depression. Paying too much attention to the fear-promoting media outlets keeps our bodies in fight or flight mode, in turn, dampening our immune systems. Many people will get the virus and move on with life without much incident, whether it be this season or in years ahead. By allowing nature to run its course, antibodies will be developed and immunity will be built up in humans just like with every other virus we have dealt with for generations. I firmly believe the emotional well-being of a person is stronger prevention than nearly all other protocols currently being forced upon us. Do your research and consider where the medical community has erred in the past with regards to illnesses, outbreaks and treatments. The human body is amazingly capable of healing from nearly all conditions as long as the mind is free of worry, fear and stress.

All the best,

Billy Peterson, CFP®, CDFA®

 

 

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. All investing involves risk, including the possible loss of principal amount invested. No investment strategy, including dollar cost averaging and diversification, can guarantee your objectives will be met. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Investing in high-yield fixed income investments may involve additional risk dues to the lower credit quality of the issuer. Dividends are not guaranteed and must be authorized by the company’s board of directors. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

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