T2 Asset Management

April 2020 Market Commentary

Well, we’ve been looking at markets for a long time, and this is a new one on us. We have now just experienced the fastest bear market (-20%) decline in history, as well as the fastest increase in jobless claims ever recorded. We had been saying for some time that the market was overvalued and was looking for a reason to sell, but no one was predicting this outcome. We truly hope that our readers had been moving to protect some of their assets over the last year as we advised, but more importantly, what do we do now?

Last month we mentioned that good economic data were now irrelevant as they represented the economy before the crisis. This remains true. Gross Domestic Product (GDP) is looking at 2.1% for the first quarter but does not reflect the current economy. Retail sales shrank 0.5% for the month and payrolls declined by 710,000 jobs. It seems that unemployment claims were in the millions, so once again, our current economic data are useless to us. We had hoped in March that maybe this would be a quick short recession as everyone stayed inside for two weeks. It seems very unlikely that it will unfold like that now.

It truly is anyone’s guess as to how long this will go now, and we would be very wary of anyone peddling total certainty here. Our economy has most definitely sustained a big hit and so far the Federal Reserve and the Treasury are trying to throw a staggering amount of money at the problem to keep us from a disaster. This is the correct move even though we will all have to pay for that later. The nature of what we are dealing with will eventually clear up, but it is foolish to say with any certainty what the net result will be on the airlines, hotels, oil companies, autos manufacturers, restaurants, etc.

So back to what we should do. First of all, many have seen even bond funds take a huge hit during this crisis as there is concern as to whether companies will be able to pay. This has let up a bit in the past week and this might be a good time to ease up on high yield, preferreds and municipal bonds. Even high grade corporate bonds may have some difficulty if this gets too ugly. Good old short-term U.S. Treasuries are a great place to hide until we see what the Tsunami has wrought. We are not saying to run screaming from those areas, but definitely cut exposure during these rallies.

On the equity side, we saw a low put in two weeks ago that had the market down 35% from its all- time high. Of course, even bear markets have bounces and as we write this, the market is down 22% from its peak. Hopefully our readers had reduced their exposure before all this happened and we would suggest maybe a bit more reduction in equities during the current rally. Once again, we may move past this in a month or two, and right now a portfolio that was 70% equity before is down 15% from the peak. If that is moved to 50% equity now and we hit all-time highs again, the portfolio will be almost right at break-even. If the crisis worsens and the market falls to -50%, the portfolio will have suffered a 30% decline.

Just some stock market math and certainly everyone should be careful here about how they handle their portfolios. Some may see that two years down the road this will all just be a piece of history. Make sure you are clear on your strategy and realize that none of us can do more than guess at how much economic damage is currently being done.