“When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational.” - George Soros
It’s getting hot out here. No, I am not referring to the weather, but instead I am commenting on our collective emotions. Over the past few months, many of us have been on lockdown and have not seen family, friends or co-workers. Businesses are closed. People have lost their jobs, are without income, and are sitting at home. Adding fuel to this fire was the shocking and inexcusable murder of George Floyd, by Minneapolis police officer Derek Chauvin.
We are sad, angry, disgusted and confused. We feel helpless. It shouldn’t be a surprise many people of all stripes felt the need to protest, to be heard. They weren’t going to stay inside their apartments, condos and homes on lockdown and sit this one out. Most people get it, but most people also will never support anarchy, looting, violence, and indiscriminate destruction. Safety of our loved ones, our life’s work, our livelihood is what matters to most of us. And this is where we are now.
Emotions are good for getting people fired up, particularly when there is something to be sold. However, they are generally counter-productive when making judgements of consequence. Today, we are trying to balance out the risk vs. reward of opening things back up – commerce, schools, recreation. It’s a trade-off, and no one really knows what is going to happen.
Managing money, like COVID-19 is similar in that we are making decisions today about an unpredictable tomorrow. Howard Marks, co-founder of Oaktree Capital Management is one of the sharpest minds in the investment management industry. I consider him the go-to authority on risk and uncertainty as they relate to markets. He wrote the following memo (click link) on COVID-19, but really it is more about how to think critically, read, and make decisions with imperfect knowledge. It is a little long, but I believe well worth the time spent.
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Markets are melting up. The Fed is committed to keeping monetary policy easy, our government has opened up the fiscal spigot, and corporate fundamentals are improving as lockdown restrictions have begun to loosen. I am not surprised to see the US stock market where it is, however given the magnitude of the rally over the past few months, it could make sense to shift a little money around.
Over the past week, we took a few chips off the table in US large capitalization technology and increased exposure to long term US Treasuries and to a lesser extent long term US Corporate Bonds. The back-up in long term yields moved to about where 30 year Treasuries were trading around the Fed’s March quantitative easing announcement, so I figured those levels could possibly serve as good yield resistance. From here, I am still generally constructive across the board and would use any decent sell-off in stocks to add/shift exposure into risk. With that said, bond yields - intermediate and long-term, risk and riskless will likely continue to benefit in a low interest rate, low volatility world given the Fed’s commitment to keep rates lower for longer. I think it makes sense to see both yield curve and yield spread contraction continue along, that is until we see the Fed begin to change its tune, which could be quite a way off.
Sincerely,
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.