The S&P/ASX200 index finished up 4.6% last week, but it petered out towards the end and the lead from Wall Street is weak following a loss of 1.5% in the S&P500 on Friday. Despite some strong weeks recently, the MSCI World Index of global stocks is down 25% from its 23 January 2020 peak.
The damage caused to returns by coronavirus is evident in the one-year numbers to 31 March 2020. Despite good performance in 2019, the S&P/ASX200 Total Return index (including dividends) is down 14.4% for the year, and even worse, the A-REITs sector (property trusts) lost 31.3%. Property is supposed to display defensive characteristics. The small caps index is down 21%.
On the life support package, the $130 billion wage stimulus is astounding in its generosity. Spent over six months, it's equivalent to the annual budgets for defence, education and health combined. A cafe owner told me a casual dishwasher who was paid a maximum of $60 for two hours work a week for the last 18 months now wants the $1,500 a fortnight payment.
The AFR reports that of the nation's 81,400 sales assistants, 72% work part time with an average weekly income of $451. The cafe owner doubts the dishwasher will ever return as she will save so much in the next six months. A 100% wage coverage up to a $1,500 cap, not a flat rate, seems more appropriate, or are wage increases paid by the government at a time of mutual sacrifice simply an unintended consequence?
The Grattan Institute commented on the stimulus:
"A broad wage subsidy will also make it harder to shift workers from idle sectors (where their pay is subsidised) to expanding ones (where it won’t be). No doubt more wrinkles will be found, and exploited, in time. But given the imperatives of speed and scale for these economic rescue packages, these imperfections are tolerable."
We asked Shane Oliver how the $200 billion of stimulus will be funded and whether there is any limit to the largesse. Yes, the unprecedented government fiscal response was needed, but there are future consequences which mean the amount must be fully justified and targetted.
Governments which have pushed hard for decades for Australia to become a market economy, with open borders, budget surpluses and a tight rein on welfare, have thrown away firmly-argued principles. Newstart (now JobSeeker) was held firm at about $550 a fortnight, which was clearly inadequate but apparently all the country could afford. Now it's doubled as JobSeeker and tripled as JobKeeper. Desperate times, indeed.
PM Scott Morrison is making incredibly tough decisions in the most testing of circumstances, and he said:
"Our goal is to protect the lives and livelihoods of Australians, to protect and preserve the very economy that we will depend on so significantly in the months ahead, and on the other side as well, for the generations that will follow us out of this. Many countries, in the months ahead and perhaps beyond that, may well see their economies collapse. Some may see them hollow out. In the very worst of circumstances, we could see countries themselves fall into chaos. This will not be Australia."
Former Governor of the Reserve Bank, Bernie Fraser, said on Tuesday:
"The packages that have been put together in recent times are very expensive. There is going to be an awful overhang of debt and at some point there is going to have to be a bit of reckoning with that and some winding back."
This week, we also tap into comments by the legendary investor Howard Marks, who in his latest memo to clients concludes:
"I would say assets were priced fairly on Friday for the optimistic case but didn’t give enough scope for the possibility of worsening news. Thus my reaction to all the above is to expect asset prices to decline. You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments."
Investing requires a plan for decades not days, and markets are moving 5% to 10% in hours at the moment. The US is shaping up as the main long-term economic problem, as the state-run responses and ambiguity of the President's position means lockdowns will be inconsistent. New cases and deaths will occur for a lot longer than the three to six months everyone is hoping for.
The assumption of unlimited demand for US Treasuries is also dangerous, as Professor Tim Congdon of the Institute of International Monetary Research says:
"The market in US Treasuries may be the most liquid on the planet, but that does not mean it overrides the laws of supply and demand. Investment institutions’ capacity to absorb that volume of debt – at current yield levels (in the 10-year area) of under 0.7% - must be in doubt."
In a humanitarian context, the most worrying consequences are for the billions of people in Africa, the sub continent, the Pacific Islands and parts of South America and the Middle East, who do not have access to clean water and health facilities. Many live in slums, need to work each day and cannot self-isolate. The world is staring down the barrel at millions of deaths. The Worldometer website is a great resource for accurate statistics.
A bear market rally?
We saw a strong stockmarket bounce from the initial fall, an impressive recovery of 15% in Australia from the 23 March low to yesterday, but rises always happen during bear markets. Overall, the S&P/ASX200 was down 24% in the March quarter.
Buyers attempt to find the bottom after a sell off as stocks look cheaper, the market rallies until there's more bad news, and the bear continues growling, as it did in the GFC. It's easy to forget how often markets improved during a multi-year decline, as shown below.
S&P500 falls and rises during GFC
Source: Jamieson Coote Bonds
The blue lines show the initial fall from October 2007 to about March 2008, followed by several months of recovery. It was not until September 2008 that the market really collapsed.
Rather than picking tops and bottoms of markets, more important are the words of Nobel Laureate Daniel Kahneman. He says the key to good investing is:
“ ... a well-calibrated sense of your future regret.”
Since most people dislike losses far more than they enjoy gains, I believe market conditions call for a defensive stance.
We are now publishing most days to the website
Firstlinks is receiving more articles than ever, too many to include in the weekly newsletter without making it longer than the bible. So we are now publishing new pieces to our website as they come in. Please visit there regularly for the most up-to-date contributions.
This week, we feature John Reckenthaler's explanation of the four stages of a typical bear market, and we are somewhere between two and three.
Two further pieces on the virus: Gofran Chowdhury says this is a good time to adjust investment portfolios, while Campbell Harvey shows why small to medium businesses will bear the brunt of the coming recession. Also loaded as an extra on the website, Frank Uhlenbruch provides a chart illustrating each bear market is different.
On managing SMSFs, Graeme Colley says SMSF trustees need to realise their Investment Strategy is under scrutiny, while Alex Denham explains the rules for accessing money from super at a time when many people will be cash-strapped.
On a brighter note, Mark Williams looks with optimism at how technology companies make not only good investmennts, but they also contribute to a cleaner planet.
Legal firm Foulsham & Geddes has provided a checklist for companies, directors and maybe individuals to follow in these unprecedented difficult conditions.
Two White Papers hot off the press with new views on coronavirus. Western Asset calls the Fed stimulus initiative a game-changer in ways we do not expect, and MFS Investment Management says panic is the enemy, and disolcations throw up strong investment opportunities.
Morningstar is seeing a dramatic increase in traffic through its newsletters and website, including record sign ups for its Premium services as investors seek independent commentary. For a free four-week trial, click here.
Graham Hand, Managing Editor
Featured Articles
How $200 billion is magically created - Shane Oliver
Australia is in a relatively good position to borrow $200 billion, with the RBA using printed money to buy bonds in the market. The long-term consequences are better than the alternative. Read more…
Howard Marks' latest on 'Which way now?' - Graham Hand
Howard Marks is the largest investor in the world in distressed securities. What does he think after checking the virus positives and negatives, and how much has he changed his mind in only a few days? Read more…
Four stages of a typical bear market - but is this typical? - John Rekenthaler
Bear markets caused by recession fears follow a pattern, but we have never seen anything like coronavirus. If financial stimulus and medicine prove ineffective, all bets are off. Read more…
Small business in path of COVID-19 tsunami - Campbell R. Harvey
The turning point in this crisis will be when the number of new COVID-19 cases starts to decrease. Until then, can we mitigate the damage to businesses and the economy so that we can snap back? Read more…
Why technology stocks are good for the future - Mark Williams
Over the long term, the technology sector has a vital role to make the essential transition to a more sustainable global economy and a cleaner planet. We highlight a few names with strong prospects. Read more…
Avoid complacency with your SMSF's investment strategy - Graeme Colley
Many trustees of SMSFs have become complacent about vague Investment Strategies, but fund auditors and regulators are paying far more attention. Ensuring your fund complies requires some simple changes. Read more…
How an SMSF member can access cash under COVID-19 rules - Alex Denham
The wide range of measures introduced due to COVID-19 include relaxation of some superannuation rules, giving some people access to cash. But watch other rules as it's not a super open-house. Read more…
Six steps in COVID-19 emergency plans for companies - Foulsham & Geddes
Businesses and directors must take steps to deal with new restrictions as a result of COVID-19. Here are six actions all companies should consider in these trying times. Read more…
Volatility is the new normal, so it’s time to adjust your portfolio - Gofran Chowdhury
The impact of COVID-19 on investments shows there's no place for complacency in a world of VUCA (volatility, uncertainty, complexity, ambiguity). How often do you stress-test your portfolio? Read more…
Sponsor White Papers
Panic is the enemy - MFS Investment Management
COVID-19 is leading to unprecedented economic destruction across the world. While the human and financial cost will be enormous, dislocation also presents opportunities. Investors will need patience and a long-term horizon to benefit. Read more…
The Fed’s latest initiative is a game-changer - Legg Mason
The Fed policy initiatives introduced in recent weeks together represent a game-changer for the economy - in ways that go beyond what you might think. Read more…
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