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2020 Q2 Market Update


Henry+Horne Wealth Management President Michael Carlin walks you through the second quarter market report. Michael discusses the COVID-19 infected market, how this virus is affecting the markets and what that means for your investments.

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Michael

Hi, this is Michael Carlin, president of Henry+Horne Wealth Management with your Manage the Funds capital markets outlook for the second quarter of 2020. This is a long awaited, obviously much anticipated market outlook. In twenty five years I haven’t been around a more confusing time for investors, for our clients of all kinds. We are very fortunate to be joined by our favorite guests, especially for these kind of matters. Joe Taiber, Taiber Kosmala co-founder. How are you, Joe, good morning.

Joe

Very good. Good morning, Michael. Happy to talk to everybody.

Michael

Thank you. So, listen, I wanted to start with something a little different, a slight anecdote about how things might have changed for you during this shut in. Life has changed for many. For me, my biggest change is this chair right here, this lovely chair, which was only purchased for looks here in my bedroom. It was never to be sat in and certainly not sat in for twelve to 14 hours a day. So I’m finding myself a hunchback. So I’ll be periodically looking to stretch. And if I’m hunching, Joe, I’m trying to break that habit. Feel free to point it out. Just let me know. Give me a little signal.

Joe

The upside of the chair, Michael, is that you look very regal in it.

Michael

So I know I get a lot of feedback about the chair. So, Joe, how about you? How have things changed?

Joe

Life changes. Oh, my. I mean, top of the head immediately, I’ve never spend so much time with my wife and kids and the fall out, both good and bad, is pronounced. So that would be the overwhelming thing that’s standing out. My kids, all teenagers want to see their high school friends, to say goodbye to those going off to college. So very much the upside of things, but the daily grind of being around the family as much as this situation warrants also some downsides.

Michael

Yeah. Yeah. I’m going to say enjoy that. Enjoy those moments with your son, you know. I’m enjoying mine too. We actually did a fun. Covid-19 How to talk to kids about the stock market recently, which will be airing soon. So interesting anecdote that I saw, Joe. Believe it or not, people are booking cruises for next year. So in the last forty five days the online cruise marketplace has a 40% increase in bookings for 2021 compared to 2019.

I didn’t see that coming. And I’m trying to figure out, you know, how much of that is positive versus crazy, because there’s many that speculate a lot about what the future of industry is going to look like but I can’t find many people that are optimistic about the cruise industry. And then I see that. I mean, does that, as an anecdote, jump out at you and slap you in the face like it does me?

Joe

It does. And is probably the first of many questions about, you know, the conversation just nationally and globally. It really is the return to normalcy and the real opening conversation and that sort of thing and how that actually is going to transpire. Nobody has the answer, of course, but things like this are a case in point of, you know, we just don’t really know how things are going to unroll as things, quote, normalize again.

Michael

I’m going to take a quick peek at that first quarter, those first quarter numbers. If you pay attention to your screen. For those listening via podcast, you can always reach out to us at managethefunds.com or manage the funds on social media. I’m happy to send you all these slides. But, Joe, if you look at your screen, you’ll see that the 2019 returns are laid out side by side versus the first quarter 2020.

And what you’ll see is, is that in some areas like small cap international emerging markets, we gave up all the gains that we made in 2019, which was a rather epic year. A U.S. large cap held in with a little bit of gains net. But what a shocking turn of events. You know, so for me, when I look at is the sharp negative returns in the equity market.

I’m looking at the different parts of the bond market and high yield and emerging market debt and global corporate debt down 12% to 4%. Municipals were soft. There was a pocket, a time when units were down 10% due to lack of liquidity. And you can see the lone short guys got hit in terms of those who were trying to get the market right or wrong, both sides. The lone standout was the US treasuries as there was a real flight to quality.

The amount of money that sought US Treasuries as a safe haven was epic. Huge, tremendous, big tidal wave. Any thoughts there?

Joe

Yeah. just big picture. I I think so many things about this whole first quarter, and in March in particular, is so shocking. And to me, one of the most pronounced is, how positive things were heading in to this downdraft. On the back of three Fed rate cuts. Fed rate cuts really happening globally. So monetary stimulus coming in, a kumbayah with China with regard to a trade agreement in January, things were definitely all the way up in through February.

Things were where were just big picture market wise, economically speaking, we’re looking really positive. And then on a dime. On a dime. This happened, you know, so that the velocity and the ferocity with which has happened is just is pretty mind numbing, needless to say.

Michael

So the amount of volatility that we saw on the market eclipsing previous other highs and market volatility, that was confidence shattering to a lot of clients. But I feel like what I could get from clients in our phone calls, in in our meetings, was a different sense of alarm and panic than I had seen before, and I think a lot of it has to do with the fact that this is something that was felt across all spectrums.

This is something that, you know, the shut in brought this economic slowdown to everyone’s doorstep immediately, where in 2008, you know, banking, troubles and banking most hit the portfolio, which is different, very different than this kind of economic shut down, which I think is part of the reason why it’s so jarring. You know, we mentioned, again, the VIX hitting an all time high, you know, taking out the 2008 number, you know, and that leads us into really trying to get our arms around a forecast, a reasonable forecast of what corporate earnings are going to look like going into the year. I’ve heard a variety of different estimates, but anywhere from, you know, negative 10 to negative 50 to negative 8. I mean, you know, I’ve seen it all. I want to have a little bit of a conversation about it. You know, I have a graph here. A chart. You know, we had, you know, peak unemployment rate of 10.8% in 1982 and what went along with it was an S&P decline of 19%.

The last time we saw major earnings declines was, of course, the dot.com bubble bursting of 2000, which this feels very different and the financial crisis as well. So as we’re trying to handicap what these earnings are going to look like. Joe, I’ll just put it on the screen and I’ll let you run with the football from here. It depends upon which sector we’re talking about. You know, there, as you can see on the graph, there is energy, which is you’re looking at a negative 50% projected earnings crunch in 2020 to where a place like tech is expecting some earnings growth.

So, you know, help us kind of, in your opinion, for the data that you see. What do you how do you see this coming together with earnings and where do you think we should be comfortable sitting versus where we were last year and we’re projecting for 2020?

Yeah. Michael, thanks. This is one of those things that that need anybody who’s who’s being honest is going to answer the question with I don’t know, because nobody truly knows  what earnings are going to shape up to be.

What we can do is look back at history and we do know that the average recession, the decline in earnings and the average recession is roughly 30-35%, above 32%. So that’s one thing that we know. Earnings season began last week in earnest and we saw that with the banks for the most part have been one of the sectors that have been very much punished in the stock market due to concerns about their loans that they make going bad, obviously going into default and earnings.

You know, for for the first quarter, most banks were anywhere between 40-45 and Wells Fargo posted almost an 80+% negative first quarter. So they’re really all over the map.

It’s definitely sector dependent. I think one really interesting thing is that the earnings results of this downdraft can look arguably very differently than the economic downdraft itself. And that’s just because when you talk about earnings, you’re usually talking about the S&P 500 and implicitly talking about the S&P 500, you talking about technology companies and health care companies and financials, sort of those three, particularly technology, obviously. So will tech earnings be as damaged as the broader economy? You know, I think the indices, in short, can look a lot different than the broader economy, just because the indices in the weightings of the indices look quite a bit different than the broader economy. So time will tell. You know, and again, I think it’s going to take time.

I think the more important question, honestly, when you’re talking about earnings is what is 2021 going to look like? Because very importantly, that’s what the stock market is pricing in. It’s not pricing in what Q1 earnings were this year or even Q2. It’s discounting forward earnings over the next couple of years. So I think the more important question is what does the reemergence and the reopening and therefore the earnings environment look like maybe in calendar year 2021, too.

Michael

That’s a great segway because we’re we are going to do throughout this podcast is dive into the data and we are going to get into some more granular thoughts about what we’re expecting and how we’re evolving portfolios. But let’s just go ahead and work our way through some data. And of course, this shouldn’t be a surprise, but the U of M consumer sentiment numbers, which again, aren’t fully, fully updated through where we are today in April. But wow, did they look terrible? Largest drop, shortest, largest, biggest drop in recorded U of M sentiment history. And it’s particularly of note because we can’t forget the fact that we are a consumption based economy and based upon how consumers feel is going to dictate and oftentimes how much they end up spending. So we are watching the consumer sentiment. We are aware of  kind of that real notable change. But right now, given that data point, Joe, I just you know, I say we kind of write it off as incredibly bad news, but when everyone’s shut in their home, of course what do you expect? We’re going to need to really see what that data looks like when things start to open up a bit. I would think so. Feel like we can just got to check the box on that being. We’ve talked about it. It’s terrible. We’ll move on.

Joe

Well, yeah, one thing that I think you and I were talking earlier this morning, one thing about retail sales, China’s numbers came out last week. I think an interesting point, just to try to extract or pull some consumer behavior out of this. Retail sales for March in the US was down 8-9%. So a pretty draconian number. But when you when you back out autos and gasoline and food, so look at a core retail sales, March only fell 3%. So, again, that’s you’re opening with the cruise lines. You know, I think there’s an under consumption baseline that will be really interesting to find out where that is. But again, that’s going to really surface in matter today for what that baseline feels like in 2021.

Michael

Yeah, you’re right. That’s a great, great, great point. I forgot about that point. About when you strip out auto and gas, which of course are going to be mind numbingly horrible and they were. We are going to talk about oil a little bit. Everyone’s getting enough Covid-19 information so they don’t need to come to us for the latest health data there. But let’s just look at it from from an economic standpoint and let’s let’s move through it quickly, because my my my expectation my understanding is that the clients that I speak to are absolutely staying on top of the CNN, the the Fox News and or MSN data points about what the Covid-19 numbers look like, but I just want to go through the economic impact of this. I’m going to go through just a little bit here on on the screen. So I’m going to share this. So again, if you see, you know, Covid-19 cases confirmed by country, if you look. Wow. Well, how do the Spain numbers do they just jump off the page? You know, here you’ve got it. You’ve got the US numbers, which which, again, are equally alarming.

But, you know, Joe, I’m just I’m looking at the changing projections. You know, there was a lot that was forecast by our own team of experts a couple of weeks ago. And those projections have come down favorably in the favor of things being albeit still difficult and still challenging. And we do hope that everybody in your family and your network of friends are happy and healthy given this tough time. But the projections were coming out a lot harder, a lot harder and a lot heavier in forecasting the number of hospital beds needed from a quarter million down to eighty six thousand in a matter of eight days, forecasted ventilators from thirty one thousand to half that in a matter of eight days. So, Joe, you know, looking at these projections and I’ve got something else up on the slide here where we’re talking about how to flatten the curve and, you know, we’ll go through some of this stuff in greater detail should you need us to on a one to one basis about the kind of things we expect the government to be doing.

But large picture, Joe, given where we were projection wise and how some of those numbers have come down, back to two things that are a bit less alarming. How do you read what’s going on with Covid-19 right now, economically speaking?

Joe

Yeah. I think you just hit the nail right on the head, Michael. I mean, we the way we’re looking at this and I think this really is just an echoing of the market sentiment over the past, you know, two weeks to three weeks since the March 23rd low. Markets have started to, I think, grasp on to maybe a bit more of a glass half full case. And that’s with respect to to the models and is as faulted and and difficult of a modeling environment that it is, the fact remains that an overwhelming majority of the models, as you, as you said, have been overestimating both the mortalities and the sad stories in the health care infrastructure overload. So fortunately, you know, they’ve been missing to the upside. So I think the markets are latching into maybe a revised reality of what these models have been predicting. Number two, and the four big things need treatments. There’s also advances in the science side of things that have come on line very quickly. And again, sticking to market focus, I think the markets have been latching on to that. The fact that, you know, Gilead, with the treatment last week here at actually University Chicago clinical studies.

So so whether it’s treatments or testing, PCR testing, serology testing. So PCR testing actually for indications of Covid or surreality testing, maybe more importantly or as importantly, certainly testing populations for antibody in the presence of antibodies in blood streams. And some of those numbers are coming out startlingly on the antibody side, startlingly high. Meaning we’re suggesting that it’s the design if it’s run its course and that just backs into a higher potential immunity baked in and maybe a bit more of a confident reemergence of economic activity case.

So all those things combined with the economic case of containment measures, flattening the curve and the success that we’ve had so far, you know, on that front, just balances out to, again, the market sort of latching on to a glass half full, a case very much bolstered by governmental moves.

Michael

I do and I do believe that the market is fairly optimistic on the Covid-19 numbers. So hopefully what we are seeing continues to come through and we continue to get positive surprises there. But you’re right, the Fed, the Fed, how could we can’t do this market outlook without trying to wrap our head around what the Fed has done. The last time we sat down, Joe, we had we used to have short term rates and short, so there was a positive number now. The Fed took that down to zero immediately. The Fed was again being super accommodative,  aggressively so. But my goodness, they didn’t they didn’t stop there. I’ll share my screen again here. And if you look, the Fed has been buying nearly everything from asset backed securities, investment grade bonds, agencies’ munis, providing some needed relief, treasuries, commercial paper repos. I spent a bunch of time talking to clients this past quarter about how disconnected the bond market was and how unusual the pricing was even on some of the most conservative and liquid securities, seemingly overnight. There was such a drive for businesses, business owners, consumers to be reining in and grabbing as much money as they could that it just decimated the bond market. So the Fed did come in and provide some some help and stability there, which is appreciated. And I want you to comment on that. And then also I’ve got here a rather busy chart. But what it what it indicates is that what the Fed was doing here in the United States to provide relief, to inject liquidity into a whole different variety of investments and investment types, to provide that stability with the prices, which helps with what you’re seeing on your statement. It was happening across the world as well.

So, Joe, how do you handicap what was going on, not just here in the United States, but worldwide with federal reserves all over the world?

Joe

Yeah, so as we were talking this morning, Michael, as as unprecedented the supply and demand shock and economic shock that we’ve just witnessed has been, so too as unprecedented as the monetary and fiscal policy response. So, you know, from a monetary side, speaking to the Fed and global central banks, the alphabet soup of programs we’re in was unleashed. And a lot of those know really just programs that were taken off the shelf from the 08 09 crisis, many of them. But even more than that, because they created new programs. They went further. Let’s be clear, they went exceptionally further than the global financial crisis back in 2008, 2009.

Michael

Never and faster and faster. It just didn’t work. There was no delay

Joe

And faster. I mean, and their charge, and I think that the chairman did a pretty decent job of articulating this, their charge was not necessarily to put money in the hands of consumers. That’s a fiscal charge. And businesses. Their charges was really more so to restore market functioning. And you you said this. I mean, markets flat out were not functioning. A high quality Double-A muni bond should have somebody willing to buy it, but it didn’t. And in bid ask spreads where we’re blowing out, and and the Fed stepped in immediately with a massive, massive amount of balance sheet to the point that it’s grown two trillion dollars already. So the Fed balance sheet after the quantitative tightening got down to about 4 trillion and change in that neighborhood, just shy of that, actually.

It’s already grown two trillion dollars in the past four weeks and is expected to probably hit ten trillion, potentially up to eleven trillion dollars. That is only nearly half of the U.S. economy in terms of size balance sheet. So they’re buying everything, supporting markets. They’re unlimited QE and so unprecedented monetary. The fiscal side if you want to paint a little color on that as well, is also unprecedented.

Michael

Unprecedented, yeah. I mean, again, we are accustomed to the fact that nothing is going to get done on Capitol Hill. We just have this basic assumption that there will be so much infighting and so much politicking that no one wants to do this particular administration any favors to make them look good. But it got to such a degree that they were able to pass historic legislation and it certainly is creating a lot of unintended consequences.

I mean, I have clients that own businesses where some of their employees, those that are earning less than about forty two thousand dollars a year are better off financially sitting at home rather than working. Which is putting my clients and their businesses at risk. Those that are still open, those that have essential businesses, where they still need to get work done, but they’re having a hard time keeping the people in the seats. There’s unintended consequences everywhere.

We’re also seeing that even like the PPP program, there was a this morning there was the first lawsuit brought out that the Chase was picking favorites on who to give PPP loans to. There’s always gonna be unintended consequences, but the extent to which that we saw the Fed and the government step in should provide a significant buffer to the downside of what we would have seen had there not been any fiscal or monetary stimulation. And I look in 2008, in 2009, you know, that we had kind of an economic growth trend and there was the recession but when we were recovering, there is kind of like a gap difference. That’s about a 5% gap where we were on that growth line versus where we would have been had we not had the recession. I wonder. If the speed with which that we injected all that liquidity, if it’s slims the gap, too early to tell, but it certainly puts us on the right track to believe that the economy is going to rebound faster and better than it would have without it by a large margin.

Joe

That gap that you just referenced, Michael, I think is really important. Again, something else we talked about this morning, which is a quick definition. That’s the output gap. So so the difference between economic potential and actual realized economic activity or in other words, economic slack and that output gap and to the extent that the fiscal stem and monetary system actually come in and mitigate that or burn that slack off, we think that’s going to be a little while.

You know, we think that gap is going to be there for probably a couple of years. And there’s a takeaway. There’s an investment take away to that. That investment take away means that we aren’t at risk despite this floodgate of liquidity. We aren’t at risk in the near-term to inflationary pressures because there’s slack in the economy that needs to be burned off. And that means we aren’t at risk of interest rates shooting higher again, despite the floodgate of liquidity.

No, anytime too soon. So your bond portfolios, albeit yields, are low and not exciting. We don’t think they’re at substantial risk right now. They’re just underwhelming, absolute returns for the time being.

Michael

So we’re going to we’re going to have to at some point really break down, Joe. I want to do something more long form on this topic because clients of all different educational levels. To them, the most basic to the most learned clients that were former, you know, big business people that are in our network. They all believe in this. And they all have this basic economic understanding to varying levels, again, where money creation to that degree to them equals inflation. And we haven’t had it. And I know that the slack is a component. I know that there’s a component of the fact that given that everyone is kind of doing the same thing at the same time, not just our own central bank, but central banks across the world are doing it. It’s helping muddy those waters a little bit. But my gosh, Joe, at some point you would have to think that all this money creation would lead to some unintended consequences. And the question is, is when and to what magnitude we would feel this thing. That’s a whole separate thing. That’s a whole can of worms we can open up, but we promise we’ll get there.

I wanted to tilt a bit on unemployment. It would make sense. We need at least address the magnitude of which this change has happened. Weekly jobless claims is now a new famous chart. Go back to the 70s, 80s, 90s, you can see indicated on the screen to the financial crisis here. We had a cresting of unemployment claims to the magnitude with what we see here. And by the way, I couldn’t put it to scale because the numbers way off the screen. Twenty two million jobs lost through April 16th.

And we got news over the weekend that, you know, places like Disney laid off 100,000 employees. We’ve got some more bad job numbers coming. And I look at it from this perspective in that we created twenty two and a half million jobs since the Great Recession. Joe, we’ve lost 22 plus million jobs over the past number of weeks. It’s easy for investors and clients to hear and see that and to say, you know what, this is horrible news for a consumer consumption based economy. And I know this is an aspect of it because it’s it’s temporary. You want to break down for folks why they might not need to be jumping out of their window quite yet.

Joe

Yeah, it’s again, yet another mind numbing statistic that’s come out here. Twenty two million jobs. The question, I mean, is in terms of how we’re looking at that, the question really is how many of those how many of those people who have filed will be back to work in 30 days. In 15 days and forty five days. 86% of March’s total job losses were categorized as temporary. So what does that mean?

That means that the time between the employee and the employer is not separate. So an employee can step back in and a temporary unemployment filing scenario and come back in at the same salary level, same benefits level as if that employee never left. So how many of the twenty two million go back to work is the real question. And the answer to that is how long? Probably how long we stay shuttered and how well the PPP and other business lifeline’s actually how well they work.

So it’s a stunning thing. The weekly numbers we are watching. 41 of 50 states anecdotally, last week reported lower jobless claims than the prior week. So a little silver lining potentially the peak obviously happened here, maybe in the front end, we would expect it to continue to taper off as the reopening conversations ensue.

Michael

Yeah, you know, you’d expect that those that are more tilted towards tourism and travel, those kinds of industries, Florida, California, energy base states like Texas, you’d assume that those states are going to be worse. They also tend to be your larger employers. But I like that anecdote. I’ll take it as a nice positive anyway, you know, but we’ll have to we’ll have to wait and see.

I did want to turn our attention to where I think we’re going to have a coming opportunity in the coming months and quarters. And that is within, you know, commercial real estate. And I did mention, you know, we’ve got this commercial mortgage backed bond issue that has cropped up. And I don’t think that’s going anywhere anytime soon. And I think that this is, again, another 30 minute conversation in and of itself. So I just want to hit the highlights. And for those clients that have specific questions, we’re happy to break it down for you. But. I think that there’s going to be a coming opportunity within real estate. You know, you’re gonna have. You’ve got large. You can even look at grocery anchored, tenanted real estate where, you know, 80% of the properties are the grocery and the remaining 20% are those other ancillary businesses where many of those are either fallen vacant or already, they’re not able to find new tenants or they’re under significant pressure.

You’ve got a lot of retailers that are gonna be challenged. I’m looking at the commercial mortgage backed rates for things that are, you know, double B, double B rated and 23% dislocation. What we’re seeing there in the double B. We’re seeing reduced sales on the commercial side. It just seems to me that what we may end up seeing longer term is a situation where you’re gonna have tenants that can’t pay, properties that are falling, vacant yields on real estate portfolios dropping and or going to zero, creating opportunities for us to kind of proactively get in there, get involved in an asset that tends to do well when you have high inflation because rents go up and property values go up. I just feel like that in combination with the fact that interest rates are so gosh darn low that we’re going to need to turn our focus on real estate at some point in the future.

Joe

We’re paddling in the same direction. You know, for sure. I mean, again, so much of this comes down to timing. And the default cycle that’s coming. And there’s no question you’re right. No question that it’s coming because checks will not get into every single needing or worthy businesses hands in time to forestall the mortgage payments, loan payments, lease payments, et cetera. So defaults are coming. They’re going to be pronounced in the real estate side, commercial real estate in particular. And viewing that as a buying opportunity is no question in distressed situations across the board. There’s no question that that’s the right place to be looking right now, that skating to where the puck is going, if you will.

So, you know, those sorts of things are definitely things that we’ll be working with you specifically on finding the right way to take advantage of those opportunities. And something that we see. That said, the amount of money that gets into who’s hands at the right time and the duration to which we end up staying closed is going to determine whether you’re catching the proverbial falling knife or or you’re coming into an entry point that would represent some longer term, you know, attractive valuations, too. So it’s it’s a needle we’re trying to thread, but definitely we see that as an opportunity longer term.

Michael

Yeah. At the moment we’re content waiting on the sidelines there, which we’re just about to get to where where we are portfolio wise. And I’ll share a couple of different things with you here on the screen. I can’t quite try to time the market. I’m going to be really clear, we can’t always be right. We won’t always be right. But we do have a really nice history of reducing risk. Certainly we’ve done that a number of times at a good time. We added risk most recently. We’ll talk about that second year, Joe. But. Some clients, some clients are asking, well, why do we have any money in the market right now? And it’s because we can’t completely take you all the way out unless we see something that is so obviously dislocated that we need to completely get away from that train. But look at this chart here.

If you took that March low, March 23rd low as as a sign, you got to get completely out of the market and we had some clients call and ask if they should, you would have missed some of the best 10 weeks and one of the best 10 weeks since 1928. And by the way, the market is up, what, Joe? Almost about 30% from the bottom. You know, which has been incredible. And again, if you look at the severe draw downs and recessions, I mean, you know, timing the bottom, not advise, you can go case after case after case in that it doesn’t pay to get completely out of the market.

But what we do try to do is oscillate where we’re trying to remove risk or add on additional risk while protecting client portfolios. You know, most of our clients, their first objective is capital preservation, which is essentially don’t lose what I’m giving you. The secondary objectives could be income and or growth. And certainly times like what we’ve been experiencing, that number one capital preservation goal comes to mind for most. And we’ve experienced really good results mostly given the fact that our largest exposure for any one area of the market going into this economic environment we’ve been in, was municipal bonds.

So that helped shield our clients significantly. We also made some other moves, Joe, with you and team that turned out to be really well. You want to you want to highlight some of those. You have some of them handy.

Joe

Well, yeah. I mean, the big picture here, just in terms of adding risk and reduced risk. Right. So when markets are feeling extended or for one of various reasons, you can look at managing your risk and just being judicious about taking it down, which was really the trend throughout 2019 into 2020. But staying still pretty constructive because what I think the most common mistake investors make is…I paint this analogy of you’re standing on the beach and you’ve got waves lapping up against your shins. You know, you’re standing right there on the beach. You’re looking straight down at the waves hitting your shins. But if you just look up and take a look at the horizon, you see really smooth water out 12, 18, 24 months. And that’s probably the most that’s probably most violated tenet of investing that people make. And it’s probably the one that is the most important to be cognizant of. That being not getting too mired in near term volatility or the water hitting your shins, but maintaining a focus if point A is today, point B is the horizon. Point B is even two years out and a show of hands in late March at our investment committee of will the market be higher or lower 24 months from now, 18 months from now, there was an overwhelming show of hands that the market was gonna be higher in late March of this year. Looking at 2021 2022. So time horizon is paramount with regard to how you judge your investing. As with your models, Michael, for Henry+Horne, we never pick the bottom of the market, but we did add to risk in your portfolios just by happens chance, as you know, on March 23rd. That’s pure luck. Beginner’s luck.

Michael

Joe, We know what we’re doing. We nailed it but that beyond that worked out great.

Joe

And it was important and it was intentional in a couple of ways. One, it felt like capitulation selling. For those of you who are watching the market that week, that was the week that the fiscal package was getting kicked down the road and it was not going to get done, but it was supposed to on Monday. By the end of the week it still wasn’t done. And we had capitulation selling without question, massive moves down in the market, et cetera, et cetera.

So adding to the market in a time that feels like capitulation selling and then how? So what we did is we sold very high quality safe and bought index equities specifically. Now going with indexed equities. A, they’re cheap, but B, the rising tide coming off, lows like that lifts all boats. Importantly, including businesses that might have more suspect balance sheets and the like, that just happened to be included in the index. So we’re really intentional with taking money off of very short term, very conservative, just judicious amounts, of course, but then adding those two indices specifically. So passive markets. That’s one of the trades we made just done in the first quarter.

Michael

Yeah. And just to highlight this other thing. This other note is that those are part of the market. You know, now our largest exposure in equities is small and mid-cap, where it had not been anywhere near close to that. And it just happens to be the greatest small mid-cap short term run in market history. But OK. You know, I mean, rather be lucky than good, I guess. But that was that worked out really well.

So I’m going to get into cash in the sidelines, oil and then wrap up. So cash on the sidelines first. I just want to make a note that we see that there’s cash on the sidelines, 4.22 trillion as of last read that I saw. It eclipses where the cash piles were as of 2008, which were under 4 trillion. That cash at some point, Joe, has got to find its way out of 0% earning money markets and or cash funds. It has been a remarkable turn on the dime where money markets not that long ago, just a few months ago, you were getting 2% or more. And you got to see that again, dry powder got to find its way home. At some point. We’d like to think that’s part of our thesis as to why the market moves higher. You know, certainly maybe not in the immediate term, but that is going to provide the additional bounces and surges that we need as the amount of cash that should be sitting in money market normalizes. And then the amount of money that should be looking for growth again normalizes as well. Yeah.

Joe

Pent up demand. Pent up demand. So cash on the sidelines. Michael’s right. Cash on the sidelines as measured by M2 or money market funds or holdings and the like at record highs. So that is no question. That’s pent up highs and holding a little bit of dry powder, which we are your models right now. We do have a bit of cash. So that warrants some mentioning.

Michael

Looking at my history, you know, I’ve never held more as a percentage of client portfolios. We are looking for the opportunistic areas to be investing. So for us, we continue to be defensive. Market’s down today. We’ll have to see what happens tomorrow and what the rest of the week brings. But we are actively looking for opportunities. Which brings us into oil and energy. This morning, oil had a day like none other down to 11 bucks a barrel. If you look at future future contracts for oil, you know, obviously it’s higher consecutively month after month after month. But this is an eye poppingly bad number because we do we finally achieved some levels of energy independence, creating great energy economy here in the United States. And then this has to happen. We’re producing too much oil. We don’t have anywhere to put it. It’s good from the fact that, you know, for consumers that whoever is filling up their tank, I don’t know anyone. But for those that are filling up your tank, they’re doing it for for less. But but, man, like we have started to put a little bit money in energy, which I’ve seen. And we’re gonna continue to look for opportunities. We know we’ve identified a couple of energy companies as a part of a Covid-19 portfolio in an energy ETF. So I think we’re starting to do is see some I mean, just again, capitulation selling here where we’re taking a step in.

Joe

Yeah. Energy is one of those things that we think long. Again, looking at the horizon, not at your shins, on the standing on the beach. That’s one of those things that energy prices just globally cannot survive. Energy companies cannot survive at $12. So they’ll they’ll all go bankrupt. The picks and shovels as well as the exploration of production companies. So the lifting costs virtually across the board, particularly here in the US, the average lifting cost per barrel of oil in the US across the Texas energy patches, the low 50s. So, you know, so I know there are properties that could produce profitably in the high 20s, low 30s, but the average is actually up there north of 50.

So Russia needs it higher. Saudi Arabia needs it higher. The United States needs it higher. Therefore, we do expect production cuts to eventually push oil back to a profitable level for all producers. The forward curve does suggest that. I mean, the forward curve looking at WTI twelve months out, the forward curve is suggesting Brent or WTI, US or non-U.S. oil contracts are suggesting 40-75% higher levels than where they are today. That doesn’t even include today’s move as well.

Michael

Yes, sure. I’ve seen that before. I’ve seen it before. Even when oil goes super low, you do see to be higher in later months, but we’re gonna have to see. So, again I just want to be really clear. We are not making a blanket recommendation. Anyone listening that they go ahead and use this as an opportunity to load up on energy. But for our clients, we are with a lot of careful diligence and we’re paying attention to total exposure while maintaining the capital preservation as that number one objective for most US effort disclosure, we are feathering my new favorite word, feathering our way into energy a bit.

So again, all this is leading us to hinge on the fact that how we have kind of this great reopening with the great reopening looks like after the great closure that we’ve been experiencing here over the past number of weeks. I’m not going to ask you for a prediction, but it just seems to me, Joe, that, you know, as the economy comes back online over the coming, if it happens in weeks or months, that sense of relief will meaningfully improve people’s economic outcomes, likely consumer spending.

It’s the kind of thing that has the good animal spirits across lots of different areas of the economy. Is there things that you’re looking for, the way that you look at reopening that you’d like to share?

Joe

In terms of the magnitude, again, I can’t pretend like I have any insight because I’ve never been here before. You know, I wasn’t alive in 1918, 1919, when the Spanish flu devastated the US and the world. But I do know that that was followed by the roaring 20s as well. So it’s really going to be difficult to handicap. I think the stock market is beginning to handicap it today, you know, and over the past several weeks, obviously. So I think. But time will tell. I think we’re going to have anecdotal stories like the cruise lines booking up for next year right alongside hesitation in some pockets.

Some industries hesitation to return to normalcy, you know, at the same time. So I think it’s going to be in fits and starts more of a not a V-shaped recovery in consumer behavior, but rather a Nike swoosh style recovery and consumer behavior or something like that.

Michael

Man, wouldn’t it be. It would be great to see a V-shaped recovery again. Sharp down, sharp up. But but again, that swoosh is what most of the PE folks that we respect the most. Joe, you included have been talking about.

So listen. We killed it. We went long. We always seem to go along. We have expectations that we’re going to try to go shorter and we try. So this has been your Henry+Horne Wealth Management second quarter 2020 market outlook with Joe Taiber, Taiber Kosmala. Thank you. Joe, you were amazing, as always.

Joe

You’re welcome, my pleasure, Michael. Always a pleasure to work with you and I appreciate all your clients.

Michael

Thank you. And again, if you need to find us, we’re at manage the funds on social media. Managethefunds.com. That’s it for today. Take care and have a great week. Bye.

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