A roller-coaster week

March 27, 2020

Fighting through snow, crocuses appeared this week near my front door, right on schedule. It was relaxing to look at them and think that nature has rhythms not to be disrupted.

It was also relaxing to see a real leader this week. Take a look U.S. Army Corp of Engineers Lt. Gen Todd Semonite giving a press conference.

This crisis is the toughest of the four I have invested through. It's tough because of the dance between medicine and economics. They are partners on the floor - lose one, and the other goes down. The crisis has been made so much more difficult by the social isolation.

Let's start by looking at where we are. This morning, my daughter thought the NY Times made a printing error with the unemployment claims filing when she saw that it consumed the vertical distance of the front page (as a point of reference the other bump in the orange graph is the peak of the 2008 Great Recession):

It's higher than that, and everyone on Wall St knows it. It's higher because people cannot get their claims through the unemployment offices. The real number may be double what you see here. It would take two NY Times stacked vertically on top of each other to display.

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I'm going to answer two questions a lot of you have asked this week, and then give you a framework that is effective for dealing with financial crises.

QUESTION 1: Do index funds go to zero?

No, not those that we recommend. In theory an index could get close to zero if it were, say, a 3X magnified inverse index, which is more a form of derivative than an index. But no, the indexes we select for clients do not go to zero. Individual stocks that people own can and do, and this is why in general we do not recommend owning individual stock positions. Individual stocks *within* an index will go to zero, but there are hundreds or thousands of stocks within. Unless Netflix has gotten truly dull, you probably won't notice.

QUESTION 2: Why is the market going up this week when the news is so bad?

Mr. Market, as he is affectionately called in financial literature, has a fickle streak. Mr. Market bounces wildly in periods like this, trying to determine what fair value means. This week the United States $2 trillion stimulus bill looked better than had been expected. Today the market is nursing a bit of a hangover from the week's euphoria.

It's possible that short sellers were covering positions (which forces them to buy shares) and it's likely that balanced funds, often in 401k's, were forced to rebalance by buying equities. The "chartist" investors, emerging from whatever dreamworld they live in, were trying to buy back to the 200-day moving average line.

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If there was ever a difficult time to ignore financial news, this is it. We're all in our houses with less to do, and the markets are swinging wildly. If you can ignore this, you are going to be a great investor, it *does not* get tougher.

Here is a technique I recommend in periods of crisis, to use only if you are having difficulty stomaching this. Peek at your statements. Multiply the number by a certain discount percentage (I don't want to write one down here because it varies by person, but clients, we'll help you with this number). "Trick" your brain into thinking that is your new asset number. If you are ok with it, this technique will help you. Otherwise you may have to consider an adjustment.

Dan Cunningham