Good Morning,

  • On Monday morning, the VIX shot past 62, closing in on record panic.
  • The current decline in stock prices seems tame compared (overall) to other periods of panic. It just feels worse because it is fast.
  • Systemic risk is still relatively low, especially in the U.S. market, and liquidity is more than abundant.

The good news about investing for the long haul it that with patience, discipline and an openness in ones view of the horizon ahead, great lessons can unfold.

Today, as the markets are set to continue their gyrations in response to the waves of COVID-19 media coverage, it might be helpful to think through the “why’s” of the February/March experience.

The fall from record highs and running out of people to fill jobs – to a near “bear market” price correction and concerns over jobs loss has been a steep example, at record-setting speed, of the forewarned roller-coaster ride ahead.


Some of the why’s arise from the tech world.

Some of the why’s arise from the financial product selling world.

Some of the why’s arise from pure emotional triggers to overwhelming data points.

The effort today is to try to step out of the “rinse and repeat” cycle of angst over the last four weeks – and look at a logical rundown of the events and reactions. This is not to suggest these are all the answers. Just a sharing of insights – which I’m hopeful may help you look beyond this latest event.

The Tech World

Algo’s, AI, “black boxes”, high speed bot execution, parallel direct connections – they are all about speed and letting technology map (at lightening speed) what are effective learned emotional responses investors make.

Like it or not, it is a “thing” which we will all need to accept as part of the fabric of the investing world of the future. The genie cannot go back into the bottle – but it can be aided by some acceptance and understanding (read: patience).

The net effect? Speed – both up and down – is here to stay. It feels like dislocation. It feels far more scary and numbing than before. It feels like “something worse” is happening when it takes 15 trade sessions to do what it used to take a year to accomplish.

The good news? It is more about the recognition that one can, does and will see this on both sides of the coin -to the upside and downside.

Financial Products…

…ah yes, ETF’s. The greatest thing since sliced bread. Like many things we have witnessed, Wall Street creates lots of stuff which often finds it has a life-cycle. My hope is we are seeing the waning days of the ETF world. New products and packaging, designed to “make it easy”, often leave a mark on the investment landscape.

First -there is no easy. If you ever feel there is, then you are likely not recognizing there is always risk.

Second, ETF’s were sold for years as a tool for “passive investing” – with two primary differentiations from mutual funds – “cost” and the idea that you can buy or sell intra-day. The latter aspect tends to be the culprit when the dark side unfolds.

The possibly overlooked fact: There is no such thing as “passive” investing. Sure, it feels like passive as markets rise. In a panic or crash, it becomes even more intense than active investing. It becomes the straight-jacket wrapped around you as you pull the ripcord.

More than 175 ETF’s, for example – own Apple. The force of panic will be felt – no matter the financial conditions of Apple.

All those tech tools above know precisely what levels of pain trigger what levels of selling for the crowd. In milliseconds, they read footprints, order books and layered stops. The bots know what levels of outflow are at the exit door on stocks and what levels of demand are flooding the hallways of bonds. This is not something to fear – but instead accept. I’ll share why further down.

We have witnessed all of the elements we have covered often about ETF’s. When someone sells 100 SPY’s and buys an equal amount of TLT, it appears as only two trades. Instead, without perfect matches, it is thousands of trades in a second. In the panic of the last 30 days, the illiquidity triggered by these waves of everyone trying to do the same thing at the same time has led to much of the speed we have watched unfold.

Just remember – yes, there is a buyer for every seller. But, never forget the often left out portion of that sentence:”at a price”

And Last – Emotions…

I wish so much that this part did not have to exist. Don’t get me wrong – it is a required part of the fabric. We must have all we experience in the markets (good, great, bad and terrible) -and we must have it for the remainder of our investing lives- in order to produce the historical and future rates of return.

Yes, that means what we are watching now is a requirement – the garden which seeds the opportunity – for what we will gain in the future. I just hate knowing the emotional toll these temporary windows can extract on many as they unfold. This too shall pass –

That noted, there is an avalanche of investing history, which proves beyond the shadow of any doubt, that long-term investors must eventually accept that volatility is not risk….time is risk:

No one has any idea how far the virus will spread and / or what the total economic and social impact will eventually become.

We do know that volatility is what causes emotional reaction. In a well-managed plan – which you should have – we work to help clients recognize they cannot let emotions drive decision-making processes when it comes to portfolios, etc.

Market panics are those triggers. The chart above shows the long-term impact of permitting emotions to take control.

When investors have been scared out of markets (and their plan) because of a volatility event and then, subsequently try to “time” when they should get back in, they have consistently and dramatically impacted their pathway to successfully build wealth for future goals and lifestyle.

Note above (chart from Tocqueville) that investors with no crystal ball, but a long-term focus through thick and thin, averaged 5.6% annualized returns over time by staying invested andriding out all of the most jarring market selloffs.

The stark reality though is this: By being out of the market on the 60 best days of the last 20 years, investor returns fell into a negative contraction in value – posting a loss of 7.4% a year!

That is a 13% annualized relative performance swing that can and will, most certainly, determine the outcome of the financial legacy for your wealth plan. It never feels that way during the emotional seizure however.

I have stated this often – the best advisors are paid to manage client’s emotions – not money. Investing over time, with the proper team and plan in place, tends to take care of itself. The emotions are what need to be monitored and addressed.

A Bit of History

Back in October of 1987, I was five years into the business, sitting at my desk in Atlanta – typing on my FIRST desktop computer. It was an IBM, with a tiny 7-inch green color monochrome screen with a dot matrix printer. It had a 35MB hard drive.

The Sunday night before, October 18th, I did not sleep well. I remember thinking “tomorrow is going to a struggle.” And indeed it was, as the stock market went on to lose 22% of its value in the span of just 6 hours.

The Crash of October 1987 shocked the world. What many may not recall is that in the midst of all the fear, panic and turmoil, it didn’t precipitate a recession. Indeed, real GDP growth in Q4 ’87 was a stunning 7%.

Today, we are perceiving in the news that massive fears are gripping the globe and our markets. For sure, much of this fear is behind the current selloff, but there is also something tangible to worry about, and that is, of course, the potential of a virus – with roughly 50,000 current cases – to upset – and possibly even to derail – the global economy on a long-term basis.

My hunch? We are collectively – again – dramatically under-estimating ourselves. In fact, while not being attended to during the hysteria – please know the data show it is highly likely that a vast portion of households will be better off when this monster has passed:


Back in 1987, it seemed inconceivable that we would avoid a recession. It seems so again today.

Sadly, our VIX index of today didn’t exist back in 1987. Insiders on the floor then told me that their calculations suggested implied stock market volatility at its peak were in the neighborhood of 100.

On Monday morning, the VIX shot past 62. We’re not at record levels of panic yet, but we’re pretty close, and so far the number of American victims of the virus is less than 100 – but sure to soar if we listen to the press. Remember, we lose 250-300 times this many people in an average US flu season, sadly.

The good news? Let’s take in some thoughts from Calafia as you have heard in previous notes already:

“Scientists are working furiously on vaccines and therapeutics. Markets are consumed with risk sharing – those willing to bear downside risk are being compensated handsomely, while those with low risk tolerances are locking in huge losses. Liquid markets act as shock absorbers for the physical economy, and there is no sign to date that liquidity is drying up. Central banks are supplying needed liquidity, and another round of Quantitative Easing seems like a no-brainer. Fiscal policy, however, is a clumsy tool at times like this; better to let market pricing solve problems by directing resources to their highest and best use.”

Not to sound like a nut, but how all of this sorts itself out in the next few days and weeks is anybody’s guess. That is FAR TOO short-term in nature for almost any investor. Besides activity is not proof of accomplishment.

But it’s a sure bet that we are nowhere near the end of the world as we know it.

A Reminder of the Barbell Economy™

Even now, we see it at full force.

The younger side of the Barbell is creating, at breakneck speed, the science and technology required to drive toward and secure the solution which will conquer and defeat the current monster – sooner than most fear,

Meanwhile, the older side of the Barbell is seeing a vast window of opportunity expand through what we always call “the most overlooked benefit of the stock market.”

Why is Dividend Investing Powerful?

Most investors are aware of the power of compound interest – and dividends work in a similar way, especially when dividends get reinvested back into the company.

That’s why in the example above, investing $10,000 in say, Coca-Cola in 1962, would have yielded more than $2 million by 2012, which is 50 years later. As boring as they seem, Dividends get reinvested to buy more stock at varying prices along the way, which then produces even higher collective dividends, and so on and so on.

Some advantages of dividend investing are as follows:

  • Companies can increase dividends over time. (P&G, for example, has increased their dividend every year for 60 years)
  • Companies can’t fake dividends – a company either declares a dividend, or it doesn’t
  • Dividends protect against inflation. (Dividends have increased 4.2% since 1912, and inflation has increased 3.3%)
  • Dividends create intrinsic value, as they generate cash flow for investors
  • Dividends can help combat volatility – that’s because dividend yield increases as the market price of a stock falls, making the stock more attractive(this will play a key role again in the coming weeks….)

What Happens After a Massive Single Day Decline in Stocks?

As the dust continues to settle on the latest panic and the convulsions work through the system over the next 3-6 months, let’s calmly consider this:

The market just saw a drop of 7.6% in a single day. This isn’t something that’s normal or an environment many traders are used to being in.

For sure, some number crunching from our friends tells us that there’s been just a handful of such large moves, where stocks get blown out, sentiment tanks, and investors are left with questions flooding their minds, all wondering what happens next.

Let’s focus on the the historical precedent of massive one-day declines in U.S. equities.

Since 1987, there have been 14 single-day declines of at least 6% in the S&P 500. Although it’s admittedly a small sample size, the historical average shows that the index is higher 3-months or so later a full 64%+ of the time. Oddly,it was also higher 85% of the time just one week later.

Repeat Warning:

If we must have a new layer of panic on top of the new virus – now is a great time to do it. Because it came to us when the US was strong on many fronts. And when it is fixed:

√ Car lots will be filed with those who may have put off buying a new car

√ Home-model sales offices across the land will be filled with Gen Y buyers – taking advantage of new, record-low mortgage rates

√ Restaurants will be packed with people “getting back out”

√ Shipping lanes will be filled to the brim moving inventory into starved pipelines

√ Flights will be booked solid to see family and friends

√ New technologies will be created to fend off further implications

√ New services will be branded to solve the next one like this – or make it easier to work with and move beyond

Fear, panic and hysteria – are all viral now. Mentally strive to stand above it.

To help you do this, review this quick video again about corrections:

…there will be more later – but for now…signing off for the night.