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Is a depression priced in?
Old 05-04-2020, 04:40 AM   #1
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Is a depression priced in?

We're normally ~45% in equities, so the ~35% market downturn put our total net worth down about 20% in February and March. But we've regained half of that in April. I can't believe that the level of worldwide depression that we are likely to see is fully priced in at that level. (Maybe I'm being pessimistic because I live on an island in the Mediterranean that gets 45% of its GDP from tourism and will have visitor numbers reduced by at least 95% this summer. We are looking at a catastrophe for employment.)

I've been pretty much a "buy and hold forever" investor for more or less 30 years, with only a few sales of equities to get that percentage slowly down (I like "100 minus your age" as a heuristic). But I can't help feeling that there is only downside from here, at least in terms of daily economics and consumer spending worldwide. Even if a vaccine for SARS-CoV-2 is announce tomorrow, I can't see us getting back to January 2020 levels for a long time.

Or are the markets, collectively, still smarter than me? To be fair, they have a pretty solid track record there...
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Old 05-04-2020, 06:58 AM   #2
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IMO. Nothing is "priced in". The Fed has been buying assets because they don't want things to be at market prices. If the Fed wasn't printing and buying in bulk, the prices would look very different.
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Old 05-04-2020, 07:11 AM   #3
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You're not alone in your head-scratching on this topic. And while I believe the mantra "the market is not the economy" I also know that the market strongly dislikes uncertainty. If the market knows, it bakes it in, good or bad. I see no reason for the strong, substantiated confidence that current prices would imply.

So I've taken some of my recent recovery-gains off the table, against my normal judgment, and I have no regrets.
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Old 05-04-2020, 08:24 AM   #4
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IMO. Nothing is "priced in". The Fed has been buying assets because they don't want things to be at market prices. If the Fed wasn't printing and buying in bulk, the prices would look very different.
+1
We will see more Fed printing if the market continues to drop, even if not a major drop.
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Old 05-04-2020, 08:29 AM   #5
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I think the probability of a great depression is already priced in, but the question is how much of it is priced in? 10%? 90%? 50%?

What probability do you think is appropriate though? If you are thinking 100%, you should shortsell all stocks now because the market certainly doesn't believe that as of this time.
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Old 05-04-2020, 08:45 AM   #6
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I think the probability of a great depression is already priced in, but the question is how much of it is priced in? 10%? 90%? 50%?

What probability do you think is appropriate though? If you are thinking 100%, you should shortsell all stocks now because the market certainly doesn't believe that as of this time.
There is a difference of thinking of leaving the equity market vs. short selling one's equity allocation of course.
One might feel negative about the market, but not willing to take unlimited risk on the downside.
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Old 05-04-2020, 08:46 AM   #7
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I believe that a lot of people (including, of course, politicians, press, business gurus) are still failing to acknowledge how serious the economic impact of this event is. I don’t see myself as a person with a particularly negative outlook on life, but realistically, it will take many years for some of the sectors (travel, entertainment, gastronomy) to get back even anywhere close to January 2020 levels. The impact is enormous so, no, I don’t believe the situation is fully priced into the markets.
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Old 05-04-2020, 08:49 AM   #8
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Originally Posted by Spock View Post
IMO. Nothing is "priced in". The Fed has been buying assets because they don't want things to be at market prices. If the Fed wasn't printing and buying in bulk, the prices would look very different.

Im with spock on this one... but honestly.. how do you bet against the fed with what they are doing?
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Old 05-04-2020, 09:03 AM   #9
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Originally Posted by Aerides View Post
You're not alone in your head-scratching on this topic. And while I believe the mantra "the market is not the economy" I also know that the market strongly dislikes uncertainty. If the market knows, it bakes it in, good or bad. I see no reason for the strong, substantiated confidence that current prices would imply.

So I've taken some of my recent recovery-gains off the table, against my normal judgment, and I have no regrets.

OTOH, it's when your fingers hover over the keyboard, nearly frozen with fear as you attempt to press the ENTER key and buy a bunch more of the Total Stock Market Index, that the best returns are earned. Or so they say.

I'm sticking with doing nothing. I will re-balance once a year like I usually do. I believe that the academic research has shown no real differences between those who re-balance every year and those who practice more frequent re-balancing. If somebody were to plop an extra 50K of Helicopter Money into my savings account, I would consider it part of my cash safety net. And I would buy that person a very nice dinner as soon as it is safe to back to the restaurants.
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Old 05-04-2020, 09:17 AM   #10
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Originally Posted by Aerides View Post
You're not alone in your head-scratching on this topic. And while I believe the mantra "the market is not the economy" I also know that the market strongly dislikes uncertainty. If the market knows, it bakes it in, good or bad. I see no reason for the strong, substantiated confidence that current prices would imply.

So I've taken some of my recent recovery-gains off the table, against my normal judgment, and I have no regrets.
Well, if it makes you feel any better, I liquidated a very large percentage of my holdings last week after the last good dead cat bounce. Did I take a hit? Well, you betcha...but it wasn't *too bad* (all things considered) but I will save a little in taxes on the loss and I have slept a LOT better the last few nights. The whole "market isn't the economy" has bugged me a lot recently the absolute lack of rhyme or reason...and I think the worst is yet to come. I am happy to sit on the sidelines for a while and see how it all pans out.
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Old 05-04-2020, 10:37 AM   #11
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In a few years hence, or sooner perhaps, this board (and others like it) will likely serve as a rich data set for researchers, Ph.D's, post-docs and others studying human psychology and economic behavior during these times.

The researchers will first have to address a myriad of data quality issues associated with the cohort that consists of posters here -- e.g., anonymous posters, selection bias and many other statistical-related concerns. A data scientist can address those concerns.

As a public good, the owners/operators of this board might want to consider conducting statistically valid surveys of their members on relevant topics as the event proceeds.

It just feels like somebody should be researching and writing a dissertation, thesis or book. The next Thomas J. Stanley is likely already out there doing it.
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Old 05-04-2020, 11:16 AM   #12
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I don't think a depression is priced in, given that we're still in the very early stages of experiencing the economic and political effects of this pandemic, and that the last U.S. depression was a lifetime+ ago with very different causes.

I think this short piece is worth a skim at the very least for the peak under the hood it provides about what the Fed has been up to and its likely impacts on returns going forward for both stocks and bonds:

https://www.etftrends.com/fixed-inco...ime-for-bonds/

My take on things that is "age in bonds" is a better starting point than ever PROVIDED said bonds are 100% U.S. Treasuries - either short-to-intermediate duration if the rest of your portfolio is all equities, or a barbell of 30 year Treasuries and short-term if you understand bond convexity and have the time an interest to follow the market closely. LTT's are up ~23% this year and deflation, which seems very likely short-term, could easily push their yields into negative territory for years to come. OTOH an interest-rate spike would obviously be catastrophic.

On the equity side we're seeing a repeat of the dominance of megacorps like Alphabet, Microsoft and Apple while small caps and value are getting crushed. The New York Times had an excellent article on this topic last week:

https://www.nytimes.com/2020/04/28/b...us-stocks.html

Of course the MPT crowd will probably say that small caps, value and international will rally any day now after two decades of underperformance but I think the above article makes it clear that companies with gigantic cash reserves who can do all of their business online are going to continue to dominate while entire industries that require brick-and-mortar presence disappear forever or change in ways we're only beginning to get a sense of.

Good time to batten down the hatches.
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Old 05-04-2020, 11:47 AM   #13
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The Fed's statements have stabilized the markets that were in a free fall. Bond yields spreads in mid March were at extremes. The statement that they made stabilized the bond market but in reality Fed has not purchased a single corporate bond investment grade or high yield through ETFs as they stated they intended to do. Many traders who were short investment grade and high yield ETFs covered, which let to the rally in bonds and then in turn stocks. This was temporary. Bankruptcies will continue to happen at an accelerated pace hitting the oil and gas sector, retail, and commercial real estate. 72% of GDP in this country is consumer driver and you have to ask yourself, what kind of recovery will you get with high unemployment and social distancing at retail and entertainment venues? Companies with good free cash flow and a stable market for their goods or services will survive. Those that burn cash and have high debt, will eventually file for bankruptcy.

Markets don't drop in a straight line. Look back to 2000 and 2008. This time however, the market is being propped up by 5 stocks whose combined market cap is higher than the bottom 350 stocks in the S&P 500. This is another major bubble that is forming. Once they break down, the market indices will also.
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Old 05-04-2020, 01:45 PM   #14
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The Fed's statements have stabilized the markets that were in a free fall. Bond yields spreads in mid March were at extremes. The statement that they made stabilized the bond market but in reality Fed has not purchased a single corporate bond investment grade or high yield through ETFs as they stated they intended to do. Many traders who were short investment grade and high yield ETFs covered, which let to the rally in bonds and then in turn stocks. This was temporary. Bankruptcies will continue to happen at an accelerated pace hitting the oil and gas sector, retail, and commercial real estate. 72% of GDP in this country is consumer driver and you have to ask yourself, what kind of recovery will you get with high unemployment and social distancing at retail and entertainment venues? Companies with good free cash flow and a stable market for their goods or services will survive. Those that burn cash and have high debt, will eventually file for bankruptcy.

Markets don't drop in a straight line. Look back to 2000 and 2008. This time however, the market is being propped up by 5 stocks whose combined market cap is higher than the bottom 350 stocks in the S&P 500. This is another major bubble that is forming. Once they break down, the market indices will also.
But what logical bad news would be coming on the 5 stocks, besides any generic negative recession type news?
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Old 05-04-2020, 02:10 PM   #15
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But what logical bad news would be coming on the 5 stocks, besides any generic negative recession type news?
Disclaimer: My #1 holding is Apple, and MSFT was worked its way to be my #4 largest. Having said that, the expression is that "The generals are the last to fall".

The idea here is that as market breadth declines, the strongest/biggest remain standing after other holdings get hit...but that eventually they too succumb. From a business perspective, this also can make sense as eventually those companies run out of buyers (both for their products as people lose their jobs as well as stock buyers, as peoples other holdings lose value and the few winners become overpriced compared to alternatives).

To put it more bluntly (for myself given that I have 9% of my net worth in Apple), if we are heading into a severe recession or depression, Apple isn't going to be selling many $1K phones, and Apple at 23X (PE) has a lot of risk.
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Old 05-04-2020, 02:14 PM   #16
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Note that the market is guided by future prospects and typically leads the economy. Even though we do not know yet how bad April was, since things in the US and around the world are slowly starting to open up, we have likely hit the absolute bottom already.
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Old 05-04-2020, 02:24 PM   #17
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I believe that a lot of people (including, of course, politicians, press, business gurus) are still failing to acknowledge how serious the economic impact of this event is. I donít see myself as a person with a particularly negative outlook on life, but realistically, it will take many years for some of the sectors (travel, entertainment, gastronomy) to get back even anywhere close to January 2020 levels. The impact is enormous so, no, I donít believe the situation is fully priced into the markets.
Agreed - both in terms of economic impact and public health impact.

I also expect many years to recover. A couple of years from last Jan to really see the back of the virus and longer for many business segments to completely recover.
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Old 05-04-2020, 02:26 PM   #18
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Im with spock on this one... but honestly.. how do you bet against the fed with what they are doing?
Also agree, and IMO that is what the market is currently focused on.
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Old 05-04-2020, 02:36 PM   #19
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But what logical bad news would be coming on the 5 stocks, besides any generic negative recession type news?
All five stocks Facebook, Amazon, Google, Microsoft, and Apple still rely on consumers and business for revenue. Both are cutting expenses and some are going out of business. You can crowd into 5 stocks for so long and then valuation will matter at some point. That was the lesson from the dotcom bubble era. The vast majority of stocks have been crushed and many of those that have been crushed are customers of the five mega cap stocks. Facebook and Google are the most vulnerable as digital ad spending drops off. Apple is another as consumers hold back on phone upgrades.
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Old 05-04-2020, 02:51 PM   #20
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Note that the market is guided by future prospects and typically leads the economy. Even though we do not know yet how bad April was, since things in the US and around the world are slowly starting to open up, we have likely hit the absolute bottom already.
Well yeah I think we all know the market is forward looking, but you have more optimism than I do that we have hit absolute anything. I don't think airlines, hotels, stadiums, conventions, casinos - and all their advertising - are going back to normal in 2020, or even 21.
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