Market Crash Roadmap
Yesterday the market was up 10 to 12%. Today it’s down over 5% as we write this. We did say it would be a bumpy ride!
The main question we are getting from clients is, What do we do now? Interestingly, this is one of three times when professional investors are asking that same question. The other two times were 2008 and 2020. The causes of all three market meltdowns were unprecedented, and the economic fallout was hard to predict. The other factor this time is that how you view what is happening is highly predicated on political bias. We’ve said this before in different ways, but it remains exceedingly true. Depending on your politics, Trump is either a master negotiator at work or a madman at the wheel. The truth, as always, is somewhere in between, but there is no doubt that it’s getting harder and harder to buy the positive spin on Trump’s tariff policy. Let’s be clear – Trump blinked. The stock market losses didn’t seem to bother him much, but he clearly balked when the bond market started to crash. The main takeaway from yesterday is that Trump intends to negotiate. He tipped his hand, and he did it in a way that makes sense – rewarding countries that step up to negotiate and punishing those (really just China) that retaliate. However, it’s hard to imagine that long-term damage hasn’t already been done. Other countries that have relied on the US as a trading partner are going to seek other partners. It won’t happen overnight, but we believe Trump’s approach will exacerbate and accelerate a global move away from the US as a trading partner. If you missed it you can click here and read this letter to understand the background and momentum of this trend.
For investors, it’s another long-term problem to watch, but it’s not necessarily investable today. You can add it to the list of slow-moving disasters like global warming, the rising federal debt level, and the depletion of social security reserves, just to name a few. In the short-term, the market can obviously go up with a successful resolution of this trade war. Unfortunately, the uncertainty is not over yet, despite what yesterday’s dramatic jump indicated. Today’s retrenchment is further proof of that. What we have right now is a pause to negotiate with most countries and an outright trade war with China. The longer this standoff with China continues, the more economic pain we will feel. The market will now look to see if China comes to the table. For our country’s sake, we hope the Trump administration finds either a mediator or a trade ambassador that can work with China as a sort of fresh start to talks. We do not think China will engage so long as Trump continues using tactics that China considers to be bullying. Vice President Vance calling the Chinese people “peasants” is an example of behavior that will continue to push China toward retaliation, not negotiation. The longer this goes on, the more painful it will be. Remember, the market hates uncertainty, and so do business leaders. You can’t effectively plan when tariff policy is bouncing around wildly. This level of uncertainty will directly impact business growth. Again, the good news is that Trump tipped his hat that what he really wants to do is negotiate. There could and should be a relatively quick reset here. This doesn’t have to be a multi-year trade war. But as long as trade policy is undecided and left to the whim of one person, we’re not rushing in to buy yet.
That leads us back to our opening question – what do we do now? One area where Paul and I have always agreed is what to do in these types of market environments. It’s a simple playbook that can really be summed up with one of Warren Buffett’s most famous quotations where he advised investors “to be fearful when others are greedy and greedy only when others are fearful.” Or as one of my former colleagues liked to say, when the building is on fire, you don’t want to join the crowd running for the door. You want to be the person walking into the building with a check to buy it at a discount.
Therefore, the first part of the market crash roadmap is to remain calm. This is easier said than done, but that is why it’s so important to stress it repeatedly. It’s very easy to get caught up in the negative storylines that come in market crashes. Fear is a powerful emotion that can focuses people’s attentions on the near-term. We wrote about this during COVID because there have been clear studies that show people struggle to think long-term in times of crisis. This was especially true during COVID when the world was upended, and society’s rules were being rewritten. What I’ve seen over the years is that fear and panic lead people to take action to stop what is causing the fear and panic. In this case, it’s selling out. Clients will tell us they just can’t take the pain, or they can’t bear to watch their accounts go down any further. But buying high and selling low is a surefire way to lose money. Now is simply not the time to sell. We’re not saying that because we think this is clearly the bottom. Markets could continue to go down if uncertainty remains high, but stocks have never stayed down forever, and they won’t this time. Even JP Morgan’s newly revised S&P 500 target price that factors in a recession is higher than we are currently! So remain calm and stick to the long-term plan. These periods of escalated volatility are part of investing.
The next part of the roadmap is to switch from fear to greed. In most market crashes, asset prices tend to fall indiscriminately across the board as investors move to risk of positioning. It’s why they feel so chaotic. Suddenly, everything is down and nowhere is safe. It’s because people are panicking. They are fleeing the burning building and leaving everything behind. The key is to figure out which assets are the proverbial baby that got thrown out with the bathwater. There is always some sector that takes a hit without really deserving it. Sometimes, it’s directly related to the crisis. Homebuilder stocks were eventually great purchases in 2009. During COVID, we bought stocks in Business Development Companies (BDC’s). BDC’s are essentially pools of levered loans. In good times, they are purchased by income-seeking investors because they offer high income of 8-10%. During COVID, these stocks traded down 50-75%, but the cash flow kept coming in and the loans continued to perform. We bought them in multiple strategies and kept buying them as they went down. Eventually, they all returned to pre-COVID levels and contributed strongly to our post-COVID performance. We will be looking for something similar in the next few months. The key ingredients we will look for in a sector bet are as follows:
1. Prices that are down as much or more than the market
2. Little or no deterioration in core fundamentals
3. Strong conviction in a path to a full recovery in the next 12-24 months
There are a few interesting candidates that we’re following right now, but nothing that we’re ready to implement yet. In the meantime, we encourage everyone to stay calm and stay invested.
All the best,
Chris
Chris Roth
CIO
5T Wealth, LLC
Main (707) 224-1340
595 Coombs St
Napa, CA 94559
Disclosure and Disclaimer - Updated last on March 20, 2024 by Paul Krsek:
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