This week’s astonishing rally in stocks is a reaction function from the Federal Reserve’s enormous balance sheet expansion. The Fed has increased their balance sheet by $586 billion in five business days! (see chart below).
Source: Bloomberg
The Fed did a tremendous job to provide stability to many parts of the fixed income market. The Fed’s decisive steps over 2 weeks took them approximately 8 months during the 2008 financial crisis. Very impressive!
The Fed has helped to stabilize a lot of the dislocations we have been discussing in our notes. Specifically:
The commercial paper market has stabilized.
Concerns over money market mutual funds ‘breaking the buck’ have declined.
The discount in numerous fixed income ETFs have substantially moderated (in the case of LQD, yesterday it closed at a 3% premium!)
We still see substantial bid/offer in single stocks but that’s likely because liquidity providers are working from home (don’t listen to those pundits that argue computers dominate all trading; last time I checked, computers don’t have to be quarantined).
On Monday, March 23rd (pre-open), we Tweeted out that there was an abundance of negative sentiment and we might be near the bottom (see Tweet below).
Source: Twitter @AstoriaAdvisors
Of course, we didn’t expect a 20% rally in 4 days. But we have been arguing for investors to think long term (click here) and not to time the market (click here). And to be clear, if history is any guidance, the market will correct again as companies begin to announce earnings, reduce capex, and lay off workers. Nonetheless, none of this can be market timed.
We argued on Tuesday, March 24, that valuations for stocks globally were very attractive (see Tweet below). If your investment time horizon is multiple years out, we would suggest not to look at day-to-day price action. Come up with an investment plan, be systematic, and take the human emotions out of investing. That’s what Astoria does.
Source: Twitter @AstoriaAdvisors. Chart Source: Morgan Stanley.
On the back of client demand, we have used our quantitative portfolio construction discipline to create a portfolio of 30 high quality US stocks. As our followers know, we have tilted our ETF portfolios to high quality stocks for the better part of 18 months. We simply believe companies with the cleanest balance sheets will offer a superior risk/reward in the next 12-18 months. Contact us if you would like to see the portfolio.
We acknowledge that there is still a lot of risk in the marketplace.
The unemployment rate will rise significantly.
Companies’ earnings will be significantly lower for the next 1-2 quarters.
We will see a rise in high yield default rates.
High yield spreads will stay elevated.
There is talk of reduced share buybacks in the future (they were a dominant buyer for stocks over the past decade).
We will see a material weakness in the real estate sector.
Some investors and businesses will be forced to de-lever.
T-bills are currently negative, and we are still at a lower interest rate bound.
Just remember stocks have priced in a lot of the bad news. Where the S&P 500 ends up in 1, 3, 6, or 12 months is anyone’s guess. Astoria Portfolio Advisors will stick with our long-term investing focus, remain quantitative and systematic with our portfolio management, and remove the human emotion out of investing.
Stay healthy and stay home!
Follow us on Twitter!
Sincerely,
John Davi
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