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Special Market Update

March 09, 2020

Markets went haywire today following some new developments between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over the weekend.

This is only adding to the uncertainties caused by the spread of the coronavirus around the world, and the major US indexes fell sharply as a result.

My promise to you and all of my subscribers is to keep you well-informed so you can make the best investment decisions possible.

So, I’m passing along some notes I sent to my Profitable Investing subscribers earlier today and last Friday.

Read on for my latest recommendations, and I’ll be back with another edition of Income Investor’s Digest on Thursday.

Here’s what I wrote this morning…

The S&P 500 Index opened lower once again this morning and quickly traded to the imposed circuit breaker level of -7%, which set a pause in trading for 15 minutes.

S&P 500 Index Intra-Day—Source: Bloomberg Finance L.P.

As of this writing, the Index is trading up by a few ticks from the low just before 10 a.m. ET. That may be a good sign for now, but the selling may beget more selling, as folks are exiting the stock market with little focus on fundamental values or company prospects.

One of the big drivers is the collapse in discussions between the Organization of the Petroleum Exporting Countries (OPEC) and Russia in Vienna.

The Kingdom of Saudi Arabia was seeking production cuts to support crude prices and ran into trouble getting Russia to go along.

It now appears that the Saudis may well try to add production to drive crude oil prices lower, which may force Russia to come to a deal. That would also put strains on US producers.

US West Texas Intermediate (WTI, White) & Brent Crude (Green)—Source: Bloomberg Finance L.P.

As a result, energy stocks are down hard this morning. And this is bringing in what I think is the bigger risk to the markets and the US economy than the coronavirus—changing credit conditions.

The argument goes like this: If energy companies are squeezed and cashflows from operations are curtailed, then their ability to service debts will be in jeopardy. And if that happens, then lenders and financials as well as the bond market will feel the credit troubles.

Right now, the markets are acting on conjecture rather than facts. There is no appetite for working through what will happen to companies, including even utilities and real estate investment trusts (REITs).

This is a painful morning for you and me. Many of our stocks are down and down hard. We had cut the number of energy investments before this weekend, but we still have some of the pipe companies and, of course, our landlord energy royalty company.

This stock is now valued at close to its liquidation value, although it has shown some buying interest in later morning trading.

Even gold has sold off. This is further proof that folks are not taking the time to figure out what’s what.

Gold Spot Intra-Day—Source: Bloomberg Finance L.P.

My bottom line for today is to stand pat. I believe that there will be developments with OPEC and Russia. There will be developments at the Federal Reserve. There will be actions taken by the Administration.

Some level of rationality is coming. I am working on lots more what-ifs and will keep you updated.

And yes, I know the adage of John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.”

But I also know that he didn’t give up and worked harder to adapt to the markets and continued to be successful, surviving even the 1929 market crash.

Here’s what I shared on Friday…

The United Nations World Health Organization (WHO) is reporting this morning that there are 95,333 cases of COVID-19 with 54,021 fully recovered, including 2,800 recovering yesterday alone. And in the US, there are only 129 cases—again with data supplied by the WHO.

But the S&P 500 Index is down 87 points or just under 3.00%, while stock market indexes in primary Asian and European markets are down around 3.00%. And since this is a Friday, the assumption of further heavy selling ahead of the weekend won’t be of much help to the upside.

The jobs report today has been a non-event as the data is behind the manic-depressive markets. The 273,000 new jobs reported is way over estimates and hugely better than the prior month. And the two-month revision was a positive 85,000 jobs. Participation rate was very healthy at 63.40%, and wage growth is at 3.00%—nearly double the rate of inflation as measured by the core Personal Consumption Expenditure Index.

In addition, given the very tight US jobs market—regardless of the data this morning—companies will be reluctant to layoff workers as they will be very hard pressed to replace after the virus-mania moves along.

S&P 500 Index with Fibonacci Retracement Levels—Source: Bloomberg Finance L.P.

The S&P 500 has the potential to head down to around 2880 and then down to around 2722. Those are Fibonacci retracement levels for the index. There is a lot of over-hyped selling as too many folks are pricing in a virus attack that will paralyze the US economy with consumers holing up in homes and consumption ending with recession as the result.

But as I wrote last Friday, COVID-19 does not cause folks to turn into flesh-eating zombies. Nor does the virus cause your skin to flare off and blood to ooze out of your eyes. It causes cold and flu-like symptoms, which according to numerous studies that I have read, are generally milder than the common flu. And children and younger folks are more likely to be impacted less, as well as healthier non-smokers.

But none of this is being received by the public well. Instead, we’re getting more hype and panic-inducing stories. For example, I read a story this morning about Facebook (FB) in which an undisclosed contractor was reported to have COVID-19, so the company is closing its offices through March 31. And again, FB won’t disclose who the person is, so more panic in Seattle.

And in New York City, the lawyer that contracted COVID-19 is causing panic having mapped his alleged driving routes. Now, speculation abounds as to where he and his children and staff might have been in the city. Again, everyone should settle down.

What the markets need is more real news, full disclosures and more discussions on what COVID-19 is and what it isn’t and who is susceptible to develop symptoms and what those symptoms are and aren’t.

But until that happens—the stock market is fully at risk.

Meanwhile, the US bond market is in a mania. The benchmark 10-year US Treasury bond yield is down to 0.72%.

US 10 Year Treasury Yield—Source: Bloomberg Finance L.P.

And that yield is moving much like the price action in the S&P 500—plunging over the past two weeks. Traders are buying bonds and ignoring prices and yields. I was in the process of recommending an indexed investment on longer-term US Treasuries with the synthetic investment in the iShares 20+ Year Treasury Bond ETF (TLT) last week but pulled back as the market sent the price of the ETF into troubling territory.

iShares 20+ Year Treasury Bond ETF—Source: Bloomberg Finance L.P.

But I’m presenting it to you if you’re a trader bent on participating in the manic-depressive market right now.

I’m continuing to recommend the allocations across the model portfolios of only 56% stocks and 44% fixed income, including 11% cash. It’s very defensive ahead of the COVID-19 fallout.

In stocks, I have an arsenal of real estate investment trusts (REITs) and US utilities that are doing far better year to date than the S&P 500 Index.

Bloomberg REIT, S&P Utilities & S&P 500 Indexes Total Return—Source: Bloomberg Finance L.P.

And in the fixed income allocation, there are plenty of bonds, bond-like investments and funds that are rolling up in price and paying ample yields.

New cash should go to these recommendations—particularly the closed-end funds that had mistakenly been sold off with the general stock market because some traders didn’t look at what the bond funds held.

And there’s gold. Yep, it’s doing well and our prefered gold stock is kicking you know what and taking names. It has returned 16.76% year to date.

One more thing: The Federal Reserve Open Market Committee (FOMC) did its bit with the 50 basis point (1/2 of 1%) cut in its target rate for Fed Funds (the market rate charged by inter-bank lending). And I see that given the yield curve, it should cut another 50 basis points.

But what too many talking heads on financial television keep saying is that fiscal policy needs to be deployed. My call is for the White House to temporarily stop collection of payroll taxes from employees and employers as well as suspending income tax collections. Those are both in the purview of the US Treasury.

The White House should also suspend all trade tariffs. The combination wouldn’t need to mess with Congress and would be a big stick for the markets.

Today is going to be a pain for stocks and a boon to bonds. And the COVID-19 story is going to be hyped for a while, even as the number of recoveries in patients grows. And even the stories about this year’s traditional flu ending early, given the step up in more healthy practices around the globe, won’t get traction.

Buy and own the defensive US-centric companies that I have in the model portfolios and buy the bond and bond-like investments. They will get through this and will keep paying you ample cash along the way.

And yes, gold should benefit with lower interest rates and the market mayhem.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life

PS—It’s that time of year again! Our annual Diamond Club meeting is right around the corner, and I’m busy preparing to get together with my subscribers to discuss my outlook for the stock and bond markets and how to best position our portfolios for the remainder of the year.

This exclusive in-person meeting is only available for Diamond Club members. But don’t worry… If you’re not already a lifetime member of my Profitable Investing research service, there’s plenty of time to sign up and save a ton on your subscription. Click here for details.