What’s Working in the Market, and What’s Not

There are two things I want every investor to understand right now: The world is almost certainly tipping into a recession. And yet, we have a lot to look forward to.

If that sounds contradictory, well, these are weird times. So, let’s dig into the details, and see what to look for, going forward.

Normally, for example, I like to talk about economic news. Tomorrow we’ll hear about retail sales for February – but really the political news is what’s important right now.

To name just a few of those headlines: Las Vegas shut down, over 14 casinos closed, amid coronavirus outbreaks. Restaurants are closed in New York City, other than providing takeout, as well as states like Illinois and Ohio. A similar federal mandate may be on the way. The city of Miami has ground to a halt. Washington, D.C. is a ghost town. I think the United States, at least, is ahead of the crisis.

But this is why I say we’re almost certainly in a recession. There are too many businesses and towns shutting down, including a lot of supply-chain disruptions. In Northern Italy – where the coronavirus outbreaks are the worst, they don’t have enough cots and respirators, and triage centers are popping up – they’ve pretty much closed all the auto plants. Don’t be surprised if they close plants in Germany, too. And, of course, most airlines are forced to cancel flights.

It’s going to take a very, very brave politician to tell everybody to get out and about again. Because it could be premature.

So, this is kind of like when a tornado comes: We have to crawl into our cellar…and see what the damage is when we come back out.

In this case, however, the national quarantine could last, say, four or six weeks. For all of us at a high-risk age, it’s pretty scary, considering what’s happening now in Italy and Spain. But hopefully as we get into spring, temperatures will rise, and the virus will temporarily die down.

Currently, some parts of the market are functional, and some are not. Even though the early Fed decision created a shock, I’m glad they decided to intervene. I was getting the heebie-jeebies last week, watching Treasury yields rise as markets were oscillating. Normally, Treasuries are the oasis.

However – now that the Fed funds rate has been slashed to zero (no higher than 0.25%), the Fed will be buying $500 billion worth of Treasury bonds, and it will buy another $200 billion worth of mortgage-backed securities – the 10-year and 30-year Treasury yields were both back down today. That’s good.
However, you might have noticed that gold is not doing well right now. Silver was down 11% on the day. JPMorgan (JPM) had some problems executing trades on Friday. So, there are some problems out there in markets.

One of them is, again, the exchange-traded funds (ETFs). I warned you last Tuesday that spreads can widen dramatically at times like this. I’ve never been a fan of ETFs at all – but if you’re going to put in an order, the best time is either the first hour or the last hour of trading. That’s when ETFs are much more liquid. It’s one thing to get out on a down day; it’s another for that ETF to pick you off a few extra percent.

For stocks, dividend yields have gotten ridiculous right now. I want you to know that some dividend cuts are going to happen; companies just don’t want to be the first to announce. My Portfolio Grader can help you keep an eye on your companies’ Cash Flow (which is where dividends come from), and my Dividend Grader has a few other tricks to assess your income stocks going forward as well. Dividend cuts have, so far, not been widespread – and the Dow is pushing 4% with today’s correction, while the dividend stocks within the S&P 500 are yielding over 3%.

So, even in these scary times, when buyers return, they’ll be reaching for these stocks that yield more than anything else.

They’ll also want the companies that aren’t suffering from analyst cuts. Tesla (TSLA), for example, is generating a lot of concern about plunging demand for its cars. On the flip side, companies with too much exposure to sub-$30/barrel oil are going to suffer as well.

There’s still good news there, though: Cheap gas puts more money in consumers’ pockets. Once we’re ready to come out and about again, people will resume buying homes, which would trigger a homebuilding boom.

So, political turmoil aside, we’ll be watching the earnings expectations. As long as you own dividend growth, and companies with strong sales growth and earnings growth, you’ll get through this a lot better than everybody else.

In the meantime, I know this is very, very stressful for everybody. But please continue to hang in there. Good stocks do bounce back in the end.

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