Alchanati Campbell & Associates
The virus has caused the US market to crash around 12%, wiping out trillions of dollars. The 10-year dropped to its lowest, Gold had a steady climb but dropped back down today, so what is one supposed to do? I am going to state it very simple and blunt: Wash your hands and take care of your health; it’s the most important thing. If you have cash on the sidelines, cost average your positions and buy into favorable stocks at these lows. If you are a new investor, congratulations and buy into this “more affordable” market. If you have debt obligations, liquidate and have some cash for those expenses because who knows where the market is heading. Lastly, don’t panic but be cautious and smart. This is a historical learning experience, and this will build character and show your true colors.
Expansion or not, CEOs are sprinting for the exit. Over 1,500 CEOs have stepped down from their positions over the last year. Last month alone set a record for the most CEO departures in one month with 219 leaving their positions. The U.S hasn’t seen this many departures since the beginning of the great recession in 2008, so why are so many CEOs stepping down during a period that is often referred to as an unprecedented period of economic growth? It is very difficult to say since many CEOs have stated varying reasons. Here are some notable CEOs who have recently stepped down; Bob Iger of Disney, Keith Block of Salesforce, Tidjane Thiam of Credit Suisse, Les Wexner the longest-tenured CEO of a Fortune 500 company (L Brands), Dennis Muilenburg of Boeing, Matthew Levatich of Harley Davidson, and Ginni Rometty of IBM announced she will step down in April. Several business consulting companies, and corporate governance groups have been following this trend and have some ideas. First off, many of the CEOs have been involved in recent corporate problems and were forced to step down as was the case for the former CEO of Boeing and former CEO of Credit Suisse. The #MeToo movement has also played a large and has lead to the resignations from the former CEOs of CBS, and McDonald's. Both of these circumstances show an increase in corporate accountability, in large part due to new social pressures placed on corporate boards. Another theory is the growing concerns of an impending recession which may cause some officers to step down with their corporate legacies intact, basically, they want to quit while they are ahead. Whatever the cause there is an undeniable outcome. Over 2,000 large corporations have CEOs that have only just filled their position within the last 2 years. This does not mean they are inexperienced business leaders, but they will need time to adjust to their new positions which will likely be more difficult than usual thanks to factors like increased international tensions, political turbulence, and COVID-19. On the bright side, this mass exodus of CEOs is allowing some space for a new generation of corporate leaders and increase equality since the number of women filling the open positions has more than doubled from just a year ago.
Treasury Yields. US 10-year treasury yields hit an all-time low of 1.127%, as of closing on February 28th 2020. We are seeing an unprecedented amount of capital flowing into US government debt, only growing with the corona virus fears. This capital is seemingly coming from domestic smart money - pensions, hedge funds, and asset managers. Investors are seemingly fine with earning such a low yield rate, with the top 100 pensions having upwards of 50% allocation in fixed income, up from 25% in 05. With this recent market sell off, it seems retail investors are also moving into these risk free instruments, seemingly once again late to the party. Although this yield seems low, a good portion of the developed world is currently in negative interest rate territory, where you are seemingly paying the government for safe harbor. With this recent fear, and the recent statements by Jerome Powell and Donald Trump, regarding further fed rate cuts and possibly going into negative territory, many fund managers believe we will see this 10 year treasury rate declining closer to 0. Personally, I’m betting that this corona virus pandemic doesn’t last past Q2, and the equity market will make a swift recovery.
Navigating a Recession. To be clear, we're not calling the current situation in the U.S. Equity Markets a recession. Nevertheless, it’s impossible to ignore the facts. This week has been the worst since 2008. The S&P 500 encountered a correction within a single week. All the gains from 2019 have been wiped out. The question is, how do you optimize your allocation of capital during a time like this. If you ask Warren Buffet, he'll give you the ol' "Time in the market beats timing the market". He's also the most famous investor of all time. Generally, people want to move from riskier assets like large-cap equities to safer assets. These safe assets typically include Gold, Bonds, and certain currencies. However, things are a little different this time around. As we know, the Fed has been cutting interest rates over the past year or so. Whether you agree with their decisions or not, it’s hard to argue against the fact that their actions have led to some wacky yields on bonds. As of now, short term T-Bills (bonds with a maturity of 1 year or less) are inverted with the yield for the 10-year treasury bond. Without getting too deep on the recession indicator implications of this, it implies that people generally have lower faith in economy in the near future. So, maybe the safe assets such as long-term Treasury Bonds are not a good place to move right now. That leaves us with Gold. Usually, the price of gold goes up during red weeks as it’s a "safe haven" to move cash into. This week however, gold has plunged. Why? Without knowing for sure, it seems panic is truly setting it. Something similar occurred during 2008 in which investors sold anything they could just to have cash, the safest of assets. Obviously, this massive sell off will lead the price of gold down. Hindsight is 20/20, and it’s impossible to be certain of the best decisions to make when the world seems to be falling down. All we will say is there is a reason that Warren Buffet is regarded as the world's smartest investor.
Democratic Socialism. A political concept of economic organization requiring relatively heavy involvement of the government in the economic affairs of a nation. While more free-market oriented than socialist regimes, democratic socialists tend to require that large industries are at least partially government or union controlled, while levying large corporate and consumption taxes to finance generous safety nets for citizenry. Importantly, democratic socialists are committed to democracy and the ideals surrounding it, meaning that these regimes generally do not tend toward authoritarianism. However, heavy state involvement in economic activities does allow the government to play a more direct role in citizens lives, often leading to increased regulation, higher tax rates, and the potential for even more far-reaching economic measures, such as direct state ownership of key industries.
The rise of Bernie Sanders in the Democratic party. The most prominent socialist in the United States, Bernie Sanders, has recently been portrayed by many news organizations as the most likely nominee of the democratic party in the upcoming presidential election. A member of the Democratic Socialists of America, Senator Sanders is the longest serving independent in the United States congress, serving the state of Vermont since the 1980’s. Until recently, Senator Sanders has been considered on the fringe of American politics, with traditional socialist policies failing to win wide appeal. However, the 2008 financial crisis prompted a radical shift in the politics of younger Americans, giving the senator a large enough power base to launch a national campaign, coming in second to Hillary Clinton in the 2016 Democratic primary. Sanders has promised new regulations on the financial industry, as well as universal healthcare, free college education, and the erasure of student debt as his signature policies. Unfortunately, these new government programs would require large new taxes on all Americans, including the middle class, and would still likely require deficit spending in the federal budget, even as the federal debt of the United States reaches record levels. In a recent poll, only 28% of Americans said they had a favorable view of the term “socialist,” and a Sanders candidacy in the general election would likely prove nearly as divisive as the Trump campaign, as his policies sharply divide the nation. The senator has used polarizing terms when campaigning, framing his potential election as a “revolution” of the political class, alienating many Americans. Regardless of his potential weakness in a general election, Sanders has won the most primaries of any Democratic candidate up until this point, as his base of support has shown active in voting in primary elections.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.