3 Reasons We Haven't Hit Bottom

What is an individual investor to do?

Written by Jimmy Mengel
Posted April 3, 2020

“Kids, come quick!” I shouted to my children on Tuesday.

“They have completely cured the coronavirus! You guys are going back to school tomorrow!”

My children ran over to me, eyes wide. That's when I showed them the date on my phone: April Fool's Day.

I got them good.

In hindsight, it was a bit cruel. But you have to find a way to entertain yourself, even if it means exploiting the fears of those around you. Like Oscar Wilde once said, “Life is much too important a thing ever to talk seriously about it.”

My kids were completely ready to buy into the fact that this nightmare was finally over. They want to get back to school. They want to play with their friends. They just want things to return to "normal."

Sadly, many adults around the country are acting the same way and it's pushing the recovery of everyday life — and the stock market — further away for us all...

Goldman Sachs just sent out a simple, three-step process to time the bottom of the market.

Let's dig into it...

Here's what they wrote:

  1. The viral spread in the United States must begin to slow, so that the ultimate economic impact of the virus and containment efforts can be understood.
  2. There must be evidence that “extraordinary measures” taken by the Federal Reserve and Congress to support the U.S. economy are sufficient. “Only time will tell to what extent the actions succeed in limiting defaults, business closures and layoffs”.
  3. Investor sentiment and positioning must bottom out. Goldman analysts point to their U.S. Equity Sentiment Indicator, which combines nine measures of equity positioning, noting that it has only declined by 1.4 standard deviations, versus standard deviations of between -2 and -3 in recent corrections.

Let's start with the number-one, most important point, slowing the virus. We've gotten mixed messages on this one...

President Trump was the most prominent person to try and brush this all under the rug, saying that the worst was behind us, the virus was no worse than a regular flu, and we'd be able to open up most of the country by Easter.

Thankfully, his health advisors talked some sense into him and he's essentially smashed his rose-colored glasses.

But he wasn't the only person in power who felt this way. Jerry Falwell Jr., just down the road from D.C., reopened Liberty University in Lynchburg, Virginia despite, let's say, HEAVY OPPOSITION from health care experts.

One thousand students were allowed back on campus last Sunday.

And wouldn't you know it, by the middle of the week, eight students tested positive for COVID-19. That number will grow.

Who would have guessed that plopping hundreds of college kids back into the Petri dish of campus life would have been a problem?

Now in my state of Maryland, we were just issued a stern, official “stay the f*ck home warning” from Governor Larry Hogan.

A man in Cecil County was just arrested for throwing a large house party.

Cop cars are driving around our downtown office, blaring threats over their loudspeakers to stay indoors or face a $5,000 fine or up to 1 year in prison.

Bodies are overfilling morgues just north of us in New York.

This is serious, and thankfully local governments are beginning to take it seriously enough to order people to stay home...

On to part two: only time will tell if the Fed and the government interventions can put a tourniquet on the bleeding wounds...

Unemployment figures jumped to over 3.3 million last week — and were doubled this week.

These are historically bad numbers...

And these numbers are likely charitable — as most of these reports are — as many unemployed folks are underreported, as the government jukes the stats for obvious reasons. That is a ton of hard-working people who are no longer working, and when things do finally start to settle down, it's going to be hard for businesses to just start hiring tons of folks right off the bat.

It's not as if once the virus slows that companies will even have the cash or capacity to start putting everyone who lost a job back to work.

It reminds me of a sinking cruise ship. There will be a number of lucky people who are able to secure a spot on the life raft, but after the storm has subsided and the ship makes it back to port — they aren't just going to be able to hop back on the cruise and finish their vacations.

Many of them will die on their way to shore. Others will be wandering for months trying to assemble their lives on a brand-new island...

Now, number three: investor sentiment and positioning must bottom out.

What is an individual investor to do? Safe havens like treasury bonds aren't looking like much of a life raft these days...

The yield on the benchmark 10-year Treasury note dropped below 0.6% while the yield on the 30-year Treasury bond was down at 1.22%. The two-year Treasury yield hit a low of 0.202%, its lowest level since May 2013.

I don't know about you, but a less than 1% return doesn't look too attractive to me.

I often look to long-term dividend-paying stocks as my life raft. However, considering the lumps that companies have taken during this crisis, those dividends may be pushed out to sea as well.

Companies will be slashing dividend payouts as the specter of recession threatens to wipe out their balance sheets. Many companies will need that cash to keep their doors open and dividend investors will have to pay the price.

Once they cut dividends, their stocks will suffer the consequences as well. 

It doesn't make much sense to dump boatloads of capital to shareholders if you need that money to keep the lights on.

So where do we turn while this madness plays out?

While I've never been a gold bug, it seems like it's the time to become one — if you weren't already. Just like toilet paper and hand sanitizer, there isn't enough gold bullion on hand for people to buy.

In fact, physical gold and silver are sold out across the board.

However, I spoke with my colleague Gerardo del Real about what he's doing now that you can't buy physical gold.

He laughed and then told me this...

"Jimmy, don't worry about gold coins right now. That's like having a pellet gun during a World War. You need heavier artillery. Right now, you can buy nearly unlimited quantities from your laptop or mobile phone. All you need is an ordinary brokerage account."

He called it Tier 2 Gold and noted that it is physically identical to physical gold you can hold in your hand, and you can take it into any bullion dealer and get paid the full spot price.

Oh yeah, it also trades at a staggering discount...

Right now, gold is the only option for short- and long-term investors. Gerardo is our resident gold advisor, I would urge you to listen to what he has to say.

Unlike many of the folks managing this crisis right now, he is taking this situation very seriously and is actually a certifiable expert.

Lend him your ear.

Godspeed,
jimmy-mengel-signature-fixed

Jimmy Mengel

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Jimmy is a managing editor for Outsider Club and the investment director of the personal finance advisory, The Crow's Nest, and cannabis stocks advisory, The Marijuana Manifesto. For more on Jimmy, check out his editor's page.

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