"While we should work to reduce uncertainty in our decision making, the greater requirement is to embrace uncertainty and to make the best possible decisions in the face of it. The means of doing this is to probabilize the future; we prevail over uncertainty through having the most accurate map of what lies ahead of us and making our decisions accordingly."
While India annoces lockdown for 21 days for a population of 1.3 billion, the Dow had the best day since the 1930s. Dow in the last month: +8%, -3%, -5%, +1%, -6%, +5%, -13%, +9%, -10%, -6%, +5%, -8%, -1%, -4%, +5%, -3%, +5%, -1%, -4%, 11%.
That is a lot of volatility for a $34 trillion market!
These are uncertain times. Like I said yesterday, a lot of people think the only way to end this pandemic truly is to find the vaccine. But that does not mean we can't restart the economy. Some fascinating ideas are being proposed. NY governor is considering ramping up the economy by letting people outside the most vulnerable group, and the people who had the virus and are now better(hence developed immunity) can go back to work.
As more and more people build resistance to this virus, naturally, the economy will start ramping up. It would be very interesting to see what other creative ideas are thrown out there.
I'm a natural optimist. I think there is a very high likelihood we will come out of this stronger and for the better. So will the economy and the markets. Just as we saw the fastest drop of 30%, we will see the quickest recovery. With that in mind, let me set my base case for how I'm planning to navigate this crisis. The framework I use to think about the economy: -
- Growth: GDP, economic expansion
- Jobs: unemployment rate, wage growth
- Profits: corporate earnings
- Rest of the world: manufacturing rate around the world, political issues
- Risks: corporate debt
- Interest rates
Using the above framework, I'm trying to build my base case.
My base case: A lot of the world has locked down for most of March, and this will continue through April in the US and probably bleed into summer for other parts of the world. Q1 and Q2 will see a sharp contraction in the GDP growth, a high increase in unemployment (already seeing unemployment insurance claims skyrocket in some places). There is going to be a significant loss in revenue and productivity due to this 2-3 month lockdown. Some businesses might not even recover.
Revenues will contract, and so will the profit margin. Manufacturing across the world will see a considerable drop, too, as the majority of the labor force is ordered to stay at home. I already wrote about interest rates.
To summarise, everything is shit.
At least for Q1 and Q2 of 2020. Now that we have laid out all the bad things.
Let's focus on the good. The US banks are in much better shape than they were in the last financial crisis. The government and the fed have been moving very fast to provide liquidity and support to the system. Also, that $6 trillion massive stimulus package! So we have those going for us.
My game plan: What we are facing right now is a health crisis than a financial crisis. There will be enormous short-term pain, but once the dust settles, most businesses will be able to recoup their revenue back to their Q4 2019 levels. This recovering of lost income can take anywhere from 3-5 years from now (the optimist in me talking). I have two main portfolios. One is active, and the other one passive.
I'm going to leave my passive portfolio untouched. I invest in it weekly through Stash. My asset allocation is for that is as follows:
30%: Match the market (IVV)
40%: Long Haul Bonds (BLV)
15%: Uncle Same (VGIT)
7.5%: Gold (GLTR)
7.5%: Delicious Dividends (SCHD)
It is based on Ray Dalio's all-season portfolio(I've repaced commodities with dividends). I get decent exposure for US stocks, US bonds, and precious metals.
Now for my active portfolio, I invest in individual stocks. I have a specific checklist that I use. It entails going through income statements, cash flow statements, and balance sheets for those companies and building a valuation model for it. I have been setting aside cash since the beginning of 2019, and I plan to start deploying it in a significant way soon. I'll write about my framework for what companies I'm looking at and which companies I'll be putting in my shopping basket tomorrow.