TO CLIENTS AND FRIENDS
THE WORLD TURNED UPSIDE DOWN
All financial markets try to predict the future. Every time a transaction happens, a buy order and a sell order take place simultaneously. You buy 100 shares of Apple, for instance, because you think it's a bargain. Someone who thinks Apple is overpriced, at the same moment, sells you that 100 shares. This is a very simplified illustration of course. But it's basically how stock markets function. Every trade that takes place between two people involves one person saying, "It's too high," and the other person saying, "it's too cheap."
There is now the highest amount of money on the sidelines than ever before in history. The estimate is close to $5 trillion dollars. Remember one of my mantras, "Scared money never wins." Much of these trillions on the sidelines is scared money. Many of you reading this memo are retired. You cannot really afford to get almost zero on your investments. All of our stock portfolios have a dividend or interest yield, most of it paying more than 10 to 30 year Treasuries. A regular income stream cushions the blow of bear markets. Cash flow comes into your accounts every month, and our philosophy remains consistent: current income higher than Treasuries, CDs, or Money Market yields. Plus long term appreciation. These are our goals for you.
Many of you are surprised by the strength of markets since the March lows, (although September was challenging, and that month historically has often been a difficult one). Here are the three reasons why I think markets have rallied since last spring:
1). There is the realization behind all the news that eventually a vaccine will be approved and distributed. It is not a lifetime sentence.
2). The Federal Reserve is really trying to put a cushion, (not My Pillow), under the economy by flooding the system with money and insuring that these lowest interest rates in history stay low long into the future. This policy pushes people into riskier assets. Meaning the stock market.
3). We have hundreds of retired clients, as I've said, who cannot afford to get zero on their money. With interest rates so low, assume you are very conservative and worried and you say, "I want to be safe as possible. US Treasuries for me." If you buy 10 year US Treasuries today, and put $1 million dollars into this 'safe haven,' you'll get interest of approximately $15,000. On one million. If this were the 1970s and you invested a million in US Treasuries, you could earn about $150,000. You cannot live on $15,000 a year, but if you own stock in many blue chip companies who pay you dividends of 2 to 3% or even higher, you will get current income much higher than the traditional 'safe havens.' In addition, we hope that while you collect your dividends, there's our hope that these stocks, over the long term, will appreciate in value.
So again, an election. Another perfect example of behavioral economics, my constant refrain to you about emotion controlling movement in markets: fear and greed.
There is anxiety throughout the land this fall, the continuing battle against Covid-19. We're not watching science fiction. We're in the movie. We know what the ending is going to be: we do find an effective vaccine. But we don't know when.
We can only guess how much the after effects have on every little nook and cranny of our society.
Just a few of the major changes that affect all of us will be in healthcare, and how it's delivered. Education will also be transformed. Sixty to seventy thousand dollars for a year at many colleges? Not sustainable. This model is broken.
I speak to dozens of young people each month, in schools, from junior high through graduate studies. Not one has told me that their virtual or hybrid classes are really doing their job. There is universal frustration.
High on this list is also, how we work and where we work. I've been in my downtown office for one day since March. That day was surreal. The office was looking clean and sparking. But no one was there. Really sad. We need life around us. The virtual office will not replace people wanting human interaction.
Now we mix in the current state of our politics, and in this pandemic not yet in our rear view mirror, what do we do about our investments?
In any investing climate there are always areas that are mispriced, both too high and too low. We are continually looking for the undervalued assets, particularly those with better than bond-like dividends. Our philosophy still is trying to have our cake and eat it too. Current income plus eventual growth. For those of you with cash on the sidelines, we are very carefully and slowly investing those funds. But only if areas we really believe in move lower. Slow and steady is our approach now, particularly approaching this election. There are so many scenarios to ponder. For whatever reasons, after election day, if prices are strong… fine. We'll let them run. If we see extreme weakness, we will certainly put funds to work in the sectors we believe in.
One last note from someone who has studied history of markets for many years: anything you worry or obsess about in the wee hours in the morning almost never happens. It's what you couldn't see coming that really damages us. Like Pearl Harbor, the Kennedy Assassination, 20% interest rates, the meltdown of 2008-2009, 9/11. And now, the worldwide pandemic.
We are still a resilient nation. And there are optimists, every day, trying to make things better: in healthcare, in education, and toward equal opportunities for all. And to find an effective vaccine.
Like the Navy Seals. Get up every day, make your bed, put on the uniform. Try to reinvent yourself to help your family and your neighbors. I feel this way in my bones. So do my partners and our entire team. We all want to make a difference in your life, and have a common sense plan for all of you.
This isn't fake news. It's from the heart.
John D. Spooner
Managing Director, Wealth Management, Financial Advisor
Morgan Stanley Smith Barney LLC
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Morgan Stanley Smith Barney LLC. Member SIPC.
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