COVID-19 and the Real Estate Market

COVID-19 and the Real Estate Market

The Coronavirus is affecting our lives in many different ways. Eating in with carryout and delivery instead of reservations at restaurants and bars, Zoom meetings and teleconferences instead of office meetings, waves instead of handshakes and hugs; the world is a different place than it was two months ago.

More of the Same….and Then It Wasn’t

The beginning of 2020 looked quite similar to the start of the last few years in the housing market. Then, as we know, everything changed in March with COVID-19. We are now left with many more questions than answers. Mortgage rates have fallen to even lower levels as the Fed is desperately trying to help the economy. This, in turn, created a glut of refinancing applications for mortgage lenders. However, the negative economic impact of COVID-19 is far reaching, creating tremendous liquidity problems within the banking system. It is difficult to close on a mortgage refinance when the money to pay off the existing mortgage is in limbo, or lock a rate on a mortgage application when the lender has no idea how long it will take to get to a closing table. Delinquencies on existing mortgages will certainly increase as homeowners deal with an uncertain job market, leading one of the country’s largest mortgage lenders, JPMorgan Chase, to change their lending guidelines in recent weeks.

Uncertainty Abounds 

The economy is in a very different place as well. Strong earnings reports and record low employment numbers have been replaced with the utmost of uncertainty. Almost every aspect of the economy is dealing with some level of ambiguity, with the housing market taking center stage. The housing market over the past decade has been, for the most part, quite strong. This has been fostered by low interest rates, ample cash liquidity, and friendly lending guidelines. This, however, has led to the issue of low inventory and excess demand for the last few years. While this has been positive for house prices and mortgage applications, it has created an imbalance. Builders are trying to take up the slack by fast-tracking new home construction, and anyone remotely interested in selling a home has been enticed with the idea of completing offers to purchase within days, instead weeks or months.

Housing Recession Imminent?

With all of this said, it would be easy to assume that the housing market is headed for a recession of its own, but I wouldn’t be so quick to come to that conclusion. This is one of the more resilient components of the overall economy. People need to buy and sell houses every day, regardless of what is happening in the rest of the economy. We will likely have a low interest rate environment for the foreseeable future, which should keep the market somewhat stimulated. 

What To Do?

What should you do if you are in the process of a refinance or house sale/purchase? First things first…don’t panic! Nothing good will come with trying to force the process to go faster or demanding that things happen. The task at hand will require more patience and understanding than in previous years. The refinancing timeline has shifted to a couple of months versus a couple of weeks. Locking rates will almost certainly become more difficult than it was before, and underwriting guidelines are changing. My recommendation would be to work with a mortgage lender who is in touch with the current protocol and can guide you through the process. You need to be working with a lender who provides specific advice and has a strategy for operating in this environment. This, in my opinion, isn’t the time for the internet lender who is offering a teaser rate of slightly below the market rate. This is a time for trusted advisors. If you need a recommendation, please let us know and we would be happy to provide you with the contact information of different lenders.

Nate Condon 

Investment Committee Meeting Recap: Responding to Market Conditions

Investment Committee Meeting Recap: Responding to Market Conditions

With work from home, school from home, and everything else from home, routines have been disrupted for many of our clients. Fortunately for us at Walkner Condon, our preparations for the need to work offsite (detailed in Clint’s post from March) have meant that our processes have largely remained unchanged. Last week, we held an investment committee meeting (via Zoom of course, with the proper password protections!), which is a key part of our ongoing investment management process. As part of our commitment to transparency, we wanted to share some of the thoughts we discussed during the meeting.

Portfolio Structure

In general, we have maintained our overall portfolio structures as they accord with our client’s risk profiles– that is to say, we have not made overall shifts from the percentage of assets allocated to bonds or stocks. However, in our discussion we also acknowledged that maintaining our long-term strategic outlook of correlating overall allocation to a clients’ financial plan is a tactical decision, especially in light of the market volatility.   

Bonds for Balance

That said, we have not left our clients portfolios untouched, and we discussed the various markets where we see opportunities and how to position our bond and stock portfolios. For instance, our overall strategy views our bond allocation as a defensive position in our clients portfolio. Consequently, our most recent rebalances look to make our bond positions more defensive in light of the ongoing uncertainty in the market. Moreover, we discussed how one of the advantages of smart-beta and active management in the bond portfolio is that it can lead to less risk exposure in negative environments like the present. Such a defensive position may help clients in the short term and also allow us to rebalance effectively into stock positions. 

Stocks for Growth

Regarding those stock positions, we discussed where we see longer term opportunities in the markets given the longer-term fallouts from the coronavirus. While we aren’t making any predictions about the shape of or the timeline of the U.S. recovery, we do continue to think that rebalancing towards a core of U.S. equities will be a solid investment for the long-term. In that context, we’ve also noted that in the previous ten years we have experienced marked outperformance from U.S. equities. The continuing strength of the U.S. dollar (which will lower the cost of their exports), coupled with a strong response to the global pandemic could mean that Asian stocks are also particularly well-positioned for long-term growth.

As we continue to discuss the strategies surrounding our clients and our portfolios, the key refrain of this discussion and others is that we need to continue to align our portfolios with our clients long-term needs and let the portfolio construction continue to be governed by our clients’ financial plans and goals.

The Walkner Condon Team

Authored by Keith Poniewaz

What’s Going On With The Price of Oil?

What’s Going On With The Price of Oil?

On April 20th, 2020 something happened that has never happened before in history. The price of a barrel of WTI oil for the May contract went negative and closed at -$37.63 for a barrel. But what exactly does this mean and why did it happen? 

It’s Not As Simple as Just Supply and Demand 

The price of oil is usually determined by supply, demand, and market sentiment toward the product. With the entire global economic situation suffering from shutdowns to combat the coronavirus outbreak, the demand for gasoline has drastically reduced and looking forward is expected to remain that way for at least several months. The supply of oil which is used to refine into gasoline as well as other energy sources has been increasing to unprecedented levels. There is only a limited amount of storage capacity available globally for this oil and due to the scarcity, the price has drastically dropped this year. On April 10th, the market went negative because traders capitulated based on the fact that it is cheaper to pay to have the oil hauled away and stored than it is to build more storage capacity or to shut down the wells that are producing it. So, with this historic market event, where do we go from here?

The Unprecedented Impact of Coronavirus

Moving forward, it is likely that many of the states will begin to reopen their economies. Other countries will also resume economic activity. How long this will take is speculative, but one thing that is certain is that the dramatic drop in price is evidence that the coronavirus has dramatically impacted the global economy, and it is going to take some time for the prices to recover. It is likely that some oil and gas companies will go bankrupt if this downturn in economic activity and oil persist. President Trump announced that the US would open up the strategic oil reserves and ask permission to buy up some of this oil and take advantage of the low prices as well as attempt to stabilize the market. It is likely that oil prices could continue to go down or stay down until the global economy resumes at or near “normal” levels. While it feels good to fill up our tanks for less than $20, it is not always a good thing for the overall health of our economy. 

How Does It Impact Investments?

There are more liquid investments on exchanges that attempt to track the price of oil such as USO, which tracks West Texas oil price, and BNO, which is tied to the Brent Crude oil price. It is important to know that they are investing in futures contracts of the commodity, and are not always able to take advantage of the drastic price swings. They are risky investments and complex in nature because of the rolling over of the monthly futures contracts and there should be significant due diligence done to understand the underlying risks of the investments before they are considered. 

There is a lot that goes into the market for oil and it is certainly a worry about the impact that it will have on the economic recovery. In the 1980’s there was a drastic drop in price and it took 7 years for prices to recover. Understanding the underlying reasons why oil prices fluctuate are important for investors, but it does not mean that you should necessarily take significant actions. 

Where Will The Price of Oil Go From Here?

As it has in the past, prices are likely to stabilize in the future. The economy will open up, and people will get back to work. The future will be determined by the tremendous global economy that has been built and grown on innovation and adaptability and there is no reason to believe that will not be the case this time either. In the meantime, go for a drive (safely and observing social distancing of course) and enjoy these low gasoline prices while they are here!

Jonathon Jordan

 

Disclosure Note: The discussion of oil and ETFs such as BNO and USO are illustrative in nature only. You should check with a trusted professional advisor before implementing any of these investments into your own portfolio. 

 

Where Are We Now In the Markets?

Where Are We Now In the Markets?

As our lives have all been upended due to COVID-19, with an extreme drop in value and subsequent rally in the stock market, many are wondering where we are now. Is it overvalued? Undervalued? Will we test a new bottom?  

The Stock Market is a Leading Indicator

Some may wonder – with death numbers increasing and uncertainty everywhere, why did the stock market go on a huge run the last week? The answer could be multifaceted, but one of the main reasons was because the death toll numbers were being adjusted downwards and the data is pointing towards more optimistic projections of ICU bed usage and critical cases. If we extrapolate that onto the projected “opening” of the economy, it appears that the more extreme measures we have been asked to take in regards to social distancing and staying at home are likely to be relaxed within the next 4-6 weeks. This has led to some positive momentum in the price of stocks.

Valuation of Stocks

If we look at the stock market price to earnings ratio (P/E), we will find that presently it is at about 17.6 (using SPLG as a benchmark). This is slightly above the historical average of 16 or so, but over the last five years, we have been running at a P/E in the low 20s. 

S&P 500 P/E Ratio, Last 5 Years

When either the numerator or denominator gets way out of whack, you can see the P/E spike, having the appearance of overvaluation. This can be a false flag, as seen by this chart showing P/E ratios after the 2008 crash. This event could occur again shortly, as earnings are about to get crushed by the freeze in economic activity. 

Chart of P/E Ratio of S&P 500, Historical

S&P 500 Historical P/E Chart

So what does this mean about valuations and the present stock market? It’s uncertain to be sure. If the virus doggedly hangs on and the policy by the state governors and the Trump administration is one of extreme caution, it is highly likely that the economy will take longer to recover. Another plausible scenario is that the economy gets opened up only to be shut down again after a return of momentum in COVID-19 cases. In either regard (and of course there are many other possibilities), the recent stock market rebound is pricing in a fairly rapid rebound in profits after the likely recession we will have in quarters 2 and 3. If this does not occur, it is very possible that stocks are overvalued at this time and we may see another significant pullback (or two) before recovering.

How Does Governmental Action Through the CARES Act and Federal Reserve Impact Economic Conditions?

What we have seen from the government in this crisis has been absolutely unprecedented. To compare and contrast the 2008 efforts with current action, here is a good article to read. There has been a massive effort to keep Americans on payroll and extend unemployment benefits to workers that previously did not qualify (like “gig” workers or freelancers). Furthermore, direct stimulus payments were sent to Americans that qualified and small businesses were allowed to participate in a variety of loan programs, some of which will offer loan forgiveness. Obviously this will eventually lead to long-term ramifications for our economy, many of which are unknown at this time. At a minimum, we will have incredibly high deficits in 2020 and likely beyond. This may lead to higher interest rates through borrowing costs, as well as increased unemployment insurance premiums for companies, a potential for inflation, and higher tax rates for both individuals and corporations. 

What Does That All Mean and What Should I Do? 

The best analogy I heard recently was that the economy is like a muscle. If you do nothing to your body but sit, your muscles will atrophy. The longer your muscles are allowed to be dormant, the longer it will take to get them back into shape. If allowed to go too long, those muscles may never recover, and even if it is relatively short term, some lasting damage could still be done. While it is likely not responsible for us to just open up the floodgates to accept an increase in virus count, there also will be a balance point where opening the economy to allow for goods and services to be consumed more freely makes sense. 

So….what to do? Continue to look at the data. There’s tons of great sources, including Worldometer, COVID-19.direct, and IHME. Practice social distancing, be safe, and start to make a plan for how you are going to handle your financial and personal life after we are allowed to return to our places of business, coffee shops, and recreational areas. Get out for frequent exercise and fresh air (we just found out that BMI is a significant factor in being hospitalized in coronavirus cases), and enjoy the responsibilities of being a teacher or simply just enjoy being a Zoom meeting happy hour participant. Whether the stock market goes straight up from here or it tests a new bottom, this too shall pass. 

Clint Walkner

Disclosure: The post was written in a rapidly changing environment for the stock market. You should not treat any of this commentary as investment advice. Please work with a professional advisor to discuss your own personal financial situation. Charts were presented as illustrative in nature only. 

 

                 

 

 

 

 

 

 

 

Our Comments on the Recent Market Decline

Our Comments on the Recent Market Decline

As a general rule, we are very cautious in commenting on the normal ebbs and flows of the stock market, as headlines have to be written daily but in our view, many times just add up to collective whims of investors. This, unfortunately, may not be the case before us at this moment.

There was a time in my career when I confidently referred to concerns about subprime mortgages as “much ado about nothing.” But as we all know,  seemingly innocuous items can add up to large ramifications for our economy, and, as a result, the stock market. As we have entered correction territory, defined as a pullback of 10%, it is not unfeasible that we could approach a bear market (losses of 20% or more). We have said in the past that the current bull market is unlikely to end just due to old age, but rather due to something unforeseen happening. A coronavirus pandemic could be “the” unlikely event.  

The measures intended to quarantine off the virus have, and will, cause disruption to the global economy and it could get worse before it gets better. Fortunately, both in the U.S. and globally, we have a good record of containment when prior communicable diseases have been found. Additionally, there are some concerns about the prospects of a less business-friendly political environment as the Democratic nomination process unfolds (which we will discuss at a later date in a podcast and/or blog post).

As the vast majority of our clients are long-term investors, we encourage you to exercise caution in trying to market time out of this. As the quarantine efforts and treatment plans unfold, we will see a leveling out and an eventual decline of the infection rate. Once this happens, the market is highly likely to react positively and the demand for products, services, and trade will rebound. The markets are not experts on pandemics and don’t know how big these disruptions will be, but the old saw “the market hates uncertainty” means that traders and analysts will often try to price the worst case scenario in order to protect themselves. As we simply don’t have enough data to accurately predict what will happen or the duration of this disruption, we encourage patience and perseverance. 

We knew that a correction (and potentially a bear market) was inevitable at some point and for the vast majority of our clients, we have consistently rebalanced toward assets in their portfolios such as bonds that do not follow the stock market and will help in times of decline. We believe strongly in diversification, and these are the times where it can help cushion the blow. However, should you need money in the short term, you should discuss that with us.

Our team at Walkner Condon follows a disciplined investment process, and we intend on rebalancing our portfolios into down markets to position ourselves opportunistically. Our core values dictate that we do what is in your best interest, and we will continue to try and fulfill that for each and every one of you, regardless of market conditions. 

Clint Walkner and the Walkner Condon Team

What Nate and Clint Learned in Orlando

What Nate and Clint Learned in Orlando

This past week, Nate and Clint went to the annual TD Ameritrade conference, called LINC 2020, held in Orlando, FL. The conference features a number of keynote speakers, breakout sessions, one-on-one training opportunities with TD Ameritrade staff, access to various vendors, and demonstrations of new technologies. Here are a few observations we came away with:

 

TD Ameritrade – Schwab Merger

Tom Nally, President of TD Ameritrade Institutional, indicated that the deal between TD Ameritrade and Schwab will close in the second half of 2020. It will operate under the Schwab name. Due to antitrust laws, TD and Schwab are very limited in the discussions they may have prior to the closing of the sale. As a result of this, as well as the sheer volume of data and systems the two companies possess, Tom estimated that it would take 2-3 years for the companies to integrate together. He was definitely hopeful that the new entity would be one of the best financial services companies around when it is finalized.

 

A Changing Geopolitical Landscape 

Ian Bremmer, president and founder of Eurasia Group, spoke at a keynote session regarding his thoughts on the worldwide economic and political environment. He sees an increasing departure from globalization and a significant technological divide between China and the United States. With China set to become the largest economic power, countries will have to decide what sort of technological backbone through 5G they will want to employ – do they prefer to go mostly through the United States or China? Bremmer sees more volatility in the markets and a general global slowdown, though not necessarily a recession imminent in the near horizon. He did not believe that there will ever be a version 2.0 of a trade deal signed with China. He was generally positive on the most recent update to NAFTA, which he pointed out was a good update to prior legislation due to technology improvements that have been made since the original version was signed. Bremmer kept the political prognostications to a minimum but placed President Trump’s chances are getting reelected at 60%. He was most concerned that we wouldn’t have a presidential choice immediately after the election due to the closeness of the race and the risks inherent in our electoral system if one of the parties refuses to accept the outcome. 

Human Connection

Marcus Lemonis is most famous for his CNBC show where he invests in struggling businesses and focuses on “people, product, and process”. He opened his keynote address by disclosing to us that he has social anxiety, an eating disorder, and was molested by a family member as an adopted child. Despite all of this, he persevered to become the CEO of Camping World and a TV star. He encouraged the people he called on to share something that no one knows about them, a deep and dark secret to just him – which of course was seen and heard by literally thousands of people in the room. It was remarkable what people would share after Marcus would gently nudge them into disclosing past trauma in order to show others that many people share the same obstacles in their journey through life. The overwhelming message was encouraging people to connect on a deeper level, and to address their past and learn from it.

 

Technology as a Tool

TD Ameritrade always features an Innovation Lab at their conference, showcasing what a financial advisory office of the future may look like. We viewed a more customized waiting room experience, offering an iPad with curated content for the meeting attendee (we prefer an old fashioned approach – actually speaking with the client and offering coffee!). We also experienced a more interactive financial planning experience, with various flash cards being strategically placed to trigger images on various screens behind the client (this was very cool). This visualization technique was designed to immerse clients more deeply in the financial planning process,  helping them to see their future value as more than merely a graph on the screen. Last, we viewed an advisor workstation desk that could automatically scan documents placed on the glass, highlighted by three large screens and stand-up capability. We also got to sit in an office chair designed by Ferrari. It was very nice, but at a price tag of $10,000, we’ll leave that purchase to the Marcus Lemonis’ of the world.

 

Clint Walkner and Nate Condon