• Tim Alford

Big Picture. Big Picture. Big Picture.

While it’s difficult with such complicated topics as economics, markets, and investing, I try as hard as possible to keep things as simple as possible and as brief as possible, with mixed success. I believe the situation right now is clear enough to accomplish that.


With most of the US and Europe beginning to join much of Asia and Italy sheltering in place, economies are likely to take significant hits, significant. It is possible the hits are short-lived, but not likely. If the goal is to “flatten the curve” of virus infections, how can social distancing and staying home be limited to 3 or 4 weeks? Won’t virus infections increase the moment those practices are over, if done before a vaccine or “herd immunity” are in place? I understand trying to manage panic and fear, as well as a renewed debate on the cost vs. the benefit of practiced quarantine that will come after a time, but this whole episode is likely to last longer than any care to currently imagine. Economic growth is likely to be down 5-20+% for 2-6 quarters and corporate profits down 30-50+%. THIS IS A BIG DEAL. There’s even a real possibility for major problems—massive defaults, stagflation, loss of faith in governments and central banks.


Markets have “dipped” 20-30%. This happens with some regular occurrence as part of market cycles, though the recent speed and volatility have been breathtaking. With the above-mentioned potential economic and profit effects, it’s likely the final outcome for markets will be significant further losses. It is certainly possible additional liquidity from central banks holds markets up, or as mentioned above the virus or economic effects are fairly short, or investors are willing to see through this period and stay invested for “the long run.” None of those are likely based on historical precedents. The probabilities and potentials are asymmetric. Simply due to the reaction to the situation and starting point of historically high valuations. it’s a much higher probability markets go down than up, with the potential move lower much larger than the potential move higher, yes even from current levels. THIS IS A BIG DEAL.


After 30 years of discovery it is my strong belief what matters most for investing are valuations and investor sentiment. Fundamentals are fairly easy to discern, fairly consistent, and don’t surprise too often. What varies greatly is what investors are willing to pay for fairly predictable cash flows based on those fundamentals, which translates into asset prices.

My belief is the best strategy is to invest in assets with strong fundamentals at reasonable or low valuations, which is typically when investor sentiment is low, and exit those assets when investor sentiment is too high. Remaining invested in favorable assets regardless of valuations creates too great of swings in performance and therefore unnecessary anxiety and risk to financial plans, as well as lost opportunity cost to redeploy capital at better valuations and thus improve returns.

As I’ve stated repeatedly, recent valuations have been historically high, while economic and profit fundamentals have been deteriorating. Now fundamentals are likely to deteriorate materially, probably dramatically. With this and the above asymmetrically negative proposal on market direction in mind, it does not make sense to remain invested through this period. Valuations are still high after the recent sell-off and returns over recent years still good, even based on today’s levels far off the highs, so it makes sense to book those gains. It’s just implausible to think assets will hold up in what is practically guaranteed to be a dramatic increase in virus cases, stress on the healthcare system and whack to economy. Things could work out differently, yes, but rarely are probabilities so clear. The course of action should be just as clear.

It is likely investors are entering a new era, where central bank policies do not hold markets up, the dynamics of inflation/deflation change, and markets don’t recover for quite some time. There will be a bottom, when valuations reach levels at which deep pocket investors that saw this coming are happy to buy and ignore prices after that, which is my plan also, but not yet. When the set-up gets to that point, bonds with good yields will be much more attractive than stocks.

Achieving favorable results in this era will require throwing away the old buy-and-hold strategy and acquiring good assets onlyat reasonable valuations and selling them at high valuations. New era, new strategy.

I strongly suggest acknowledging the historic nature of current events and recognizing that different thoughts and behaviors will be necessary to deal with them. I know it’s hard to think about and such thoughts can even incapacitate us, but horrible events and financial fallouts do happen historically so why can’t they happen again, and why not force yourself to be open to the possibility so you can manage more effectively.

The big long-term fear is a major blowout in markets followed by a very long period to recovery. Holding investments through such a period will not work. It happened in Japan (market topped in 1989, still way below), a pattern which the US market is so far following:

The big short-term fear is regulators close markets if losses get worse. Upon re-open they could be up, but they could be disasterously lower with no chance get out.

Overall risk is high enough in the big picture to work toward no financial exposure for now. Markets are catching up to fundamentals, which will get worse, but have a ways to go.

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