What Have the Markets Done For You Lately?

Remember the comic Gallagher, the guy who’d smash watermelons with a sledgehammer, dousing people in the front row with watermelon guts? He used to do a bit on drivers. He said we could do away with a lot of our traffic police by issuing all drivers dart guns with suction-cup darts.  

When you saw someone do something stupid in traffic, you shot them with a dart. When your car collected a set number of darts, the police would issue you a stupidity ticket. If you got too many darts, they would take your license away. The policy would also tell you whom to avoid on the road and in parking lots.

Socially-enforced rules… I like it. 

With shelter-in-place orders putting 25% of the nation under some level of lockdown, people are getting bored and looking for outlets. California Governor Gavin Newsom specifically exempted outside activity from his lockdown order, but also cautioned people to be reasonable. 

They weren’t. Soon, Californians were flooding public parks, hiking trails, beaches… anywhere that gave them a way to get out and be around people, which was the problem. And not paying attention to social distancing.  

So, I’ve got a solution, inspired by a friend in Dallas: Everyone carries a spray bottle filled with fluorescent orange dye. When someone gets too close, hit ‘em with it. That allows the rest of us to easily avoid people covered in orange. 

We’re not likely to adopt such a measure, but I like the idea.

As for the markets, they had the best single-day gain since the Great Depression on Tuesday, but we’ve all got that “what-have-you-done-for-me-lately” feeling. Will the good times continue, or was this just a stimulated bounce that will fade as we get more bad news from New York?  

I think the answer is, “both.” The return trip won’t be straight, and it won’t reach the finish line, but with $2 trillion headed our way and Americans itching to get back to work, it seems unlikely we retest the bottom in this move. Nike sold a lot of shoes online, and President Trump said he won’t let Boeing fail. 

But that doesn’t mean we go back to the February highs. As the restrictions lift, not everyone will still have a job. Many workers in the oil patch will return just to get a pink slip. Americans will keep a little more, or a lot more, cash on hand, and companies will rebuild cash cushions while avoiding stock buybacks for a while. None of this says, “the good times are back!”

And then there’s the math problem.

If you earn 100%, lose 50%, earn 50%, and then lose 33%, your average return is 16.75%, but you’re back where you started in real cash. Your $100 investment went to $200, then back to $100, then up to $150, and back down to $100. This is the magic, or pain, of geometrically-linked returns. The market fell 34%, but it will take a rebound of more than 50% to get us back to record highs. That seems…unlikely. 

We’re adding positions to the Boom & Bust portfolio, on both sides. But I’m more interested in holding the Bust securities, big income plays, for a long time. However far the rebound takes us, I think we become range bound as we face the aftermath of the shutdowns and the looming election. That will make solid income plays a fabulous addition to your portfolio, and right now there are many fat yields and dividends to be had.