What Keeps Me Up At Night
I don’t often write about the things that are bothering me. Not only do I hate being negative (there’s plenty of people out there who are) but it seems so trivial to talk about the concerns of one Michael Antonelli. 2020 has given us our fair share of things to lose sleep over so I thought I’d do a quick list of the topics that wrack my brain while I try to fall asleep every night. Here they are, in no particular order:
- Permanent job losses. When the pandemic started I had hoped we would get through it fast enough that the people who were initially laid off would find work quickly again but “permanent job losses” are growing. Bill McBride of Calculated Risk blog has a chart of them here (shows permanent job losers as a percent of the pre-recession peak in employment through the June ’20 report). These aren’t “furloughs,” these are jobs that are gone, pure economic damage. I’m hopeful that line bottoms out quickly and that it doesn’t get as bad as the GFC.
- A “Start/Stop” economy. Our economy will only truly recover to pre-pandemic levels once the virus is under control. If we keep doing this open/close/open/close thing it’s going to rattle the stock market and make our path to normalcy longer and more treacherous. Controlling the spread of the virus is how the economy wins.
- Clients that are completely out of the market. I worry about them a lot and I’m not even an advisor. There are always risks to investing, there are always “reasons to sell”. But an underappreciated risk is that you might outlive your money, especially in a world where rates are near zero. How do we help someone who is currently sitting in cash get comfortable with re-entering a diversified portfolio so they can reach their cherished goals?
- The Bond portion of a portfolio: To further what I just touched on, if you have relied on the bond portion of your portfolio for income what happens when its filled with instruments that yield 0.50% or 0.85% ? A 60/40 portfolio (for example) is going to look a lot different starting in 2020 than it did in the past. The last thing I’d want is clients reaching for yield in order to maintain income. This is really an important issue going forward.
- My back. Why didn’t someone tell me that as I aged I’d come to hate sleeping? When I was in college I could sleep 15 hours no problem, now when I sleep more than 6 hours my lower back feels like someone took a sledgehammer to it. Ugh.
- Losing touch with my teammates. Sure, I can chat with them on IM, I can see them on Zoom calls, and I can participate in a socially distanced happy hour. But I miss the days of stopping by their desk to tell them how awesome Disney is, or going to grab a SBUX, or bouncing an idea off someone in a hallway. I miss the collaboration and face to face camaraderie.
- School. Will it happen? Will my children be safe? Will one infection close down a school for weeks? Will my children get the same level of education if they have to do it from home again How can you not lie awake at night and worry about school?
- Having to wear dress clothes again. I looked at my work shoes the other day and laughed. Hey guys, remember me? Boy you sure have a lot of dust on you. My dry-cleaning bag could fit on the back of Santa’s sleigh and I dread the bill when I take it in. If my bosses sent an email “we encourage associates to wear athleisure” I’d be willing to take a pay cut (that’s a joke…)
- That this moment passes us by without any real change: Have we reached a tipping point? Are we being nudged? Whatever fancy term you want to use I pray that 2020 is the year that deep meaningful change finally happens and that we look back on this moment as a historical turning point for equality. To quote Hamilton: History has its eyes on us.
- That millennials never trust the stock market again. I know you’ve lived through two really bad crashes and two horrendous job markets but I want you to know that the World breaks all the time, the stock market crashes often, please don’t fall into a mindset that the World is out to get you. Having an investing plan and sticking to it is the key to reaching your goals especially during turbulent times.
But while these things keep me up at night they don’t diminish my long term optimism. We live in a world that rewards problem solving, grit, and resolve. The incentives are all there to figure this thing out – it will take time, sacrifice, and tremendous effort, but I think the case optimism always wins out.
Guess what, if you are waiting for the world to be calm, stocks to be cheap, the perfect political atmosphere, and complete certainty about the future before you invest then, my friend, you’re going to be waiting a very long time.
Build a plan, have a goal, find someone to talk you through the tough times, then spend your days doing what you love and ignoring the noise. That dear reader will help you sleep at night.
Not A Recovery, A Revival
The stock market roared back to unchanged on the year (before the most recent decline). It's weird to type that, it's even weirder to see it:
The crash of 2020 was an absolutely chaotic breakdown as the market became obsessed with the worst-case scenario. Would 2 million people die? Would we have another Great Depression? Would the economy be shut down for years? All it could think about was darkness.
But then we bounced, for a variety of reasons. Government stimulus, Federal Reserve backstops, a market structure dominated by big tech firms, the fact that it cares more about the "duration" of this event than the "depth". While we read about a 40% drop in Q2 GDP and tens of millions unemployed the market was thinking about a potential recovery.
Recovery, it's a curious word, defined as: "a return to a normal state of health, mind, or strength." Opentable data shows more people going back to restaurants, TSA data shows more people going through security checkpoints, Credit Card data shows people back to normal levels of spending, Hotels are seeing increased occupancy. The market started to price in an economic recovery in early April and we're just now seeing it happen in real time. But I don't want to focus on a "recovery," the US economy is resilient and will get back to where it was one day, I want us to focus on a "revival."
Revival is defined as "an improvement in the condition or strength of something" and that's where I want us to go. I don't want to see a return to a "normal state". I want to see an improvement in the market, in the economy, and in the fabric of the World around us.
Racism in every single form needs to end NOW. Let us shine a spotlight of equality across the World so that every one of us can be confident in seeking life, liberty, and the pursuit of happiness.
I wrote a blog post titled "Bite Sized Chunks" that is sitting in my draft folder. In it I wanted to relay how I've been approaching all that we've seen in 2020 and how I deal with it on a personal level. Here is a snippet:
I will help in a circle around me: I can't affect the national picture but I can impact everything in a tight circle around me. My friends, my family, my community, my firm. I will help where I can knowing that my little portion of this World is rowing in the right direction.
I can't solve the problems of the World, and they are vast, but I will be a force for good which includes teaching my children and making a positive impact in the community. I can make a difference, I know I can, and I will.
Help us be a part of this revival, not recovery, so that going forward our nation (and economy) is better for every single person.
The world (and the market) is a chaotic place, never in a state of calm, but that doesn't preclude long term growth. Things get better over time, others don't let's focus on what needs fixing so that 2020 wasn't the worst of our years, but one of the best of them.
Grading My Actions
As I look back on the past two months of insane markets, I feel both shock and relief at what we’ve been going through. March 2020 was the most volatile month in stock markets history. 2 of the 6 worst days in DJIA history happened in March. We saw the fastest bear market in history and at the low on March 23rd it felt like the wheels were coming off. Looking back on it now it was easily the scariest month I’ve witnessed in my career (and I was an institutional trader through 2008-2009).
Then April followed and proved to be one of the best months in history, a +12.9% gain. Horrendous crash, relief bounce, quite a one-two punch. I wanted to use this space not to talk about why the market fell in March then rose in April but to analyze my own actions during those months. I am a market strategist in Baird’s Private Wealth Division. I spend my entire life embroiled in the ups and downs of markets and investing. I thought it would be interesting to examine what I did as the pandemic rocked global markets because if I’m going to talk to advisors and their clients about investing, I should be willing to share my results and thought process.
To set the stage I am a married 46-year-old with two children ages 14 and 12. My advisor and I have decided on broadly diversified mix of equities and bonds (this is not investment advice, nor is my asset allocation a model for every investor). I’m going to use a chart of the S&P500 as a proxy for when I made my decisions because I have no great benchmark given the complexity of my holdings. When the pandemic got going in March, and the stock market fell, I made the decision to start moving some of the bonds into stocks, essentially upping my equity weight. I made two buys, you can see the area where I made a decision on this chart, and where the market is today (May 7).
How do I grade those two decisions? Hindsight is obviously 20/20 and the first decision now looks early, but stocks had fallen 7% from their highs. A 7% drop in a huge bull market looked attractive to me. Unfortunately, the market started to fall apart as the news worsened. My second buy was early March, down 18% from the highs. Better for sure but still appears early. This was my thinking as market fell – I’m 46, I have decades of time in front of me and I am finally getting a chance to buy at lower prices after a ten year bull market….why would I pass that up?
Then things really came unglued and my nerve to buy stocks evaporated. At the low on March 23rd I could think of nothing but the worst-case scenario unfolding. I was frozen. Everything made me think the market was going even lower, my mind filled with darkness, muttering to myself “I can’t buy here”. I called my advisor so they could bring me back from the ledge, to remind me why I’m investing and why planning is so important to my success.
While I took no action close to the lows, look what happened on March 25, two days after the low.
That’s right, my dividends reinvested like they always do. Dividends can play a significant role in investment returns and, in this instance, they did a better job of buying near the lows than I did though obviously I did get lucky on timing here.
So how did I end up doing? How do I view my actions in hindsight?
First, that may not have been THE bottom, we might retest it or go lower, but for now I want to grade my actions while they are fresh in my mind. I think my first buy was clearly way too early. I didn’t know how bad it could get, I just assumed it would be a temporary blip. The second buy is certainly better but I learned a painful lesson about bear markets, when stocks are in free fall they can accelerate to the downside. The dividend reinvestment reminded me that the automatic portion of my investment plan has no emotions, it just sticks to the plan. If I had to grade myself I’d say B-, what I do know is that I need to work with my advisor on a rules-based plan for how I react to selloffs going forward.
No joke I had my finger over the sell button near the lows, I had seen scary markets before but the added worry about a health crisis rocked me to my core. I remember leaving my basement, walking around outside and thinking about how bad it could get, what I would do, what my family would suffer if the market kept imploding. Thankfully I had an advisor there to remind me one thing: that my plan, my investments, my strategy, is built SPECIFICALLY for me and no one else. He reminded me that “the end of the world isn’t a plannable event, it’s best to think of the most likely outcome rather than the worst case”. What was that? That continuing to be a long-term optimist is true to who I am and my strategy. The key to success, especially with investing, is being able to ride out the inevitable declines.
Investing can be much more emotional than we want and March 2020 reminded me that having someone outside my brain is incredibly valuable. I may not have bought at the absolute low but I honestly don’t care and neither should you. It’s entirely possible that WASN’T the ultimate low, only time will tell. Let me end with this quote by Howard Marks:
“The Investors goal should be to make a large number of good buys, not just a few perfect one’s.”
I didn’t make a few perfect buys, no one does, but that will never be my goal. My goal is to keep making “good buys”, be optimistic about the future, get through scary selloffs when they happen, stick to my investment plan, and allow time and compounding to do its work.
Just Show Up
Amongst all the hectic news and markets I never got a chance to say goodbye to someone special to me and to my teammates at Baird. Paul Purcell, long time CEO and mentor to us all, passed away on February 28 at the age of 73. There have been many amazing tributes to his life and legacy both inside and outside my firm (my friend John Taft wrote a great one here in Barrons) but I wanted to use something he often said to guide us in these turbulent times.
Imagine your CEO emails you and says “hey, can you add me to your blog/daily email?” Ummmm, sure Paul, absolutely, let me just pace around the office for an hour first. While I was incredibly honored I was also a bit nervous, I mean who wouldn’t be, but him reaching out is what’s so amazing about Baird. Every leader, all of them, are super approachable, having him read my content was no different than anyone else because he made it easy between us. Paul was always happy to engage with me, if I sent an email he’d respond instantly. I never wondered if he read it, he’d constantly send me “thank you’s”. When I see our advisors on the road they love to show me where Paul recruited them. “See that table over there, Paul wouldn’t let me leave it until he convinced me Baird was the right place for my business.” They all, to a person, remember every single interaction with him. They also echo something Paul used to say about the key to success: Just Show Up.
It's a simple phrase with profound wisdom. Just show up to work, just show up for your teammates, just show up for your clients, just show up for your community. In these incredibly difficult times that phrase might seem out of place but it’s not, it means even more. If you can’t show up at your office because you are working remotely then find a spot to work and show up for your company there. If your clients need help because they are scared, show up on the phone or in a Zoom meeting. If your family is sad or worried about what’s going on, show up and offer them strength. If your neighbor is elderly and scared to go to the store because of a pandemic, SHOW UP FOR THEM.
We recently entered a bear market and if we use history as a guide it could last awhile. My friend Callie Cox wrote: “Bear markets are a process, the past 11 bears have taken an average of 15 months to find a bottom, and 8 months from the bottom to reach new 52-week highs”. No Bear market since the mid-19th century has dropped 20% and made the round trip in less than 3 months. You know what else? You just lived thru the craziest month in stock market history.
Volatility is going to be heightened for awhile, expect gigantic daily moves. After the crash of ‘87 the market bounced 15% in two days, then re-tested the low 33 days later. Every bottom is different, this one will be too. What matters right now is your risk tolerance and your horizon not someone else’s. Hyper focus on that, play to your strengths.
One of the great, if not best, things about this nation is that we don’t wait for people to tell us what to do, we do it because it’s right and it needs to happen. In the past when our nation mobilized to defeat an enemy it started at the individual level, then the community level, then the national level. Not the reverse.
Wherever you are, whoever you are, now is the time to heed the words of a great man who is off to a better place: JUST SHOW UP. In ANY WAY you can. For yourself, for your teammates, for your family, for all of humanity.
Thank you for all you did for me Paul and for us at Baird, we’ll never forget you or your words that echo thru eternity.
Lessons Learned From a Basement
I started working from home late last week, for the first time in my career, and little did I know I’d go on an incredible journey in just a few days. When we look back at this time period it will be with awe, sadness, incredulity, and solemn reverence. The things we are learning about ourselves and the World will forever shape the rest of our lives. Let me pass to you a few of the lessons I’ve learned on a laptop in my new basement “office.”
- You have to pick a side in life. Big picture…long term….you are either an optimist or a pessimist. A helper or a complainer. A bull or a bear. In extraordinary circumstances it’s important to define who you are so you can get to work. The first question you should ask yourself is this: Will humanity win, will we persevere over this virus? Only after answering that can you move onto other decisions. I believe we will, I’m an optimist, and I will be a helper to my firm and our clients EVEN as I acknowledge the challenges we face right now (a bit of realism).
- Make your move and sleep at night. Investing, for as complicated as it can be, is all about you and your own time horizon, no one else’s. What you see in the news and on TV is someone else’s game so why do you care? Studies have shown people with advisors do better in times like these than people who go it alone. Why? For a multitude of reasons but mostly because they have someone alongside them to remind them that their game, their home field, is what matters. That their actions, right here during March of 2020, will determine their success at reaching cherished goals.
- Look at your results and recalibrate if something is wrong. You want to know how diversified portfolios are doing thru the worst selloff since the Great Depression? They’re doing fine. My friend Ben Carlson looked at their performance on March 23. A 50/50 Stock Bond portfolio (on March 23) was down 15% YTD. A 100% stock was down 30.8%. This is the WHOLE POINT of a well-diversified portfolio. If you look at your allocation and you can’t stomach it then you’ve learned about your risk tolerance. You need to have “impatient money” and “patient money”. Impatient money should be used in the here and now, cash to meet short term needs, while patient is set to ride out storms. Don’t mix the two (this is a failure of a great many investors)
- Focus on what you can control. Here is what’s under my control A) My family’s safety and staying at home B) What I do to support my teammates, our advisors, and their clients C) my attitude D) staying in touch with people I love E) Keeping my spirits up. You know what’s not in my control? The market, the virus, people who are constantly negative, what the government does, or when the Olympics happen. Fear and negativity is as infectious as COVID 19, don’t let it penetrate you. It’s OK to acknowledge how scary this is but focus on what you can control.
- What my son eats. I swear there are not enough snacks in the World to satiate my 14 year old boy. He’s a remorseless eating machine plowing thru Doritos like Homer Simpson through donuts.
- The World will be different on the other side. Lots of things will change, some for the better. Watching a first run movie at home is amazing, doing conference calls on Zoom is seamless, drinking coffee in my kitchen and going to work in my sweatpants is liberating to my creativity (I hope my bosses allow sweat pants when we all go back to our desks). Some of Newton’s most profound discoveries happened during the Bubonic Plague, we could see incredible things happen in the next few years.
- Local Business matters. The stock market will survive, big companies like AAPL, AMZN, WMT will be fine, but your local business might not survive. I promise you that the valuations on your favorite restaurant or bar are attractive, support them so they don’t fall into an abyss. They are the heartbeat of our nation, don’t forget them.
- Every crisis has heroes, this will be no different. There will be stories told of the heroism of Doctors, Nurses, and Medical professionals that will rival anything you’ve ever read. God look over them, bless them, and keep them safe.
- Regular jobs have HUGE importance. Grocery stores, retail workers, pharmacists, the list goes on and on. They might not be super star athletes or movie stars but their importance to our society is immeasurable. Thank you.
- Laughter is a huge part of life, even in Finance. Find someone who makes you smile and hold onto them with both hands. Human beings can only take so much serious investment commentary, I try to balance markets with a sense of humor and I hope it shows. Follow smart people, read good commentary, but don’t drown in technicals.
Let me end with a quote from my one of my favorite books of all time. The message is timeless and I want you to take it to heart. Read it a few times and let it wash over you.
Frodo: "I wish the ring had never come to me, I wish none of this had happened"
Gandalf: "So do all who live to see such times, but that is not for them to decide. All we have to decide is what to do with the time that is given to us"
J.R.R. Tolkien - The Lord of the Rings