Newsletter 04/23/2020

Hello Clients,

The beat goes on. Watch the news as sparingly as possible. Same goes for watching your portfolio. The markets are out of our individual control. Choose to limit your exposure.

Despite current challenges, every day we are inspired by the examples of innovation, heroism, creativity, and progress brought by this new age. Greater wisdom will prevail and a more normal, albeit different, life will emerge. Our hope is that we use this as an opportunity to bring back the best of what we had and build an even brighter future together. All of America wants to return not just to work, but to our chosen routines and a sense of community. There are solutions and we must be patient. Will this episode teach us to be more prepared for the unexpected? Perhaps. Will it enable us to address societal problems that existed before that have been exacerbated by this crisis? We shall see.

We are fortunate for our frontline workers in healthcare, first responders, postal workers, and all essential workers providing us with food and other basics in a time of heightened importance. Our current circumstance is unique and different from previous national crises. This is the first time the front line has extended beyond military and first responders.

IN THE MARKETS

Stock markets retreated by 5% at the beginning of the week only to regain some of that loss on Wednesday. Daily movements of 1% or more continue at a record setting pace. Oil prices collapsed this week as well. Not indicative of lower prices at the pump, but a side effect to major disruptions in the economy. This volatility is bred by uncertainty and morsels of mixed news; sometimes areas of improvement and some worse than anticipated economic news.  As we all know, bad news is often perceived as good news; good news is good news, and good news is bad news depending on the day and the news. From a portfolio perspective, the days that we remember are when bad news is bad news and markets decline precipitously.

More interesting to SAS is the bond/credit markets where we see opportunities especially in CA Municipal Bonds. Currently CA munis are priced with a yield multiple of the equivalent US Treasury securities. This makes little rational sense because CA munis are double tax-free for CA residents and US Treasury Bonds are only state tax-free. Historically CA municipal bonds have been priced to yield about 80% of the equivalent US Treasuries. This relationship is now backwards. The same occurred in 2008-09 as mentioned in a prior SAS market update.  ‘Reversion to the mean’ relationship did not occur until a couple of years ago. This relationship holds true even when comparing taxable municipal bonds (Build America Bonds-BABs) which also have a yield 2 or 3 times the equivalent US Treasury! In light of the opportunity, we have been purchasing both taxable municipal bonds and tax-free CA bonds for portfolios as they become available. Our fixed income traders at TD Ameritrade notify our firm as inventory becomes available and we are buying them.

Volatility creates unease, but it also creates opportunity. There are always opportunities somewhere in the securities markets and fixed income at the moment remains very attractive.

Keep your questions coming. We appreciate hearing from you. Stay well!

Your SAS Advisory Team