Prepared?

From record high to worst week since the financial crisis in October 2008, stocks ended thirty-plus years of bull in dramatic fashion. The top bull in the better than best of recent asset pricing is taking the leadership role in the great deflate.

From a high of 29,568 on February 12 to an end of month low of 24,681, the Dow Jones Industrial Average has lost over 4,000 points with 3,600 of it in one week (source: Bloomberg). This is not your normal pull back. This is not the buy the dip (one more time!). This is the end we have been talking about since November 2017 in my letter, Top of Tops. In that letter I noted 23,500 as the all-time high turning point for stocks. The extra run since then was a bonus.

You all know I have been writing about asset prices being at the end of something. From the depths of the financial crisis in March 2009 to February 2020, it was quite a ride. A ride I believed would be over (in November 2017) but continued through Groundhog Day (after Groundhog Day) 2020.

Consequential? Unbelievably so. This isn’t even the worst part. From my point of view stock investors “haven’t lost anything” as they are still ahead of November 2017. No, the worst part is ahead of us because it involves the bond market.

Stock prices weren’t the only asset class priced at better than best. Bonds and gold were as well. Both received nice bumps up in price in a fight-to-safety move while stocks tumbled last week. This is the last hurrah for both. In the coming months I believe I will be writing a lot about flight-to-safety, primarily how diversified investors in stocks and bonds will probably have no place to hide.

I believe bonds today are where stocks were a few short weeks ago. Low yields have pushed prices to highs, with all-time highs for many long-term bonds. These high values are apparent in bond mutual funds and bond exchange traded funds (ETFs) as well. Investors in these products have done well of late, regardless of how long they have owned the products.

But again, this is the end of something. Like stocks, bonds have enjoyed thirty-plus years of bull and with last week’s final push, I believe the era of bond market performance to be over.

Long-time readers know my line in the sand for long-term bonds occurred in 2012. Not only did I believe the bull market for long-term bond prices to be over, I believed it best to stay away from long-term bonds. Yes, there may have been time frames over the past eight-plus years when long-term bonds actually performed well, but I will also put The Select Approach^TM up against those periods as well. And like we have seen in stocks with a quick reversal in February, the coming bond reversal could be stunning as well.

It is not the coronavirus. I have been talking about the turn in asset prices for many years now. It is the market, and this is how markets behave. After a run up in prices, markets reverse course. After a long run up in prices, markets reverse course a lot. Watch for the quick reversal in gold as well as bond prices.

Low interest rates did not protect stock investors from February’s carnage. The Federal Reserve did not protect stock investors either. Long-term bond prices will reverse course, despite the Federal Reserve as well. These are markets we are invested in and markets will behave like markets, so be prepared.

We continue to work our plan with The Select Approach^TM. Your portfolios have liquidity built in (bonds mature). Other asset classes must be sold. I believe liquidity will become a very important topic over the coming months. Now that stocks have topped, the pace of change should pick up. Make sure your other assets are protected. I believe your portfolio with The Select Approach^TM should be well positioned to weather the coming change.

Comfort Independent School District, TX

Aaa (A1 Under) Moody’s

Permanent School Fund Guaranteed

Due 8/1 Dated 3/1/20 Maturity 8/1/2044

$17,040,000 Sold

1 2021 4.00% 0.84%
2 2022 4.00% 0.87%
3 2023 4.00% 0.90%
4 2024 2.00% 0.92%
5 2025 2.00% 0.94%
6 2026 2.00% 0.99%
7 2027 4.00% 1.04%
8 2028 4.00% 1.11%
9 2029 4.00% 1.21%
10 2030** 4.00% 1.29%
11 2031** 4.00% 1.33%
12 2032** 4.00% 1.39%
13 2033** 4.00% 1.44%
14 2034** 4.00% 1.50%
15 2035** 4.00% 1.54%
16 2036** 4.00% 1.58%
17 2037** 4.00% 1.62%
18 2038** 4.00% 1.66%
19 2039** 4.00% 1.70%
20 2040** 4.00% 1.73%
24 2044** 4.00% 1.87%

* Yield to Worst (Call or Maturity) ** Call 8/1/2029

Source: Bloomberg

This is an example of a new issue priced the week of 3/2/20

Prices, yield and availability subject to change