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In a world filled with varying narratives, not to mention conflicting narratives, narratives do not move markets.

The Market Doesn’t Care

October 20th, 2020 by Kurt L. Smith
  • Voting is in full swing across our nation and I am sure you will be voting as well if you haven’t already. While we all care about our election, the market does not.

    In a world filled with varying narratives, not to mention conflicting narratives, narratives do not move markets. News, breaking or not, also does not move markets. Yet markets move, even in ways that may convince you that something, or someone (or several someone’s) may be responsible.

    Asset prices remain near their record prices for almost all asset classes. This may look good on paper, may provide you with a feeling of security, but does it affect your day-to-day or year-to-year life? It is when we harvest some of these assets, sell them, that we can then enjoy the new home or a sabbatical. Otherwise, we maintain our assets and hope they continue to grow.

    I wrote the March 6th letter as a call to sell bond funds as the hope for continued growth in these funds was largely futile, in my opinion. Why would one continue to own a fund of bonds priced at next to nothing yields (and their corresponding high price)? Would one buy such a fund at these prices? And if not, should one sell it?

    And there is the rub. Most assets must be sold for us to “move on”. This is certainly true for stocks, gold, and real estate, but also for funds of all different types, including bond funds. Even long-term bonds need to be sold to realize today’s premium price; if you hold it to maturity today’s price premium would eventually disappear.

    The same maybe true for stocks. I grew up in the days of Peter Lynch, legendary manager of Fidelity’s Magellan Fund. I remember one of Mr. Lynch’s favorite stocks was Fannie Mae, FNMA (Federal National Mortgage Association). I’m sure he loved it because it made him and his investors wonderful returns all through the 1980’s and into the 2000’s. FINMA was a rocket-ship, (look it up!) for many years beyond Mr. Lynch’s tenure with Fidelity, though it may have helped enable his early retirement. For long-term holders of FNMA, they have watched their high-flying profits at first dwindle, then almost totally disappear in a few months in 2007-2008.

    We have all been blessed to live with the wind to our back in this bull market for asset prices over these past several decades. Experience has taught us that dips are for buying, better still, that corrections are for loading up.

    Markets have lifespans. Stocks, like FNMA, have lifespans.  Certainly, I believe the lifespan for the bond market to be over if keep bringing up my March 6th letter. And I do believe the same will be true for stocks, gold, and other assets.

    Change is upon us and part of that is a change in one’s portfolio. New assumptions and new skills will be involved. So far, we have bounced back from March 2020, only to move sideways. Markets however will move. We should continue to be prepared.

    Fort Worth, TX

    Drainage Utility Revenue Refunding & Improvement, Series 2020

    AA+ S&P Underlying   AA+ Fitch Underlying

    Due 2/15   Dated 10/15/20 Maturity 2/15/45

    $103,210,000 Sold

    Years   Maturity     Coupon      Yield*

     1            2021           5.00%          0.19%

     2            2022          5.00%           0.19%

     3            2023          5.00%           0.20%

     4            2024          5.00%           0.23%

     5            2025          5.00%           0.32%

     6            2026          5.00%           0.46%

     7            2027          5.00%           0.61%

     8            2028          5.00%           0.78%

     9            2029          5.00%           0.94%

     10          2030**     4.00%           1.07%

     11          2031**      3.00%           1.26%

     12          2032**      3.00%           1.39%

     14          2034**      2.00%           1.85%

     15          2035**      2.00%           1.95%

     16          2036**      2.00%           2.00%

     17          2037**      2.00%           2.04%

     18          2038**      2.00%           2.09%

     19          2039**      2.00%           2.126%

     20          2040**      2.00%           2.127%

     21          2041**      2.00%           2.242%

     22          2042**      2.00%           2.244%

     23          2043**      2.00%           2.32%

     24          2044**      2.00%           2.35%

     25          2045**      4.00%           2.359%

    *Yield to Worst (Call or Maturity) ** Call 8/15/29

    Source: Bloomberg

    This is an example of a new issue priced the week of 10/15/20

    Prices, yield and availability subject to change


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