Think Strategically: The Metronome of Investor Temperament

(Aditya Vyas on Unsplash)

Greed and Fear

Some years ago, I developed the concept of the “Metronome of Investor Temperament.” A metronome is a device that produces a steady beat, marking it with a left-to-right tick, to help musicians play rhythms accurately. We refer to it when dealing in markets such as this one. Often, they alter the investor temperament as a result of greed transforming into fear. Being vigilant and understanding the excessive swings of any cycle is an essential requirement for any investor. The principal reason that markets have dropped more than 10,000 points is fear.

Dealing with the uncertainty coronavirus brought to the world plays a critical part in market downturns. Make no mistake; the global economy will suffer insurmountable difficulties, reflected in plummeting gross domestic product and employment, with a cost that could surpass $6 trillion. With a large part of the economy closing all companies other than hospitals, pharmacies, supermarkets and restaurants, the impact on small and midsize businesses will be severe. 

For that very same reason, governments, including Puerto Rico, announced measures that support the economy and thousands of businesses that are obligated to close to prevent the spread of the novel coronavirus. In the eurozone and the United States, stimulus packages are being worked on that surpass the $1 trillion mark. As we see the “Metronome of Investor Temperament” in action, we note that investors generally fluctuate between optimism and pessimism but are all gathered in the corner of greed and fear. 

You see markets oscillate between greed and fear because they respond to investors’ greed and fear; it is human nature. When we feel good about our prospects and market fundamentals are good, most investors get greedy and focus on making money. Their greed and hubris causes markets to rise, and most asset classes to increase in value. However, as soon as uncertainty or negativity dominates the markets, fear takes over, they start thinking about preserving their money and buying slows down. The best advice we can provide investors is to resist external influences, remain emotionally balanced, act rationally and weigh both negative and positive events.  

Washington Update

The Trump administration and Congress are working on a bi-partisan plan of unprecedented scope, named “Stimulus 3,” to help soften the economic impact from the pandemic.

The bill could exceed $1.2 trillion and will impact virtually every American. 

Additionally, President Trump signed a law that is estimated to cost more than $100 billion and contains a variety of coronavirus response measures, including the following:

  • Funding for an expansion of federal health programs to cover the testing and treatment of COVID-19 expanded sick leave for impacted employees, 
  • Virus-related insurance coverage 
  • Paycheck replacement for affected workers, 
  • The purchase of emergency protective equipment for health personnel
  • Continued coverage of federally subsidized meals to eligible school children while schools are closed.

U.S. Indicators, March 16-22

  • U.S. Retail Sales year-over-year: 4.23%, compared to 4.70% last month. 
  • U.S. Business Sales: $1.471 trillion, up from $1.461 trillion last month.
  • U.S. Business Inventories: minus-0.23%, compared to 0.10% last month. 
  • U.S. Housing Starts: 1.599 million, down from 1.624 million last month. 
  • U.S. Initial Jobless Claims: 281,000, a rise of 70,000, or 33.18%, from last week. We expect this number to rise to two million by next week.

Fed Takes Decisive Action

            The Fed took steps to deal with the recent illiquidity in parts of the credit markets:

  • Injected $700 billion in liquidity to free up markets. 
  • Expanded bond purchases, including municipal bond markets.
  • Lowered the discount window rate for banks.
  • Implemented commercial paper purchases to allow companies to borrow. 
  • The Fed worked with other central banks to increase swap lines and prevent a shortage of U.S. dollars. 
  • Backstopping money market funds that were under pressure as investors sold off assets. 

Week in markets: Bill Gates’ predictions; world markets continue to fall

Not many people would have ever thought that a pandemic would push the world’s market and economies into a virtual collapse. Usually, the causes of market turmoil are financial and economic. However in 2015, during a TED Talk, Bill Gates, co-founder of Microsoft, stated that the next risk of a global catastrophe that would kill millions of people was going to be an infectious disease. He noted that the world had spent trillions of dollars over time to prepare for war and to develop a nuclear weapon arsenal, but no preparation to deal with an epidemic. He even made a model of disease, like the 1918 Spanish flu, that would allow you to feel well enough while infected that you could get on a plane or train and go to events. In that model, it killed 33,365,533 people in 263 days. As he wrapped up his talk, Gates said the cost of such a pandemic would be $3 trillion worldwide, and the world was not prepared to face such an epidemic, and he was right.

On to the markets. The Dow Jones Industrial Average closed the week of March 20 at 19,173.18, for a loss of 4,012.44 points, or 17.31 percent, and a year-to-date (YTD) return of minus-32.81 percent. The S&P 500 closed at 2,304.92, for a loss of 406.10, or 14.98 percent, and a YTD return of minus-28.66 percent. Meanwhile, the Nasdaq closed at 6,879.52, a loss of 994.56, or 12.63 percent, and YTD return of minus-23.33 percent. 

The Birling Puerto Rico Stock Index closed at 968.82, dropping 427.56 points, or 30.62 percent, for a YTD return of minus-52.46 percent. Meanwhile, the U.S. Treasury’s 10-year note closed at 0.92 percent, 2.13 percent less, for a YTD return of minus-1.1 percent. The U.S. Treasury’s two-year note closed at 0.37 percent, losing 2.13 percent versus last week, and returning minus-1.5 percent YTD.

Our expectation is for market uncertainty to continue, and volatility should remain while the coronavirus spreads and until containment efforts start yielding positive results. We do believe that the $1.2 trillion stimulus package will help soften the blow and will allow the United States to see beyond the crisis. As we have stated in the past, we encourage everyone to view the markets with an open mind, remain vigilant, calm and make decisions that are in line with your financial goals and not following your emotions or the daily headlines.

Final Word: Governors Coronavirus Task Force & P.S.1538

Gov. Wanda Vázquez has made two sagacious decisions these past few days; for one, the Puerto Rico lockdown order has forced the whole island to understand the severity of the coronavirus pandemic. Although, for some, it has been hard to stomach, it is a necessary action that was needed to protect us. The second decision was creating the Medical Task Force and naming our dear friend Dr. Segundo Rodríguez-Quilinchini, dean of the UPR School of Medicine, to head it. The health and well being of Puerto Rico is in their hands, and we will pray for their success in saving lives. One of those could be yours.

Puerto Rico Senate Bill 1538 expects that all businesses in Puerto Rico continue paying all employees their salaries and benefits while the governor’s lockdown order is in place, forcing most companies to close. Measures like SB 1538 and many other votes seeking populist schemes are the main reason Puerto Rico is in bankruptcy. As Puerto Rico businesses are forced to close or work remotely, some have been able, for now, to pay their employees; others have asked them to seek unemployment benefits. Those in government have to understand that the private sector is the only one that produces capital, investments, creates jobs and wealth. The government creates nothing, is an obstacle to development, and mismanages and overspends our hard-earned tax dollars. We commend the House of Representatives for defeating this bill.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.