If You’ve Had Enough Already, You’re Not Alone…

Normally, my usual intro to High-Yield Investing would be the part where I discuss a specific topic before moving on to my featured recommendation. But these are not normal times.

They are, by any definition of the word, most extraordinary.

The coronavirus (now officially labeled a pandemic) has thrown the world into utter chaos. Public schools have been shut down. Travel to the U.S. from Europe has been suspended. Collegiate and professional sports have been put on hiatus.

The CDC is strongly discouraging any large-scale public gatherings, and local/state leaders across the country have complied. Here in Louisiana, our governor has issued a decree banning any interaction of more than 250 people – be it casinos, weddings, even church congregations. A few days later, he ordered all bars, restaurants, and movie theaters closed.

In the early stages of all this, we were entertaining ourselves with amusing memes about stockpiling toilet paper. But it’s not that funny anymore. To be honest, recent developments have scared the daylights out of a lot of people.

Things Are Looking Dark (For Now)

It’s not necessarily the Covid-19 disease itself. Although the numbers are alarming, I think our healthcare industry — while perhaps stretched to the limits — will rise to meet the challenge. What’s even more frightening to many is the financial fallout on families and businesses in our communities.

Workers are struggling without paychecks. Mom-and-pop stores are being told to shut down. The chance of reopening, for many, is bleak. I’m also a little unnerved by the authoritarian steps being taken under the guise of “public welfare and safety.”

Inmates are being released from prison in some Ohio cities. An Illinois mayor (without a single confirmed case in her jurisdiction) invoked an executive order granting the power to ban the sale of guns and alcohol, enforce curfews, and even confiscate private property if deemed necessary. There is even talk of outlawing interstate travel, preventing people from seeing friends and family.

Such extreme measures would have been almost unthinkable just a few weeks ago. While most of these ordinances are well-meaning, I think some politicians will use this emergency as the perfect cover to push their own agendas.

New York Mayor Bill De Blasio has gone on record arguing that the government needs to “nationalize crucial factories and industries… to prepare the country for what we need.” In other words, the only way to combat this epidemic is a government takeover of privately-owned pharmaceutical and healthcare facilities.

Some have called for a mandatory two-week shutdown of our entire economy – everything – to keep the outbreak in check. The whole thing sounds like the far-fetched plot of a Michael Crichton novel to me. And yet, here we are, only a few steps from martial law.

Meanwhile, investors are being violently whipsawed back and forth. We’ve seen spectacular rallies followed by equally colossal selloffs. I can’t remember the last day where the Dow didn’t swing by 1,000 points or more. The Volatility Index (VIX) has registered the second-highest reading in the past 30 years.

The market is fixated on the 24-hour coronavirus news cycle coverage, almost to the exclusion of anything else. You probably didn’t hear a word about the latest monthly jobs report (it was outstanding, by the way, with payrolls expanding by 273,000).

And all that talk about “flattening the curve”. This is the first time investors are referring to disease rather than bond yields.

Where The Market Stands

In times of distress, the Federal Reserve often rides to the rescue. And once again, the central bank has unveiled plans to inject liquidity into the system by purchasing $700 billion of Treasury assets and slashing short-term borrowing costs to near zero.

Ordinarily, such stimulus measures would draw cheers from investors. But not this time. Stocks collapsed on the news. Perhaps it was the market’s way of acknowledging that while monetary policy can cure an ailing economy, it offers nothing to stem the tide of sick patients.

Interest rate cuts can’t do much when thousands of businesses are forcibly closed down and consumers can’t leave their homes. You can almost hear the wheels of commerce grinding to a halt.

We’re only beginning to see the financial fallout.

United Airlines just warned that March revenue would plunge by $1.5 billion compared with the same month last year. Starbucks is expecting to lose $430 million in sales this quarter from its 4,300 Chinese stores. Few people are buying new shoes and athletic gear right now. Nike could suffer a $3.5 billion decline in sales in the current quarter.

Safe havens are few and far between. Even most utility stocks are falling. But a handful of companies stand to benefit from this crisis. Bleach sales have skyrocketed, sending shares of Clorox (NYSE: CLX) racing. With restaurants closed, grocery stores around the country are being raided – sending Kroger (NYSE: KR) streaking higher. Pharmacies aren’t really hurting either.

But these are rare exceptions. Nearly 200 major companies have already issued Covid-19 related earnings warnings. Apple, Best Buy, Hilton, Mastercard… the list goes on.

Many have withdrawn (not revised, withdrawn) their sales and earnings guidance until such time that they can pin down a reasonable forecast. The outlook is about as clear as mud. If company execs can’t even make a guesstimate as to where profits will level out, then how can we?

And therein lies the problem.

Morningstar has one of the most comprehensive assessments I’ve seen, incorporating historical data from past epidemics. It reads more like an article from a healthcare journal than a financial media site. Their conclusion: global GDP could take a 5.0% hit at worst this year, or a mild 0.10% ding at best.

The median and most likely scenario calls for a negative GDP impact of 1.25%.

When you’re talking about trillions in lost economic activity, every basis point counts. But a 1% to 2% deceleration in GDP is nothing we haven’t seen before. More importantly, Morningstar rates the long-term impact as negligible.

The Bright Side…

This disease will leave some scars behind. But after it has run its course, most quality companies will make a full recovery. Our economy is nothing if not resilient. Of course, it’s easy to talk about staying calm and maintaining a long-term perspective, but I know those words ring hollow when years of hard-earned gains disappear in a matter of days.

But take some solace in this…

There are dislocations all over the market, pricing discrepancies we never see during normal trading. Investors that keep their heads during this panic will be able to exploit them for hefty profits.

Just remember the sage advice of Warren Buffett: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Over at High-Yield Investing, I’m temporarily avoiding a few groups at the moment. Commodities remain under pressure (industrial metals like copper have slipped to multi-year lows). Banks are being hit by a double-whammy, decreased appetite for commercial loans and thinner net interest margins as yield spreads compress. It’s also hard to make a compelling case for many consumer discretionary companies right now.

But I am selectively putting cash to work. Nobody knows when and where we’ll reach the bottom, but there are prices out there that are difficult to ignore (even if that means riding the elevator down another floor or two before the return trip back up).

If nothing else, this sharp pullback has greatly deepened the pool of high-quality 6% to 8% yielders (they were becoming quite scarce at the market peak). So every dollar you put to work in this market, once the situation stabilizes, will eventually work harder for you.

Of course, it will take more than that to restore confidence on Wall Street. The market needs to see a bold, bi-partisan effort to help businesses and working families during this time of crisis. And it looks like Congress is working feverishly an unprecedented stimulus package. I’ve seen figures of $850 billion, and even up to $1 trillion.

The centerpiece of that plan involves Uncle Sam sending direct cash payments to every American. There will also be grants and low-cost loans for small businesses, as well as financial aid for deeply affected sectors like the airlines.

We’ll Make It Through This, Together…

Make no mistake, we are not out of the woods. But this is a huge step in the right direction. And by the time we are out of the woods, I believe today’s prices will already be a distant memory.

Remember: Don’t lose your head in this market. This too shall pass.

In the meantime, over at High-Yield Investing, my staff and I are here to help. While I can’t offer personalized advice, my staff and I will do our best to provide you with clear-headed analysis and actionable information.

You can send me a message here and I will do my level best to respond to as many as I can. And if you’d like to learn how to join us in finding some of the highest and best yields we’re likely to see in a generation, go here now.