The Compound and Friends - The Fastest Bear Market of All Time

Episode Date: March 25, 2020

On an all new What Are Your Thoughts - Michael Batnick and Josh Brown discuss the biggest topics of the moment. Including: * Do investors care at all about the details of Congressional stimulus plans? * Mark Cuban just said what everyone's thinking. * What do you with a Black Swan fund now that it's already Swanned? * The biggest single day of retail investor stock selling. * The fastest 30% bear market in history - just 22 days! * Will Work From Home become the new normal? * Did the stock market bottom? ...and much more! Let us know what your thoughts! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's Josh Brown. We are live from The Compound to play our favorite game. Even though we're not in person, Michael Batnick and I are going to play What Are Your Thoughts? I don't know what Mike wants to talk about. He doesn't know what I'm going to ask him. Stick around. Let's see what's happening. Welcome to The Compound Show podcast. Each week, we let you in on some of the best conversations we're having about markets, investing, and life. Just a quick reminder, the hosts of this show are employees of Ritholtz Wealth Management. All opinions expressed are solely their own opinions and do not reflect the opinion of

Ritholtz Wealth. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, here we go. Obviously, Mike, today the market is up huge because traders and investors anticipate Congress coming through with fiscal stimulus. My take on this, and I want to see if you agree, stimulus coming through with fiscal stimulus. My take on this, and I want to see if you agree, I know the details are really interesting to the political chatter, but I don't think they really matter to the market. I think just the fact that something gets signed and the details are irrelevant. What do you think? Yeah. I don't think that investors were going to be like,

ah, no, I don't like this. I don't like that part. I don't like this part. They're not like, ah, no, I don't like this. I don't like that part. I don't like this part. They're not like – Yeah, sell because I don't like this. Yeah. They're just happy that anything is being done. So I agree with that. Yeah. So I was looking at what the sticking points are.

And if I were somebody that's investing three to five-year money, not one of them would really matter that much to me. would really matter that much to me. It seems that the Democrats' big hangup is that they wanted to create this $500 billion kind of opportunistic slush fund that Mnuchin can pick favored industries like probably oil and airlines. And then what the Republicans are saying about the Democrats' plan is that they're trying to stuff things in there about like voter rights and things that are like they're big liberal wish list items, but they have nothing to do with getting the economy started. But like if either of those things made it in, I don't I don't feel like stocks would would react negatively. It's almost like just let's get this done. stocks would react negatively. It's almost like, just let's get this done. And Mark Cuban sent a really great tweet this morning, which I can't quote, there's a big fat F-bomb in there, but he's got a ton of- Like that's ever stopped you.

Yeah, I know. So Mark Cuban's like, just do your fucking job and called out Cornyn and Pelosi in the house. And I guarantee you, there are equal amounts of people on both sides of the political spectrum retweeting that and favoriting that. I feel like that's where everyone is. What do you got? Okay. Is this the bottom? So we are... Stocks are... Hold on. Stocks are 6%. Got to start somewhere. I mean, 6% is a lot of percent now, relatively speaking. It's a drop in the bucket. But is this the bottom?

Hold on. Was yesterday the low? Like the low, low, low? It was, right? I'm asking you. Is this it? No, I'm saying what was the lowest point that we reached since this crisis began? Oh, yeah.

It was yesterday. Yeah. Yesterday, the S&P got as low as 2191. Now we're 2367. Can I make an ask? Can we have two consecutive updates before anyone starts using the B word? Yesterday, the S&P got as low as 2191. Now we're 2367. Can I make an ask? Can we have two consecutive up days before anyone starts using the B word? We haven't had two green closing days in how many weeks?

Is it four weeks? Five weeks? Every time stocks go up, people are saying it's at the bottom. Answer the question. No, it's not. I don't think it is. Look, I'm invested and I've been adding. I've been buying things.

We've been doing rebalances because who the hell knows? And if it was the bottom and you did nothing at all, you're going to be pretty pissed off a month from now. But I don't think so. Gun to my head. I don't see why we would start pricing in a recovery yet, considering they're talking about like this open ended. Everyone stay at home for months and months. Why would anyone think it's the bottom? I don't. I don't.

I don't think anybody is going to be upset if this was the bottom and they, quote, missed it. That's true. That's true. Actually, you're right. I think I'm wrong about that. Now that now that you say it out loud, I'm thinking like, let's say somebody doesn't buy anything right now and we're up 20% a month from now. Is anyone going to be like, oh, I wish I bought – people are just going to be like, I'm so glad it's over. So maybe that lack of FOMO is like really healthy.

I don't know. There was a tweet yesterday. Merrill Lynch, Pierce Fenner, and Smith. By the way, haven't heard the full thing in like a while. Those poor guys' heirs. Like, imagine like a guy who's like, my great-grandfather was Fenner. Do you know who I am? Who?

Yeah. So they were saying that it was their largest retail sell day of the entire move down uh that comes from fx macro so well maybe good enough for a yesterday that was yesterday i believe it um one thing i want to say about buying and selling and i did a piece about this yesterday um i like i don't when you see like big outflows like that and you see days with stocks and treasuries down, my big takeaway is that's people that literally need cash to float a small business or because they anticipate getting laid off and they just want to have emergency funds. I don't think people are selling 30% in the hole because they necessarily think we're going to be down another 10% or 20%. I don't think that's what's happening. I think there is a huge demand for dollars.

And I don't think it's controversial. To me, that's one of the best arguments for keeping the market open. Forget about all the signals that it might send in terms of like, holy cow. But people literally need their assets to live. To your point, people are selling because they need the cash. Yeah. You can't close the market because this is extraordinary. Because I guarantee you in five years, something else

extraordinary is going to happen. And that's the wrong precedent that like, oh, we're open for business when times are good. And when times are bad, too bad, you can't get your money. It's like the worst possible thing they could do. And how about people that are living off of interest and dividends and all that sort of stuff? Of course. We have clients in that position. I mean, they're not living on stock dividends. They're living on tax-free muni dividends in some cases. But like- Actually, they're not living off of treasury yields. They're living off stock dividends. Yeah, not treasury yields anymore. Yeah. And then I think you got to keep it open. If you look at the periods of time where it was closed, 9-11, because geographically it had to be closed for that week. It was just – you had to literally clear rubble to get into the building and World War I. And outside of that, we don't close the market.

Well, there was a bank holiday in 1933. But again, it was for a week for extraordinary, extraordinary times. Right. And I think the stock market was less systemic for most – for the average American in the 30s than it is now. Don't you think – could you imagine – don't you think that's shutting the market? Not that we're not already there, but would cause mass hysteria? Like wouldn't that send such a bad signal? You know what would be the worst possible thing they could do is be like, we're shutting the market one week from today. We'd be down 10,000 and then they would shut it. Oh, my God. Don't do it.

Don't shut it. I have friends on the New York Stock Exchange. I don't think they have the pull to make that decision, but I hope they're not even considering it. I want to get into this is the fastest bear market of all time. into this is the fastest bear market of all time. And one of the funny things that you, when you talk to like older traders, they're like, oh, well, wait till you see a bear market. Okay. So now, 73 million millennials, some of whom are professional traders, financial advisors, most of whom are just investors. What are you going to tell me now, tough guy? Right?

So this is – Go get your shine box. Yeah. What can you throw at me now that I've never seen? This is Stephen Suttmeier. We'll throw this chart up. Bank of America, Merrill Lynch. He's their chief technician. Suttmeier is the man.

He did this thing yesterday. He looked at the fastest 30% drawdowns from all time highs in history. In this particular case, it took 22 days for the stock market to be at a record high to get down 30%. And the closest was in February of 34. We did it in 23 days, which I guess is pretty, that's pretty hot too. And then the next two yeah the next two were 31 and 1929 and then when you get to 1987 it's 38 days it's almost twice the amount of time so you know these guys that are now in their early 60s talking about 87 kiss my ass 87 uh anyway um that's that's what do you think about that i can't believe that we're making comparisons, like legitimate comparisons to 1929.

Well, it is a legitimate comparison though. No, I know. I know. I did a chart last week showing that the absolute daily change over the last 18 days is as high as it's been since literally 1929. It's incredible. I still think Ben's comment that if you had shown somebody a chart of February and March back in December, said this is what's going to happen in February and March, they would have to assume that aliens landed on Earth. What else could explain that? At the lows yesterday, stocks were down 28% almost for the month, which would be the worst month since 1931.

And just for some context, the worst month in the GFC was negative 14%. So it was- Hold on. Obviously, the month isn't over. What was that, October 08? Was that- It was October 08. So twice as bad. Again, month isn't over. But the magnitude of this is insane. And so I wrote a post a long time ago saying something along the lines of experience is overrated, not to be disrespectful and say that it doesn't matter because of course it does. But just this idea that because you lived through one extraordinary moment, you were better equipped to survive the next one. Maybe you are, maybe you're not. But like, so, all right. Let's talk about specific industries. What is going to recover first?

What's not going to recover at all? Like in terms of the industries that where there's just been a complete washout. I think a lot of like non-food related retail is just not going to recover. So, bad, bad thing to be honest. I hate saying this. Like, I don't, I almost, I don't want to say these things because if they come true, I'm just going to feel gross about it. But like – All right, fine.

So what will the company – Department stores. I mean – So let's talk about what will – Yeah, I like that conversation better. I think the banks will get back to one times book value very quickly. They're all selling at a discount, and I understand book value has now changed. But I could picture,

I don't think there'll be huge winners. I could just picture them recovering back to their recent historical valuation metric. And I don't think the fundamentals of banking are really that different. I understand rates are now zero. The curve has steepened slightly. Maybe that's good for lending. But I think as the economy comes back online, those balance sheets have not been blown up. And I don't think banks are running to treasury for no interest loans. They might access the discount window and all these other things, and they should if they have the opportunity to. There's no stigma where there shouldn't be. But I don't feel like banks are the epicenter of this. So I think those equities will be okay and the preferred stocks that go along with that.

And I'm actually looking at some of those myself. What about restaurants, specifically like Shake Shack? You saw that Danny Meyer was laying off 80% of the staff. So Shake Shack was $105 last summer. It fell to a low of $30. Is that going to come back? And I don't necessarily mean the stock. I'm just talking about like will they reopen or will they be back to normal?

Well, yes, of course. They'll reopen. So what is normal now? I feel like we're going to be walking around with masks this summer. I don't think so. Well, have you seen post-recovery China? Because they're all on the streets. They're all going to work.

But they're like a million people wearing surgical masks. Fine. Fine. What about a year from now? Maybe you're right. Maybe in the summer, but what about a year from now? I don't know. I would bet. So I, I bought Starbucks, like full disclosure, I bought Starbucks. I bought it twice. I bought it at 70, kept falling. I bought it at 60. It's like in the fs now. But I can't imagine people not wanting coffee when we all get out of our houses. Let me ask you this. So these companies recover, right? Let's just say the fundamentals recover. Are investors ever, not ever, are investors in the next 12 months, 24 months going to pay the same multiple that they were previously? They might because of where interest rates

are and because of how much stimulus is being thrown at the economy like in 2021 we could have a boom um i also i also think uh because we're we're throwing more stimulus at this economy all at the same time than we've ever done outside of world war ii this is just like what the numbers are i'm not saying we should. We shouldn't. I understand it's not a war, but that's – It is a war. It's a war.

That's a fact. That is an absolute fact. Go ahead and look at the post-World War II spending boom, what that meant for equities. You had a 20-year, 25-year incredible bull market from the mid 40s, like right up until 1970 or late 1969. So like, I think it's reasonable to say this much stimulus three years from now, we'll say, okay, they did so much, it might have been too much. Like that's literally what's going on right now. So I'm not going to comment on what that means for inflation or whatever. I'm just saying I can't imagine a rate hike for at least a year under any circumstances at all. The unemployment data is going to be bad for at least a few quarters.

I don't know if it ever reverses. So if you're an investor and you're looking at where yields are for quote-unquote risk-free assets, I really feel like a lot of your money ends up back at risk. So I don't know what it means for multiples. Are we going to pay – look at the multiples they're putting on Clorox right now. It's 30 times earnings. What's Walmart? 27?

I'm not looking. Well, it's 12 months earnings. Obviously, the earnings are going to go up. So maybe earnings are actually 18 times. Obviously, the earnings are going to go up. So maybe earnings are actually 18. We know the earnings will go up, but 30 times for consumer staples. But forward might be only 18. Yeah, I hear your point. All right.

What else you got? Oh, I wanted to – Holy cow. By the way, I just pulled up Clorox. This looked like freaking Tilray or Bitcoin. It went from 165 to 215 back to 165. Somebody asked me about that. I forget who.

Somebody was looking at Clorox specifically and then looking at some of the other staples. And they're like, why are people paying this high of a multiple for Clorox? And I tried to explain to them, there are active managers whose mandate is to be fully invested. And they have to buy something. And so they know for a fact, if they're an earnings growth oriented manager, they know for a fact that this company is having its moment and the fundamentals are going to be great. And so like there are different people that are buying things like that for different reasons. It's not that they think Clorox is cheap. They think it's a place they can hide out and they

have to belong something. So I think there's some element to that in the staple stocks. I don't think anyone's buying them being like, these are cheap stocks, right? I wanted to ask you about Black Swan Funds. We took a quick look at a couple of like the ETFs. Just in general, though, you could imagine the marketing campaigns in the second half of this year, they're going to have, if they worked, they're going to have amazing looking track records year to date at least. My question is if you bought a Black Swan fund after the last crisis, have you made enough money back in the last month to justify how much you paid and what amounts to let's say insurance premiums for the decade prior? Like does this pay off if you buy this right after a crisis? Probably not.

I have mixed thoughts on this. On the one hand, so the way that Meb does his tail ETF, I think he says it's a small holding in his personal portfolio. His ticker is SWAN, right? No, it's tail. Oh, that's tail risk. Who has swan? That's somebody else?

I think that's the black swan growth one, I think. All right. Yeah. So anyway, so he says, listen, this has a negative expected return. Flat out. However, when you get these pops, let's say they pop 80% or whatever, once every four years, that's when you rebalance back out of it, back down to your target weight. So I think that they can make sense in a portfolio. Do I think that these products are probably grossly misused? Yeah. So Meb is saying sell my product right after it works, like get out of it? I don't want to put words in his mouth, but- That's what rebalance back means. We'll link to what he said.

Okay. I think that's the gist of it. I want to talk about working from home. You having fun yet? Are you having fun yet? I am not of the mind that this is going to change things forever. I think that people are absolutely going to freaking sprint back to work. Yeah, you're wrong. Why?

Because this fundamentally changes an entire generation's outlook on what needs to be done in person versus what can be done online with more efficiency. This is a game-changing moment. There's no doubt. There's absolutely no doubt. I'm not saying we're never going to be working in an office. I'm just saying the amount of work that people get done at home from now on versus in person. And I don't just mean like knowledge economy shit.

Like, oh, I make content. I could do it from home. Like I'm saying doctor's visits. I'm saying like consultations for every kind of service. But we were already going in that direction. I don't think that this is going to be a seismic shift because people are- Let me ask you a question. Let's say you and Robin were fighting like crazy for the last two weeks and you just couldn't take it anymore. And you

said, I'm going to get a divorce lawyer. I need to talk to a lawyer. You can't go to a lawyer's office right now. You get a referral from me. Call me, Josh, do you know a good divorce lawyer? Yes. Go see this guy. You could definitely do a FaceTime or a Skype with that lawyer. So what's your point? My point is once you do that once and you say, why would I ever go show up and meet this guy in person? What do I have to do that for? And that's like a tiny, tiny example of professional services that can be done digitally, that will be done digitally. And so I'm super bullish on teleconferencing and like not that everyone's going to work from home.

The flexibility is what's going to change. And we are already built that way, Mike. We have 31 employees, only 15 of them report to New York City every week. Right. So like We're already accustomed to that. What's wrong with that going a step further for every other industry? I really think it will.

No? Give me your take. I don't think so. I just don't. It's weird. I'm older than you. You should be like, yeah. I think the trend is in place, but I'm not worried about commercial real estate because the buildings are going to be empty. No, not that they'll be empty, that the amount people will be willing to pay for rents will be less.

Oh, one other thing on this. I don't want to go long here. I put out a tweet yesterday that went crazy. Just like randomly. I'm like, I would be betting on suburban real estate. I put out a tweet. It's such, just like randomly. I'm like, I would be betting on suburban real estate. I put out a tweet as such an old thing. No, but I did. I published a tweet yesterday, but I was like, suburban real estate, just like there's been this for 20 years, every city in America has been like investing in its downtown because that's where young people want

to live. And that might still be the case. But like if I were 30 years old and had a baby and another one on the way, and I were trapped in a 750 square foot apartment for four weeks, I would be like, you know what? I want a house. I want out of here. I never want to go through this again. I don't care that we're nearby restaurants because I couldn't even go to restaurants. While I was trapped here. So I would be betting on suburban real estate. Quite frankly. For young families. I think it's coming back. And I'm the ultimate suburban schlub.

So I could say that. Alright. What are your thoughts? Let us know what you think about the topics we discussed. We love your feedback. We read all your comments. We reply when we can. Leave us your feedback on all the topics we discussed and we'll check them out.

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