Volatility Creates Opportunity

Volatility is back in the stock and bond markets.  

The major stock market averages have been bouncing around this week like a piñata getting whacked by a stick with daily swings of at least several hundred points and they will be ending the week with two consecutive down days.  These averages were down around 2% for the week.

In 2019 we only saw a handful of days where daily swings exceeded 500 points on the Dow Jones Industrial Average.  Every day this week had daily swings during trading exceeding 500 points.

Investors are heading for the hills and there is a big flight to perceived safety.  Bond yields have plummeted and the bond market 10 year yield on U.S. Treasuries dropped below 1% for the first time ever and it hit an all-time low today.  It currently stands at about 0.7%  One year ago it was just under 3%.

The VIX index, a measure known for estimating the future volatility of the stock market, has shot up like a rocket and gone from a 13.68 on February 10^th to 47.36 as of today.  That change is more than a 300% increase and the VIX index has not reached these levels since 2008-2009 when we were in the midst of the financial crisis.

I even had trouble buying toilet paper this week when I went to the market.  There are pictures of barren shelves at Costco and stories of lines of people waiting for stores to open so they can stock up on water, toilet paper, and Clorox.  We have not hit those levels of panic/preparation in my neighborhood but this week while I was in the check-out line at the market at least half of the people were buying cases of water, multiple bundles of toilet paper, or some type of disinfectant. 

No one cares about the February jobs report and the 273,000 new jobs it showed last month.  It is old news when there is this much volatility and the markets are more interested in the March jobs report and first quarter earnings updates.

What does this all mean?  Should we head out and buy toilet paper right now?

It is time to seriously look at refinancing your mortgage if you have one

Mortgage rates fell to an all-time low following the Federal Reserve’s decision to cut interest rates this week. Per a Freddie Mac report, the 30-year fixed  mortgage averaged 3.29% for the week ending March 5, down from 3.45% the previous week. The 15-year fixed-rate mortgage fell to an average of 2.79% and the 5-year adjustable-rate mortgage averaged 3.18%.  The 30-year-fixed mortgage rate was about 4.4% last year.

I really do not care what kind of mortgage you choose right now.  I gave my thoughts on the best mortgage type for most people, see here, but any of these mortgages are offering historically low rates. 

For me, I have (soon to be had) a 3.875% 30-year fixed mortgage which I thought was a low rate.

Well, I talked with some mortgage folks this morning and was quoted the following rates:

• 2.625% (no points) on a 15 year fixed mortgage
• 3.0% (no points) in a 7 year adjustable rate mortgage
• 3.25% (no points) on a 30 year fixed mortgage

I am taking this opportunity caused by the volatility to refinance my loan at a low cost.  Rates may go lower over the next few months (maybe not) but I just hit send on my mortgage refinance application and am moving forward with a refinancing.  I am locking in a lower rate, pulling out an additional $100,000 for investment purposes (please do not do a cash out your equity to spend it), and I will have the same monthly payment on the loan. 

You should look into your own refinancing options.  At least make the call to a mortgage provider and see what can be done.   Shop it around too as I noticed there is still a lot of variability among lenders.

The Stock Market has some Opportunity if You Can Stomach the Volatility

Some great businesses have gone on sale.  They are on the discount rack waiting to be bought.  Some of these stocks will see even deeper discounts over the next few months but buying stocks of good companies that have been hit really hard might bear fruit over the next several years.  Remember, you may have to wait anywhere from a few months to a few years to see a rebound but it has always happened in the past – see here.  I do not believe this virus will cause that trend to be bucked.

If you look at these battered stocks as businesses and apply a 5 year outlook how many of them are still going to be impacted by the virus at that time?

• Tech companies have been hit hard although rebounded somewhat.  Apple was at $327 per share earlier this year and dropped below $265 per share last week.  It is now at approximately $285 per share.  There are others such as Microsoft. 
• Oil and Gas stocks are pariahs right now.  Exxon Mobile, which has had a rough decade regarding its stock performance, has dropped all the way down to $48 per share.  It has a 7% dividend yield right now which is unheard of for a stock like Exxon.  Some energy pipeline companies are seeing dividend yields of 10% or more and these companies are good companies.
• The cruise lines may go bankrupt if you believe the price action you have seen on a lot of these stocks in the past month.  Royal Caribbean Cruise Lines, a $13 billion dollar company (it was a $26 billion company), hit a 52 week high of $135 per share earlier this year and is now down to $64 per share.    That is over a 50% loss in its value in less than a month.  People will go on cruises again – it is a cheap way to have a great vacation.
• Apparently, people only fly again if it is absolutely essential.  Airlines like Delta are down over 20% since the market downturn started.  Delta, as an example, has a dividend yield of over 3.3% right now – historically it has had a dividend yield closer to 2-2.5%.   A lot of dividend stocks have seen their yields go way up over the last month.  This is a good time to be adding stocks to a dividend portfolio – see here why I like dividend portfolios.

I have been nibbling on tech, oil, real estate, and industrial stocks the last few weeks.  The yields are way up and I can be patient and wait for things to improve even if it takes years.  I have also placed some bets through options on the cruise lines as they are offering ridiculous premiums right now. 

If you have cash-on-hand you should think about using some (not all) of it to buy some stocks that have been hit hard.  If you believe their underlying business will be back to normal at some point.  I do not suggest buying these stocks all at once but invest over time when we have down days.   The volatility can be your friend.

Do not get me wrong, I have bought some extra toilet paper and Clorox and that is why I am not putting all of my cash into the market right now.  Earnings reports and other bad news could make this thing get worse for stocks.

But using some of your cash to buy over time, and having the discipline to hold on to these investments until things get better, could be a winning strategy for average investors like us.