Alison Southwick and Robert Brokamp, CFP

Mar 16, 2020 at 12:52PM

It's been stressful as countries work to contain the spread of the coronavirus. Motley Fool analyst Bill Mann joins us to share his insight into the top headlines as well as how he's managing his money amid the volatility.

To catch full episodes of all The Motley Fool's free podcasts, check out ourpodcast center. To get started investing, check out ourquick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 28, 2020.

This video was recorded on Feb. 28, 2020.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Bertie Brokamp. I've already called you that one, haven't I?

Robert Brokamp: You're running out because there are only so many things you can do.

Southwick: Personal finance expert here at The Motley Fool. Hello, Bro.

Brokamp: Well, hi.

Southwick: In this week's episode... Well, it's been a doozy of a week for everyone as investors [and the world, at large] try to deal with the spread of the coronavirus. Joining us, in-studio, to help make sense of the headlines is Bill Mann. Hi, Bill...

Bill Mann: How are you?

Southwick: ...analyst at The Motley Fool. All that and more on this week's episode of Motley Fool Answers.

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So, Bro, what's up?

Brokamp: Well, we're going to talk about stocks a little later. They're not up, but I will tell you what is up because something else is down. As the stock market goes down, often people flee to the bond market driving bond prices up and driving rates down. So the 10-year Treasury, as of this taping on Friday -- so a few days before this episode comes live -- is at 1.15%, an all-time low. The 30-year Treasury is at 1.66%, another all-time low. We've never seen rates this low.

When rates go down, the prices of existing bonds go up. The Vanguard Total Bond Market ETF -- an ETF that I own a little bit of -- was actually up 3.5% this year doing its job -- going up as stocks go down. Over the past year the bond market is up almost 11%.

If you asked anyone a year ago if they would expect 11% from the bond market they would have said no, but that's where we are.

What does this mean for your personal finances? Well, first of all, mortgage rates are also down, so the rate on a 30-year mortgage, according to Freddie Mac, is 3.45%, only a little bit above the all-time low of 3.3% is from 2012.

Mann: Amazing.

Southwick: Giving it away.

Brokamp: Just giving it away.

Mann: Come get a house!

Brokamp: Exactly. So that's good. Now what this also means is probably at some point the Fed's going to cut rates. It was just a few weeks ago when Fed Chair Jerome Powell was saying, we're probably where the rates are this year. Don't expect anything. Now the markets are predicting, with about a 90% chance of certainty, that there will be at least one rate cut and maybe three this year.

Southwick: Whoa! Bill's ready to pull the trigger on saying something.

Brokamp: How much is that going to help, Bill?

Mann: I'm a very simple bear and maybe I'm not creative enough to think about this; but, ultimately markets are dropping and the 10-year, which is a great fear gauge -- maybe even better than the VIX -- is skyrocketing. What good is a rate cut going to do when you're talking about a health scare? Is it going to make people less afraid? This isn't a financial crisis.

Brokamp: Right, and I don't have the answer to that. Part of it is psychological. When you read the articles of people saying the Fed shouldn't even wait until the March meeting -- they should cut now -- it's just to reassure folks that they're on top of it.

Southwick: Whatever "on top" that means.

Brokamp: Whatever it means.

Mann: Does a quarter point rate cut come with a mask?

Southwick: We're doing things, OK? We're doing stuff. Get off our back. We're very busy.

Mann: Actions are happening.

Southwick: They're just running around waving their arms.

Brokamp: Practically speaking, what this means is to the extent that you can earn anything under cash, which is not very much, it's going to go down. What you can do now -- and I think it's probably worth considering -- is buy a one or two-year CD to lock in today's low rates before they go lower. That's what's going to happen. That's the one thing that occurs to me -- is that those are going to go down. Also other types of loans will be cheaper. Maybe it's a better time to buy a car. It might mean that you...

Mann: But you can't talk to people.

Brokamp: That's true. Just stay in the car. Don't get out of it, ever.

Mann: Just beep your horn until someone brings you another car.

Brokamp: Hopefully credit card rates will go down. We talked last week about how much the level of credit card debt is at an all-time high. The average rate, now, is between 17-21%. Maybe that will go down and be helpful. But for the most part I agree with you. There's only so much that the Fed can do at this point.

And that, by the way, is what's up.

[...]

Southwick: So it's been a rough week [on Wall Street and around the world], to put it lightly, and so we thought we would have Bill Mann come in. He's an analyst at The Motley Fool. He's been an analyst with The Motley Fool for a while, now.

Mann: 633 years.

Southwick: 633 years.

Brokamp: Which must be the same because Bill and I started on the exact same day.

Southwick: Oh, no way!

Brokamp: Yes.

Southwick: I didn't know that.

Mann: Yeah.

Brokamp: We have the exact same Fooliversary.

Southwick: Oh, that is fun.

Mann: That was either one of the greatest days in Fool history or the worst.

Southwick: Did anyone else start with you guys?

Brokamp: Rich McCaffrey, who's no longer here.

Mann: Yes, who was a great guy and a great analyst. I miss him terribly.

Brokamp: He moved to Morningstar and then Legg Mason. Is he still alive? Hey, Rich, how are you doing?

Mann: That's terrible. He's doing great.

Southwick: I think it's obvious we want to talk about anything other than the stock market this week, so let's talk more about Rich. What's his favorite color?

Brokamp: Great guy. Lovely wife.

Southwick: So woof, it was a rough week for Wall Street and the global markets. As of today I believe the Dow has dropped for seven straight days, but who's counting? There's been a lot of crazy headlines out there, so Bill's [here] to help us dissect the headlines and hopefully feel better about ourselves. Today is Friday. For our listeners it's [next] Tuesday.

Mann: Yes, so the market can't drop tomorrow.

Southwick: Not for us, but for our listeners it can.

Brokamp: Yes.

Southwick: Who even knows what's going on in the world when they're listening to this? I don't know. Maybe they're living off of tin can food and stockpiling guns. I don't know what's going on this coming Tuesday. It's gonna be chaos, maybe. No, it's not. It's all going to be fine.

Bill, thank you for joining us today. Should we open up the newspapers and see...?

Mann: You actually should. I think this is one of those situations... There's something that I always find so interesting [with] our leaders. With journalists. To be responsible [with] most crises they don't want to make people panic. But at some point you don't want people to underestimate what's happening, either, and there's this interesting inflection.

I think that's what happened this week. We went from it's the flu. It's not as bad as any of the other things that turned out not to matter that you had to remind yourself [about]. This actually is worse.

Southwick: Let's look at the top of The Wall Street Journal this morning, this morning being Friday in our world. The big headline was, Stocks on Track for Biggest Weekly Losses Since 2008. Oh, 2008 was the worst.

Mann: That was the worst.

Southwick: Bill, take us back.

Mann: It's been the quickest that we have moved from a top into a correction in history.

Southwick: Which is a 10% drop, right?

Mann: A 10% drop. I think these sort of demarcations are silly, but they exist so let's use one. To me, we talk about coronavirus as it is an epidemic or pandemic, but we also have to think of it as being an economic incidence, and the economic incidence, in this case, is going to be worse than the actual disease will turn out to be. I think for most situations you want to just shrug and say I don't know what's going to happen, but what is going to happen is that fairly heroic measures are going to have to be taken to stop the spread of the disease and that's going to hit supply chains everywhere.

Southwick: It's like the effort to keep it from spreading is what's hurting the economy. It's not the actual impact of so many people being sick. It's us trying to keep it contained that's what's doing it. I think you said it on one of the other shows -- or maybe you just said it aloud...

Mann: Hey, there are no other shows out there. This is the show.

Brokamp: The lesser shows.

Southwick: The lesser shows. I think you commented that you were kind of surprised that it took so long for the stock market to react. Why is that?

Mann: I think it goes back to how people are primed to not panic. And I think that's really the case in the midst of a bull market. I mean good news tends to be overemphasized and bad news tends to be hand waved away, a little bit, until it becomes self-evident that it really is bad and impactful.

China was already locked down in the middle of February. Factories were closed and the market was still hitting all-time highs. I just had to ask myself what's going on here because, in other times, really small events have made the markets react very sharply, but in this case the country that is literally the center of global manufacturing was closed for business and we're like, "Well, it seems OK."

Southwick: It's a whole town. Not even a town. It's a city of millions of people being told, "You can't leave your house."

Mann: It's essentially the country. We get reports from Beijing and from Shanghai where traffic, right now, is 3% of what it usually is. These are word-of-mouth reports, but the eyes on the streets are saying that the country is ground to a halt. And just to highlight how impactful this can be, Dun & Bradstreet did a study and showed that of the Fortune 1000 companies worldwide, about 163 have a Tier 1 relationship with Chinese suppliers, which means that Chinese suppliers directly supply things to them. But nearly all of them, 938 have a second-level relationship with a supplier in China. So any type of interruption of the supply chain will really impact companies that we would think about.

Southwick: Let's start by talking about the sectors that are going to be the hardest hit. We can head over to CNN who's saying that, "The global travel industry may not recover for years."

Initially we saw a cruise ship quarantined in Japan. We see the people waving from their balconies. And the initial headlines were like the cruise industry is really going to take a hit. As if, "Oh, no. My portfolio. The cruise industry. I'm so overexposed there. This is going to be bad." Then people were like, "Oh, wait a second. l travel. Maybe I shouldn't even go on a plane. I shouldn't go on a vacation." Now companies are telling their employees to cancel all their business trips. You're not flying anywhere.

Mann: Yes. Apple just cancelled a conference. Microsoft just cancelled a conference. And these were conferences that were happening in April and in May. So it is deeply impacting the travel industry.

To go back to China -- and I understand that by Tuesday these points are completely meaningless because it's already in 56 countries -- Chinese travelers made 150 million overseas trips in 2019 and right now it's functionally zero. And when most things go from 150 million to zero, that seems bad. So the travel industry is being impacted in really harsh ways. Take Apple, for example. If you can't get an iPhone, right now, because of a supply issue, you're going to get it when the supply becomes available. But a trip -- that's not something that's going to get consumed again later. It's just simply not happening. So any company that has a lot of debt and a lot of leverage -- in many different ways -- is in a lot of risk right now and travel is probably at the top of the heap.

Southwick: Are there any other sectors that you [think] are going to be in trouble?

Brokamp: The price of oil has plummeted. Absolutely plummeted.

Mann: Yes, the oil manufacturers. The luxury industry simply because of where they count on most of their growth coming from. From China. From the Middle East. Those types of companies are going to feel the pinch.

But [take] the pharmaceutical industry, all of the basic ingredients for pharmaceuticals tend to be made in China and in Asia, now. Just the basic materials. And if those are unavailable, that's a big problem.

Southwick: Let's talk about some individual companies. CNBC today had the headline, Apple is now down more than 20% from its record, making it among the hardest hit Dow stocks. And so Apple and Microsoft are among the most prominent businesses that have warned that supply chain disruptions could slow sales. What's funny, though, is if you actually look at Apple's chart, it's $270.

Mann: Thank you.

Southwick: That's where we were in December.

Mann: Exactly. First of all, everyone just take a deep breath. It's so easy to get wound up. I feel like what we were just doing is getting people wound up. Just keep in mind that Apple, Microsoft, and companies like that are coming down a lot because they have had unbelievable runs in their share prices. Apple has essentially doubled over the last year -- and that's hard to do when you started as a $600 billion company -- so any type of disruption for Apple had no bad news priced in.

Yes, it's a fact that Apple has dropped 20% but this is not a crisis. You're back to where you were in December, so thank you for putting it that way.

Southwick: You're welcome, although I am a little bummed to see Disney is also down 20%, but I guess people aren't going to go into the parks except for the Southwicks. We're going to Disney World in three weeks.

Mann: The Manns are on our way, too, in April.

Southwick: Are you really?

Mann: Yes, so what I'm saying is...

Brokamp: Shorter lines is what you have, too.

Mann: Yes, that's good. That's also good, but the way we tend to go there is just buy Disney now because we're leaving all of our money.

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