A "Fear On" Market

Most of the time, financial markets find balance between fear and greed. Most quarters, while allowing for some winners and some losers, will have a slight overriding direction. This was not one of those quarters. 

The first quarter of 2020, specifically February and March, was a “fear on” market. What started as a decline in the stock market quickly became a rout of not just stocks, but all publicly traded securities (treasury bonds being an exception) that pushed values lower across investment sectors.

These “fear on” markets are tough to deal with emotionally and financially, especially when all of us have been preconditioned, not just socially but by heredity, to respond to sudden fear with quick flight. This “fearflight response” may have kept our hunter-gatherer ancestors alive when living upon the plains of Africa, but needs to be guarded against in managing publicly traded securities.

In March (much like from 2008-2009), the “fear-flight” response was clearly seen in the market for preferred stocks. Preferred stocks are best thought of as the halfway point between the stock and the bond markets. Some are stocks and some are bonds, though in normal efficient markets they trade much like bonds. March was not a normal market, and what we saw in the preferred markets was highly inefficient. Investment grade shares fell from prices just above $25.00/share to prices in the mid-teens or about 60% of their call price (most preferred stocks are callable at $25.00/share at regular intervals and most of the time will trade within a dollar or two of that price). Mind you, these are investment grade preferred shares. Those prices indicate one of two outcomes; 1) capitalism is coming to an end or 2) financial markets are not rational.

The good news is that capitalism is not coming to an end, but rather that markets have entered one of their “fear on” periods where prices are not a good indicator of value. Uncomfortable as that may be, it’s happened before and if we have the good fortune it will happen a few more times during our lifetimes. So what is a good indicator of value during a “fear on” market if prices are sending false signals as to the long-term value of your portfolio? At Iowa Wealth Management we look to portfolio income.

Panics are a time to focus upon the amount of durable income your portfolio provides. Simply ask yourself, how much has my income changed? Have any of my companies lowered their dividends? Have my mutual funds or ETFs lowered their distributions? During the 2008- 2009 bear market some companies found it necessary to lower or eliminate their dividends, but the declines to income for blue chip companies were not so great (about 10% vs. a decline in prices of about 45%).

Watch prices if you must, but history tells us the durability of your income is more important right now. As for the preferred shares I mentioned earlier, most (as of April 14th) are now trading around $24-$25/share or 95-100% of their call price… Fear off.


Past performance is no assurance of future results. Iowa Wealth Management is a registered investment adviser with its principal place of business in the State of Iowa. Opinions expressed are those of Iowa Wealth Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security.