I’ve noticed other things.

Advertising of dubious investment products ramps up quickly in a bear market. We’ve had no inquiries from clients about them as yet, but if the downturn is protracted like August 2009, we expect to hear from some clients that wonder if these outfits have found the secret to separating risk from return.

Speaking of which, annuities have a place but some annuity salespeople tout indexed products as a sort of new mouse trap for stock market investing rather than a fixed product. Indexed annuity products in particular are going to face challenges going forward. The fixed products, by law, must put the bulk of the assets in low risk fixed income securities. With interest so low, the amount left to buy the instruments that provide exposure to market movements shrinks.

Contracts likely face smaller index-linked additional credits as the low returns from bonds force more assets into low yielding bonds to ensure the insurer can meet the contractual minimums. Crediting rates after the 2008 crisis have been generally poor relative to the strong markets. Today’s even more severe low interest squeeze has already caused some insurers to cease sales of new contracts. Expectations for returns on these should be adjusted accordingly.

Speaking of bonds, as was the case during the financial crisis, high-yield bonds took a dive. If clients reached for yield on the fixed income side of the portfolio by buying lower credit quality bonds, not only did the bonds fail to provide ballast against equity volatility, the clients hindered the effectiveness of rebalancing. 

The voracity of the bear attack caused some issues with holders of less risky bonds too. Holders of individual bonds saw prices that were far from what they’d expect and the ability to trade some otherwise high-quality bonds were impeded for a time. 

These dislocations affected mutual funds too but especially some ETFs. Similar action occurred during the financial crisis. Having observed these issues in the past, we have maintained bond holdings through a mix of individual securities, open end funds and ETFs rather than rely too heavily on any one of those. Trading anything is a challenge when the market is moving 5-7% every day but being able to liquidate some of the traditional open-end mutual fund positions enabled us to avoid some of the problems in the bond markets. Our rebalancing in March was executed more effectively than if we had been using exclusively individual holdings or ETFs.

Based on past downturns, I knew this would happen but the speed at which Wall Street can create securities is pretty impressive. If they think you will buy it, they will create a product for it. Apri saw the announcement of an ETF with the proposed ticker “WFH” (Work From Home) from Direxion and an ETF from Pacer group tracking a “biothreat” index comprised of companies that range from those that identify or combat diseases to those that enable social distancing. These may be great, but the speed at which they were created reminds me of the black swan products that came after the financial crisis, most of which didn’t last long.

One thing to watch out for is use of the post hoc fallacy. Derived from the Latin “post hoc, ergo propter hoc,” meaning “after this, therefore because of this,” this misplacement of credit is a favorite of politicians and pundits. “I did this then that happened so give me credit” or “He did this, then that happened so blame him”

An easy one to spot coming in the financial world concerns the yield curve.