Satori Fund Founder & Portfolio Manager Dan Niles joins Yahoo Finance’s Zack Guzman and Brian Cheung to discuss his outlook for 2020, after calling the coronavirus market collapse.
ZACK GUZMAN: And Mr. Niles, when we look at this, you're even calling kind of that short-term rebound we saw here a bit of a dead cat bounce here, and maybe attributing that to pension fund rebalancing as we wrap up Q1. What makes you so confident that we might move lower here, and what are the indicators you're going to be watching?
DAN NILES: Yeah, so a couple of things. In terms of the bounce, if you go back and you look at history, there are nine times that the market has sold off about 30% or so since the 1920s. So it's pretty normal. You get one of these every 10 years or so. And if you look at every one of them, you always get these what I call bear market rallies.
And if you look at the Great Depression, which is probably the closest analog to this, you lost 86% of your money during the Great Depression over 33 months, but you had eight rallies in the S&P 500 and averaged 24%. So these rallies kept sucking investors back in, you know, in the sense that you thought it was over, and then you got worked over because the drops were 33% on average on your way to losing 86% of your money.
So that's the first thing. You always get these bear market rallies off of oversold conditions. The second part, though, is if you look at pension rebalancing, and if you go to my website, DanNiles.com, we put this out yesterday and, you know, why we were concerned going into April. Pensions, for those viewers who aren't aware, pensions tend to have this balance between stocks and bonds, and so it might be 60% stocks, 40% bonds, et cetera. In a month like last month, where you had stocks getting absolutely crushed, that difference between performance was over 10%.
Now, by the way, that's only happened, you know, about nine times since 1990. And if you look at what happened in the last five trading days of the month, the market was up 88% of the time, and in five trading days, the S&P gained 6.8% on average. But then it got hit when you started the new month, and some of those drops were around 4% a piece on average.
The market was down 75% of the time, with an average drop of 1.1. So that was sort of the setup coming into this. And then, you know, we can talk about valuations. They're still 30% too high, and so it's very easy to figure out, the market probably goes down 30% before we're even at near fair valuation.
ZACK GUZMAN: Yeah, and I want to get into that first, but I do just want to stress kind of the point here, since we've had a lot of guests on the show, and some will say, you know, this is the bottom and we're going to go up from here, but I do just want to stress for our viewers at home who are watching all this, I mean, your fund right now is up for March and up year-to-date. And just to read a little bit of what you were saying back then, even before all this happened, right before even we hit the peak back in February, from your January letter to investors, which Yahoo Finance was able to obtain, I just want to read a piece of that.
You said, "I am increasingly worried that central bank accommodativeness and favorable seasonality is being used as an excuse by equity investors to ignore the impact that COVID-19 may have long-term on the global economy. With valuations such as market cap to GDP at all-time record highs, this should worry investors about the downside possible, but does not seem to be having an impact for now."
Of course, after that letter, we hit highs, and then we saw the market fall out, and came down about 30%. But on your point of market cap to GDP, what does that valuation kind of point to when you're looking at how much further we could go from here, and why you think we're still potentially overvalued?
DAN NILES: Yeah, that's a great question, Zack. So I view investing as you have to manage risk. That's your number one thing, because if you lose 50% of your money, being up 50 does not get you to even. That gets you to down 25%. So the key is you've got to limit the downside. And in terms of risk and how to think about it, one of the measures is, well, how expensive is whatever you're paying for the stock market.
And so if you look at the market cap of the entire stock market divided by GDP, that number got up to about 1.5 back, you know, at the peak. By the way, that's higher than where it was even during the tech bubble. The average since 1970 is 0.8. That's just the average. The low in March of 2009 was 0.6. Where we are today is right about 1.1. So just to get the average, you'd have to have the market go down 30%. If you wanted to get to the lows, obviously you can do the math.
The other part of that is obviously that's a multiple on GDP, and everybody knows the GDP numbers are too high. The question is, is it down 10%, 20%? You know, I've seen estimates out there 30% for the second quarter. And that's the second part of that equation in terms of adding things together. So that's why, you know, you're not getting compensated for the risk of owning stocks here when they're 30% above average valuations.
BRIAN CHEUNG: Hey, Dan. It's Brian Cheung here. So you're talking about that equation, I guess, if you will, market cap to GDP. And as you mentioned, a lot of that is predicated on where you think the market cap is going to be, which we can get real time, and then where you think GDP is going to be, which we won't get real time. And we'll have to wait until almost July to get Q2 data. So I'm wondering, you can see the valuations or that ratio kind of hold, right? Assuming market cap is going down with GDP also going down. But is your expectation then that market cap is going to deteriorate way worse than GDP will?
DAN NILES: Yeah, I mean, to get to the average market cap to GDP ratio, the stock market needs to go down 30%. And then you have to say, well, if GDP is being revised lower by another 10% or so, then, you know, it needs to go down even further. Obviously, if you want to be bullish or try to create a bull case, you can say, yeah, but interest rates are a lot lower, and so therefore, you know, it should be-- the multiple should bottom out at a higher level.
My answer to that would be, yeah, but low interest rates are killing certain industries like the banking sector. So you could argue that it should be actually worse. If you look at Europe, the market cap to GDP average is lower than it is in the United States. And I would argue a lot of that is because they've had negative interest rates for so long.
So that's kind of the way to think about it, and that's why we [INAUDIBLE] the bear market rally. That's why we're having a good day today, as well, to start the new quarter, because, you know, when you look back at history, I love the Mark Twain quote, which is, you know, history doesn't necessarily repeat itself, but it often does rhyme.
And I think you've got nine prior times in history where you've seen the market go down 30% plus. It always takes a long period of time to find the bottom. You haven't found it in one month. And with potentially 5 million people being unemployed when we get this next week number, which compares to the 3.3 million that we got last week, which compares to the 700,000, which was the all-time record high, we're blowing through those numbers. So it's really hard for me to believe that, with that kind of unemployment happening, that we're even near the bottom.
ZACK GUZMAN: Yeah, and I mean, if that's the case, [INAUDIBLE] notes over time have kind of talked about capital preservation. Fancy term for just don't lose your [INAUDIBLE] stocks on the way down. And when we're looking at this, just want to get your sense of how you've been playing it, because we have seen some of these companies who did see themselves get hit the hardest.
I mean, those are the companies that rebounded, but now back off again. You look at Boeing, back down, off another 11%. Darden Restaurants off another 15%. These are stocks that were going up as people were saying that we had hit the bottom. How do you play investing now, though? If there is still room to move to the downside, what should people be thinking about in terms of allocating their portfolio now?
DAN NILES: Yeah, I mean, I think you should be-- you know, if you're going to own stocks, you need to own stocks that are good over the longer term, whether we're in an environment where we're on lockdown, you know, through May, June, or whether that comes off early. And there are some spaces like that. I mean, if you look at the gaming sector, it's one we've been talking about since January at least. You know, we own several stocks in that space.
And actually, I was looking at it this morning. You know, a couple of those names are actually up through the March quarter. I mean, Activision is up like 10 basis points, but it is still up through the entire March quarter. We own Zynga. That's up 12% through the March quarter. I mean, people are staying at home. There's only two things you can really do, which is, you know, you're streaming movies or you're playing video games. And the video game sector, on top of that, you've got new consoles coming out for the first time with brand-new hardware architecture since 2013. So you know, I like playing video games, and so do my kids, and we're really excited to get those, as well. And so that's an area you can be in.
Also, companies that help you work from home. We own a company called RingCentral. That stock for the March quarter is up 25%. So, you know, those are the ones you stick with. Now, a Boeing or something, if you want to take a crack at it, sure, but there's real bankruptcy risk there. Same thing with the airlines, same thing with the hotels, same thing with the mall REITs. I mean, these are great for one day, you know, where they're down already 80%.
They may be up 40% in a day, which is terrific, but if you're down 80%, you know, you've taken your $100, turned it into 20. If you're up 40% off the 20, you've made back $8 of the money that you lost. That's not much. And you're taking a lot of risk, because the ultimate downside is zero. So for me, that's not something I'm interested in buying when the market gets hit. And those, quite honestly, or the financial services companies, where they can't make money when rates are at zero, those are the other sets of names that [INAUDIBLE].
BRIAN CHEUNG: So I want to follow up on what you said earlier, which is that, you know, it's hard to call the bottom right here, but that these recoveries should not be expected to be a short thing. We saw that as the case in 1987 with Black Monday. A lot of people make that comparison. It took a long, long time before you had the markets try to recover those losses. I'm wondering, is there anything that you're seeing that would tell you about whether or not you would expect that to be even longer for this COVID-19 related recovery, when we do end up getting there?
DAN NILES: Oh, yeah. It's absolutely going to be longer. I mean, I sort of laugh when I hear people talking about a V-shaped recovery because, you know, we're going to have at least 10% unemployment-- my guess is it's closer to 20-- before all this is said and done. I mean, you're not going to get a fast recovery with that many people out of a job. And we're not just talking in the United States, we're talking all across the globe there's problems that are happening.
And so this is the global slowdown that we have not seen at this magnitude since the Great Depression. And it wouldn't be a big deal, but as we talked about earlier, valuations are 30% above just average. Not even the lows, just average. So from that perspective, I feel like-- and I've said this in my Twitter, which is, you know, @DanielTNiles-- I've said this multiple times-- you know, what our strategy is we sell rallies, we short rallies, and we buy oversold conditions.
And the thing is that each oversold condition, because of the way the market's acting, after you get a rally, you have to go much lower than the prior low for it to be oversold. So that's kind of how we're thinking about this. And the stocks that we're buying are not names that-- obviously, you know, if you bought Boeing at the exact bottom, you made a lot of money. But you know, it's still got bankruptcy risk. We'd rather own more of our gaming companies.
And we-- you know, we're actually buying more in that sector today because we feel like that's a real fundamental thing that will continue when the economy-- and it will-- you know, when we get through this and we recover. I mean, we got through the Spanish influenza. You had 50 to 100 million people die in the world. You know, obviously we're way better off today than we were then. And that'll be the case this time, as well. But we want to stick with stocks that we think will benefit regardless of the environment.
ZACK GUZMAN: And Dan, just real quick before we let you go, too, just because it sounded like you were calling for, you know, potentially-- no one ever wants to call a bottom. Everyone's always afraid of calling a bottom, especially with this much uncertainty around regarding how long the shutdown will last, but when you look at it, it sounds like 30% still to the downside remains. Obviously, you're up today. You're been making money on the way down. So how far down do you think we could still go here before you'd be comfortable going much more on the long side than on the short side?
DAN NILES: Yeah, I mean, again, you know, you get these bear market rallies. You had eight of them during the Great Depression. I'm sure we'll get another one. But you know, I would-- before I even thought about getting aggressive in terms of-- and typically, what we do is we cover our shorts. Our longs stay-- you know, they move around, too, obviously, but they stay more consistent in terms of we owned video game stocks back in January, we own them today. We just own more of them.
You know, so from my perspective, you have to cut below the lows you saw in March-- 24th I think was the low-- before I would think about, OK, you know, I think I want to go ahead and start taking off the shorts. But even then, my belief is that, you know, you should be thinking the market has to go down potentially, you know, around that from peak to trough, that 35%, 50% range. And my belief is that number is probably closer to 50 than it is to 35 before this is all said and done.
But you know, it takes time. I mean, during the Great Depression, the market went down 86%. And that took 33 months to get through that. So this is something you're getting new data every day, and you're adjusting it. And if you get, you know, a cure for the virus somehow miraculously, that'll help. If the oil markets, if the Saudis and the Russians sort of agree, that will help, too. And so, you know, you're sort of evaluating it real time. And the nice thing is that you're getting these massive moves every day. And so if you're actually disciplined, you know, with managing your risk, then you can actually do pretty well in this market.
ZACK GUZMAN: Yeah, an important reminder from a man who's up for March and up for the year, as well. Dan Niles, thanks so much for joining us. Appreciate you taking the time, man.