In this episode of MarketFoolery, Chris Hill chats with Motley Fool Chief Investment Officer Andy Cross about the latest news from Wall Street. They also touch upon housing mortgage rates and refinancing, where they are seeing growth opportunities for investors, and much more.

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This video was recorded on March 16, 2020.

Chris Hill: Another Monday, another circuit breaker triggered. This time 30 seconds into the trading day. It's another crazy day, folks. If we're going to get through this, Chief Investment Officer, Andy Cross, and I just came from a 75-minute live Q&A that we did with Motley Fool members. So, we just came to the studio, recorded something quick, so that's what you're going to hear today.

 It's Monday, March 16th, welcome to MarketFoolery. I'm Chris Hill, with me in studio today, Chief Investment Officer here at The Motley Fool, it's Andy Cross. Thanks for being here.

Andy Cross: Absolutely, Chris. Thank you.

Chris Hill: So, you and I just walked down from the fifth floor where we did a 75-minute live video Q&A with Motley Fool members. And I just wanted to, sort of, reflect on that and also what's happening, for I'm assuming most of the dozens of listeners are aware of where we're at right now, but just in case. On Sunday, The Federal Reserve announced interest rates are being cut to 0%, buying $700 billion in government and mortgage backed bonds. And just like a week ago, Monday, 30 seconds into the trading day the circuit breaker gets triggered, the market tanks. And I'm looking for signs of solace out there. One for me, personally, is the banks appear to be in better shape than they were when the market was melting down in 2008-2009, but there is just so much red out there.

Cross: And you're starting to see, Chris, more and more announcements from companies that are trying to get ahead of the COVID-19 spread, you're seeing some from governments. I just saw that there's some agreement in New York and New Jersey, I think it was to halt dining-out. So, you're hearing more and more from government officials, clearly you're hearing from the Fed, Jerome Powell, they ramped up, they sped up the meeting of the Fed. They were supposed to meet Tuesday and Wednesday of this week, they canceled that and they met over the weekend and they made the decision to cut the rates by a 100 basis points. And now this is the fastest drop we've seen in, and not just stocks, but the fastest drop we've seen in the Fed funds rate, I think, ever.

So, it's dramatic, it's uncertain, there's a lot of volatility out there in all markets, not just stocks, but you're seeing in the treasury market, you're seeing in the cash markets, you're seeing in the commercial paper markets.

So, investors are looking for signs of assurance out there. And for long-term investors, like us, at The Motley Fool, I continue to anchor to this fact that we're trying to own businesses that we think over the next five years, ten years are going to be the ones that are going to not just survive, but thrive. They're going to take market share, they're run by capable, talented people, they're in very good spots, their balance sheets are in good attractive shapes to be able to weather this, but they'll be disrupted. Their businesses will be challenged, all of our businesses will. No one is going to be spared by this in the U.S. and around the globe. So, investors trying to understand the right mindset and right perspective is really important in days like this.

Hill: What we saw in 2008-2009 was, in terms of the bank's melting down, the market drop, that happened over a seven to eight months period. And part of what is challenging right now for investors is the speed with which this is happening. And so, because of that there are big, important questions being asked that have not yet been answered. Things like, is there going to be a bailout? Whether it's just the airline industry or something larger for travel and hospitality? As restaurants are being told to shut down operations, do they need some sort of bailout? And I think that's what makes this tricky right now.

Cross: You're right, Chris. The old line that the market hates uncertainty, and I wrote a piece that says, "Well, markets may hate uncertainty, but investors shouldn't necessarily shy away from that," because, obviously, that volatility, especially in a market that is so driven by algorithmic trading and just a curse of short-term myopic thinking and actions, gives the long-term investors and individual investors like us the ability to make decisions that others don't make or can't make. So, that isn't a typical, normal market that I invest in and like to think about, and even now that's the approach I take.

But it's even more difficult because not just what we're seeing in the uncertainty with markets but just in our personal lives. Our schools are closed, my wife is home with our kids. I got to run home after this to help setup the at-home school for three weeks, you know, that ...

Hill: ... at least three weeks.

Cross: ... that we're not necessarily prepared for. We did some prep over the weekend. So, there's a lot of disruption in all of our lives, and I think that's driving a lot of the fear. And then, of course, we have the very real impact that, actually if we're not in a recession now, we might go into one now. Stocks are forward-looking and they often react before the official recession numbers hit. So, I'm not saying that we are in one now necessarily, but it's looking more and more that's a higher likely case.

I think the recent numbers I saw were somewhere in the neighborhood of 65% to 80% of the chance that we will hit a recession at some point this year. So, I think markets are all digesting this news and we're seeing the massive volatility of down 4%, back up 9%, down 10%, circuit breakers get triggered that we haven't seen get triggered in years, if ever, and markets are down on a daily basis in ways that most investors who've never invested before or just consumers have experienced before. So, this is really new. And the last thing I'll say is that we are truly in this together, because we're investors with our members and with our readers and with our listeners who also are following your advice. And so, we are feeling that with you.

Hill: And certainly, as we've said constantly, if you're looking at money that you need in the next two to three years, it should not be in the stock market. That being said, there are a lot of folks out there who are looking at the market, they're trying to be opportunistic, they've got a little cash to deploy. So, let me get to a couple of the themes that we just went through with our members and the questions that we were getting. And we can touch on them briefly here.

One broad type of question that we got was about either specific stocks or specific industries that have been knocked down, people looking at something that they were looking at, by the way, six to eight weeks ago and thinking, "I might buy shares of that," and now it's 40% cheaper. How do people make that determination? Because when it comes to things like -- and I'll just mention two specific industries that we got questions about repeatedly: Airlines and cruise lines.

And I look at both of those and I just think, not now with the airlines for me personally, they're certainly better-run than they were a decade ago. And the cruise lines, I think some of the cruise lines might be depending on what happens with federal intervention. Some of those cruise lines might go under completely.

Cross: Yeah. And there'll probably have to be some mergers and there'll be some M&A, Merger and Acquisition, activity in a lot of these businesses. But there's the consideration of what happens at the federal side to support all businesses, but especially those ones that are really so much more disruptive, and mostly, when I think about that I think about it from the travel and leisure sector but also on the financial sector. So, we'll see, like we mentioned before, the banks are better capitalized than they were in 2008. That's great to see. Hopefully, that lasts.

The way that I've been thinking about this, Chris, is, I heard an analyst today talking about, no one is now talking about all these great themes that we talked about over the past couple of years. No one is talking about, like, the cloud theme and no one is talking about, maybe 5G. So, right now we're not talking about the businesses and what is going to drive growth and where innovation is going to come from. We're all talking about 10% down in the stock market, we're all talking about the curves of COVID-19, and we're all talking about whether the government is doing a good job or not and what the Fed is doing with rates? Those are all important things, but we're not talking about the bigger picture.

And during times like this -- I didn't make this point on our talk and I should've -- during times like this, our timeframe and our perspective shrinks. It's human nature to do that, because we're thinking about survival. And from an investor side, from an investor perspective, the way that we invest, that's very dangerous to do because it may make you make bad decisions. And we want to really constantly fight that, which is why we continue to talk about those businesses that when I look out three, five, ten years, are going to be the ones that are going to be able to take market share, going to be able to grow revenues, grow cash flows and that continues to be in those areas that we like so much. So, it's technology, it's consumer growth, it's maybe even some healthcare, there are lots of healthcare stocks that are just really beaten up in the large cap and the small cap space that through the coronavirus will probably do OK as we come out on the other side, but in the near-term it's going to be difficult.

Hill: Another broad category of questions we got is related to the interest rate cut. Some people asking, "What is this going to do for housing mortgage rates; and, oh, by the way, should I refinance my mortgage?" And then other people asking, "What does this do to bonds and should I be looking at bonds at all?"

Cross: So, on the mortgage front and the housing front, it is very interesting because we've seen mortgage rates not follow the drop of the federal funds rate per se. I don't know where they are today or where they're getting quoted today. But we saw a little uptick in mortgage rates over the past week, I think. So, there's undoubtedly been a lot of activity in the mortgage refi market, a lot of interest in people refi-ing their mortgage, who have maybe a rate that's in that, you know, 4% to 5% range maybe, if you're up there, to refi even a little bit, to improve your mortgage payment.

What is interesting to think through though is, our house that we buy, for so many of us, is our largest purchase, it's our largest capital commitment, it's our largest outlay. So, in a market of perhaps unemployment increasing, perhaps not understanding where my next paycheck may come from, you're going to see concern, you're going to see worries about people forking over the capital and making the commitment to buy a house, whether it's a new house or to buy an existing house. So, I expect to see those numbers drop and I think that's why you're seeing stocks like, Redfin and Zillow fall dramatically, even though mortgage rates are going to come down.

Homebuilders got crushed last week and there's a couple of high-quality ones out there including NVR, that I think we like across The Fool. So, you could see some continued pressures on those businesses because people just don't want to spend. So, that's the mortgage on the housing side.

And the other one was on treasury and bonds front. I think if you're closer to retirement, having more conservative investments is a natural way to think. And we hope everyone, kind of, follows that advice, so not necessarily get out of stocks altogether, because we are living longer than ever before. And bonds and bond funds tend not to earn as much as they used to with rates this low. So, I think it's still smart that you can have some money allocated in that area for close to retirement but don't use this as an opportunity to sell all of your equities and get all into either cash or bonds. The all-or-nothing moves, I think are dangerous ones. Dangerous ones you want to watch out for.

Hill: Two things before we wrap up and then I'll let you go. How important is any given company's balance sheet in an environment like that, because we got a lot of questions from members about small upstart growth potential companies that, at the moment, are not profitable. So, that's one. And then second, just broadly, without naming specific companies, where do you find your eyes gravitating toward as you look for opportunities?

Cross: The balance sheets are more important than ever before, so. And I haven't checked, just because markets are moving so dramatically, but if healthier balance sheets are outlasting crappy balance sheets -- for lack of a better word -- certainly, in the energy space you're seeing a lot of concern with what's happening with the shale plays, the specific drillers because they're so levered, especially the small ones have become so levered and they need to refinance that debt over the next couple of years, next year maybe or so. So, concerns about what they will have to pay to refinance that as spreads between the rates that they will have to fork over for that debt and pay for on that debt versus the risk-free rates today are really widening. So, concerns there.

So, I would definitely say or I do say, balance sheets and financial stability matter more so than ever before. That doesn't mean you necessarily only have to go large caps, Chris. There are small caps out there or mid-caps out there that have very good balance sheets, that longer-term have attractive growth rates for their businesses. All of that that we talked about before. So, I would much prefer to invest in those kinds of businesses in a time like this. So, do pay attention to the balance sheets and particularly look for companies that have more cash than debt on the balance sheets.

And there's another part to the question, industries.

Hill: Industries. Just broadly, where do you find yourself looking?

Cross: Well, I would stay away from those ones we talked about the most. Don't try to catch the falling knife at this point, I just don't think that's worth it. And certainly, don't think about it as, like, these trading positions or making moves in the short-term nature. I think that could be very dangerous for most investors, for 99% out there. Longer-term, I continue to look at the technology space, continue to be excited to add some consumer-facing ones. Any business that I think, when I look at, I truly try to take this five-year perspective and I say, "Will this business, not only be around, but over the next few years be able to sustain its growth rates." Yes, they'll all be disrupted over the next quarter or two, maybe even the year.

When I look at a business like MasterCard, MarketAxess, which I've talked to about before, a tech company like Zscaler, which is a small cap company that's been really hitting out, so many of these businesses are trading near their 52-week low, that utilize technology and they embrace technology, if not, they actually support in technology. Because that continues to be the way that we're going to, as consumers, what we will be doing. And you have prices that are 20%, 30%, 40% cheaper than they were a few months ago. So, use it as an opportunity to add to those attractive growth opportunities.

Hill: Thanks for being here.

Cross: Thanks, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.