We have just seen the market swing from a 52 week high to a 52 week low in the shortest amount of time ever.
This is truly a historic moment.
There are two primary factors at play at the moment – the oil wars and the spreading of the coronavirus. Of the two, the virus is the much more impactful story for the moment.
There is no way to forecast the spread and the impacts of the virus. Some camps believe we’ll see this purely as a seasonal health issue that should peak in a few weeks and taper off relatively quickly thereafter. Others see it quite the opposite, as something that isn’t as conveniently weather-related in any way and likely to be a story that is only resolved with a genuine scientific solution.
But what is key to the financial world is how this all relates to consumer activity and the health of business of all sizes and in all industries.
Shutdowns are on the rise. Schools, businesses, travel outlets, sporting events, conferences of all sorts, etc. There is no denying the negative impact on corporate earnings as a result. What is unknown is whether we have a one quarter issue on our hands, or a multi quarter issue.
Yesterday in Washington DC, many of the CEOs of the major financial institutions met with the President to confirm their strength and provide reassurance that this is not a financial crisis. As a result of the genuine financial crisis of 2008-2009, these banks have been stress tested and required to follow much more rigorous standards and that now results in their ability to withstand this current matter and provide people and businesses with capital needed to see them through this difficult season.
While this isn’t a financial crisis, it is to some degree a crisis of confidence. And when confidence is shaken, spending slows. This creates the possible domino effect that leads to weaker economic conditions and lower earnings for businesses. This means lower prices of stocks to reflect those lower earnings.
But how long might this last?
Speed works in both directions. Could we see a sharp recovery, perhaps an incline as sharp as the decline we just witnessed? I personally don’t think that’ll be the case. In other words, I don’t think stocks are likely to make their way back to their peaks in 6 months. But since this isn’t a foundational problem with our financial system and is instead more an issue of when the world of the average citizen and average consumer’s life goes back to some semblance of normal, I am quite confident that markets will regain their footing and find their way to higher ground. That means I’d expect more of a “U” than a “V” in terms of a recovery. This isn’t a certain outcome, obviously, but it isn’t far-fetched at all in my view.
So how should we as investors handle this interim period?
As much as humanly possible – calmly. I don’t mean to be glib or overly simplistic. And I never intend to discount the emotional toll that periods like these can take. But just as the early bird gets the worm, typically speaking, the calm investor reaches the goal.
What’s happening around us right now is very serious in nature. That said, it is also ‘what is happening around us right now’, not forever. There is most definitely a brighter set of days to follow. And from an investment perspective, those days could actually be very bright. Considering that interest rates will be so low and an economic stimulus package is highly likely to get floated; coupling this with the idea that stock prices are now back to levels that can be argued as inexpensive, investors have a good chance of seeing nice gains in a post-coronavirus world.
And yes, I do believe there is going to be that post-coronavirus world. I wouldn’t suggest anyone bet against mankind’s ingenuity and advancements in science, American or otherwise. And while these times are tough to endure, we are likely to see a robust pick-up in consumer activity when this virus wanes.
Using my own little world as a case study, I’ve had three different events cancelled in the past month as a direct response to coronavirus. There are likely to be more. But let me clarify, they haven’t been cancelled, they’ve been postponed. That means current revenue for the cities and businesses is lost, but future revenue is still reliable; perhaps even moreso.
There’s a knot in the hose at the moment. And when that knot works its way out, there’s a bit of a gush to come. Consumers are very likely to over-do it when they get back out there. We have seen this pattern after past health related fears. This behavior is logical and highly likely to repeat. There’s a saying that the behavior of any one individual is essentially random, but the behavior of the masses is highly predictable. This will pass, and when it does, I’d expect the consumer to make up for lost time.
Of course, this does require the consumer to be able to retain his or her job. And this is perhaps where a government back-stop of some sort is required. It’s unknown at this point if that backstop will be created or not. This is one of the factors keeping the markets from looking beyond this immediate moment and into that brighter future.
Another factor in these wild markets at the moment is the unwinding of excesses. Most notable are the closures of things like leveraged hedge funds. An unprecedented swing from high to low is devastating for these types of speculators. And as they go under, they flood the markets with whatever they owned and are looking for buyers at any price. This leads to the simple economics 101 condition of desperate sellers and opportunistic buyers. That means plenty of stock for sale temporarily at low prices.
We have to wade through these periods and focus more on the underlying strength of the economy and less on the current condition of stock prices. The economy came into the period on stable footing; it’s the Plow Horse I keep referencing. I believe the Plow Horse lives through this crisis. Should we see these ultra-low interest rates and stimulus come into the system, we may see that horse gallop a bit. This is at odds with the notion that the horse might lay down for good. Those odds still aren’t high; and if he’s lying down, it’s likely to be a nap and not the eternal slumber.
As much as this might feel like a truly unique moment in time, it actually isn’t. This volatility is historic in terms of speed, but these types of growth scares brought on by completely exogenous circumstances aren’t. This isn’t our first health scare and it is far from our first oil war. Today’s headlines aren’t likely to be this summer’s headlines.
Times like these always remind me of investment wisdom from an odd bunch of characters.
One is Mike Tyson; yes, that face-tattooed boxer of yester-year. He famously quipped that “everybody has a plan until I pop ‘em in the mouth”. Investment-wise, this month is quite a pop in the mouth.
Another is Yogi Berra, everyone’s favorite. He, of course, famously coined “Déjà vu all over again”. We’ve indeed seen this movie before in the markets.
I also am fond of Dr. Seuss in that he attempted to avoid using any straight lines in his illustrations. He wanted to make the point that there are very rarely straight lines in life. And there certainly aren’t straight lines in investment markets.
If you prefer your investment philosophies be taken from more polished sources, we can always rely on John Templeton’s axiom of looking to buy when there’s blood in the streets. Or Warren Buffett’s view to be fearful when others are greedy, and greedy when others are fearful.
Personally, I synthesize all of this into the lesson to “do the right things, long enough”. From an investment perspective, doing the rights things would include the basics of being diversified and disciplined. It’s the ‘long enough’ part this is often more challenging. We need to be patient and let the investment process play out. We need to know the markets don’t always behave rationally. And we need to accept that unforeseen situations are, ironically, a common part of the story. Lots of things have come and gone throughout the decades to keep investors on edge. That’s happening again now and will happen again in the future. The key to success isn’t guessing at when the unforeseen might occur, but how we manage ourselves through those seasons.
The Takeaways:
- The markets are panicky, but I hope you aren’t. Try not to join that fray and you’ll be better off.
- If you have any concerns at all about your portfolio or its ability to still create the lifelong income you need or to provide the legacy you desire; or if you are having any trouble getting a good night’s sleep at times like these – please call me!
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