At a time when so many people have so much to say about the Coronavirus and yet they typically end up admitting that it all really could go any direction, I chose the word ‘enduring’ because I think it’s the most appropriate. Truthfully, we are having to endure so much – emotionally, psychologically, and financially. These are highly unusual times in so many ways.
Today I wanted to simply provide a little context as these events unfold. I’ll briefly cover what I hear from my perspective on the virus itself, its impact on the economy and the financial markets, and some thoughts on the most appropriate course of investment positioning as a result.
Regarding the virus itself, first let me say a huge Thank You to the folks who I know are reading these words that are working on the front lines. These people are doctors, nurses, volunteers, etc; a good number of whom are retired from their practices but heeding the call to help others in this time of great need. I feel confident that I can speak for everyone not just here in our offices but everyone reading this note that might not be in a position to help when I express our collective gratitude and pass along a sincere word of thanks!
By all accounts, this virus is proving to be a mighty foe. I’m not qualified to speak about exactly why that is from a medical or scientific perspective; but the common thought is that we are about to see the real escalation in new cases as we head into April. By watching the patterns that developed around the rest of the world, it would seem that the next few weeks could prove to be emotionally and psychologically challenging. The most likely scenario is that we’ll see the peak of the epidemic curve in April and then, we all hope, we should be beyond the worst and heading down the back side of that curve later in the month. We all need to recognize that this is merely the amalgamation of the best educated guesses of brilliant scientists that could prove to be wrong; nevertheless, there is a concentrated belief that this will prove to be the case. The question that will be answered is whether or not we’ve steeled ourselves to withstand the headlines and the sadness they’ll bring. The United States now has more Coronavirus cases than either China or Italy and the numbers haven’t even begun to ramp. Are we prepared to hear about the rising numbers or will they incite more fear or even panic? And what will be the mortality rate? Could it be that we see cases rise sharply but get good news about a lowering mortality rate? Anything is possible and we need to accept this unknown, which is difficult since we’d all love to control something as important as life itself!
On the topic of control, I’m happy to report that it seems like the Federal Reserve and Treasury Department actually have a real grasp of the size of the economic impact of this virus and have taken some very bold actions to stay in control of the big picture of the economy. And I really do mean bold! It’s hard to believe, but by the end of this week, from a monetary standpoint, the central bank will have bought $1 Trillion worth of Treasury and Mortgage Backed bonds. This will have been done over the span of two weeks since those actions were originally outlined. In these two weeks the central bank will have taken a total of actions that took 8 months to be done back in 2009. That’s staggering! Continuing along their charted course would mean that by the end of the month of May the Fed will have purchased what it took 6 years to get done during the Quantitative Easing (QE) actions that began after 2008. That’s 6 years of impact condensed into 3 months. Commentators have said this is the Fed’s bazooka being shot. I think they’ve significantly understated something more akin to a nuclear bomb! These countermeasures are massive and they aren’t necessarily intended to make economic conditions better immediately. Instead, they are being taken to ensure that there is a functioning economy for workers and consumers to return to when this virus subsides.
It’s the actions out of Washington DC to pass the relief bill that is intended to keep those workers and consumers on relatively stable footing as we go through this government-mandated economic pause. In short, if the intentions of that bill are administered properly, corporations and individuals alike will get the money they need to account for their forced losses of income to tide them over. In the end, if most small and mid sized business and their millions of employees are essentially kept financially solvent, we should have the pieces necessary to patch together the reignition of our economy in the months ahead.
So what about the financial markets in both the interim and the years ahead?
What an incredibly wild market we’ve seen in recent weeks. It’s truly been historic. It was the fastest fall from yearly highs to yearly lows ever, having been done is less than 3 weeks. We saw the broad indexes down over 35% before reversing course to have spikes that were also historic. The past three days was the best performing stretch since the 1930’s. The debate in the financial world is whether we’ve seen a healthy bottom put into place or if we’re seeing a false positive in the form of a stunning bear market rally.
I saw this chart below on CNBC the other day and thought it was worth sharing. It speaks at least a bit to that big question about the market. I’m sure you’ve all heard the expression that history doesn’t repeat, but it often rhymes. That’s a fair statement in a lot of sides of life and that includes the financial markets. But keep in mind that this literally means you can glean some potentially valuable perspective by studying the past, but you’d be wrong to think those past periods spell out exactly what to expect going forward. I honestly get perturbed whenever I see the lazy work of analysts saying things like “the last time we saw ‘X’, that led to ‘Y’” and them forming a conclusion based on that loose linkage. There are many errors with this approach, not the least of which is that is presumes life happens in a vacuum and the same extenuating circumstances or catalysts are in place ‘now’ as they were ‘then’. And that applies very directly to something like Coronavirus. The recession we are sure to experience from this virus is better likened to a natural disaster and doesn’t exactly have much in common with previous recessions. Therefore, the actions of the markets might not be similar to the actions of those prior eras. So here we plainly see where studying the past can be helpful, but should not be relied upon to be a trusted outline of what’s to come. With that caveat in place, let’s look at this chart. It reflects the only previous occasions upon which the market fell as swiftly as we’ve just seen – 1987 and 2008.
What you’ll notice is that a bottom formed more immediately in 1987 than in 2008. In both instances the markets stabilized at least for a while after the immediate shock, much like what we’ve just seen in recent days, but there was divergence after that relatively calm period. What you’ll hopefully also notice is that in both cases the markets were moving back into consistent upward patterns after 8 months. The chart cuts off where those strong upward trends took hold, but that is indeed what we all know happened in those prior events.
My strong belief is that’ll be a safe bet for this current outcome as well. The next couple of months are legitimately anyone’s guess since they’ll be dictated not by economics or business fundamentals, but nearly entirely by the developments of the virus. But looking out a couple quarters, I am actually very excited about what that future holds.
I’ve been asked a common question lately so I wanted to finish by addresses the important nuance it entails. The question seems innocent, but it’s actually potentially toxic. The simple question is: “What’s the best way to invest in this environment?” Innocent, right? Practical, yes? What’s the problem? Well, the word ‘best’ is the problem. That’s because you can only know what was ‘best’ after the fact. And the quest for ‘best’ is a dangerous path. I am a big fan of the statement “don’t let perfection be the enemy of good”. The quest for perfection is a horrible thing. It leads to nothing good, at all – paralysis through analysis, self-loathing, certain disappointment, and the list goes on. Perfection doesn’t exist. Not on this Earth, anyway. So it’s far better to give up on being perfect or doing the ‘best’ thing and instead focusing on how to do the most intelligent thing. Analyze the facts as you have them and simply make the most intelligent decision possible based on those facts. Critical thinking is valuable at the time of the decision; being critical of a decision because it might not have been the ‘best’ will drive you crazy. It’ll likely drive you to the poor house as well since this type of thinking is often cited by DALBAR as the main reason the average investor tends to earn less than half of the market’s returns over 10, 20, and 30 year periods.
Specific to the markets of the moment, I would obviously eschew the attempt to be perfect in market timing and knowing exactly what might turn out to have been the best way to position in the short term. That requires clairvoyance not possessed by mortals, which means it boils down to luck. I’d suggest it’s better to park that ego and instead look to be intelligent, which means trying to protect and find opportunity from all sides. Said another way, being diversified and deliberately avoiding the urge to concentrate on any one area – stocks, gold, cash, bitcoin! – is the intelligent path. In these unprecedented times, we need to protect against bad news and being overexposed to risk assets as well as protect against positive surprises and being left behind on the sidelines in those infamous chairs that shift so swiftly from comfortable to costly. Holding a portfolio full of stocks at this moment is just as foolish as holding a portfolio full of cash. I think opportunistic positioning suits the ambiguity of the moment, and that means covering all asset class bases and holding a higher amount of cash than usual fits the bill. That cash should be seen as the valuable tool we’ll put to use on the inevitable down days to come as we go through this season of the virus.
My base case remains that virtually any high quality asset that is bought now is very likely to be higher in value in 18-24 months. That’s probably true even in the 9-12 month range. But it’s important to state that it’s anyone’s guess in 60-90 days.
Heroes can guess at the bottom. Perhaps we’ve seen it, perhaps we haven’t. In the end, that person is going to think they are either much smarter or much stupider than they really are. That all depends on whether they called ‘heads’ or ‘tails’ correctly.
Investors can take great comfort in the bottoming process being supported by the actions of the Fed and the folks in DC and gradually buy high quality assets in the weeks ahead knowing that perfection is their enemy, and the good work they’re doing is almost certainly going to reward them in the years ahead.
Lastly consider these tidbits from powerhouses in the fields of real estate (Zillow) and the financial markets (BlackRock).
The real estate website Zillow recently published some reports trying to show how pandemics have tended to impact the housing market. This will surely be a slow time for real estate transactions since it’s pretty hard to go tour houses when you’re under a ‘shelter-at-home’ order, or at the very least trying to practice good social distancing manners. But what they shared falls in line with my base case notion that our current Coronavirus recession is unlike the typical financial-conditions led recessions. Key findings of their report state: During the 1918 influenza and the 2003 SARS pandemics, economic activity fell sharply, but snapped back quickly once the pandemic was over. The rapid fall and rebound associated with those pandemics differs from a standard recession in which economic activity falls for 6 to 18 months, and then recovers more slowly.
Couple this history with recent research published by BlackRock and it should provide confidence in the future, if not the immediate couple of weeks ahead. BlackRock’s recent findings are geared at investment market actions during times of crisis. They stated that: Following the 15 worst trading days in the U.S. Stock Market since the start of 1950, stocks are up over 24% over the next 12 months, on average.” And as it relates to my thoughts above about trying to be perfect in timing a bottom, they provide the following perspective – “Perfect market timing in a Bear Market is not needed to get well above average returns. Historically, investors that were two weeks too early returned over 24% over the next 12 months and investors that were two weeks too late returned over 21% (since 1/1/1950, covering 13 bear markets).”
The takeaways:
- Be careful of excessive emotions at times like these, either excessive fear or excessive greed. It makes perfect sense to have a spirit of optimism, both with respect to how our country and our world will beat back the Coronavirus as well as how our financial markets will regain much higher ground in the quarters to come. But don’t get carried away with any emotional response in your financial life.
- Specifically speaking, there’s no reason for younger working people to make any adjustments to their 401k plans. Keep contributing without skipping a beat! You’ll be glad you did down the road. And for all other investment portfolios, staying disciplined and diversified will still take you where you want to go in the future.
- We can lean on history as a guide to tell us what might be most likely to come in the markets ahead, but don’t ever think the past is perfect prologue – sorry Shakespeare.
- If your long term goals for your portfolio haven’t changed, it doesn’t make much sense to perform any sort of major overhaul. But if something has come up that you think means there’s a good chance you’ll need to take a meaningful distribution from your investments, say 15% or more in the next year, let’s talk about how to factor that into your allocations.
- We will get through this. But it’s very important to remember that it is a process. So it’s better to say that we are getting through this – we have not yet gotten through it. In fact, we may just now be getting into the real fight with this virus. Only time will tell. But faith in science is well placed, as is faith in the spirit of mankind to endure and ultimately thrive!
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