Special Market Update: Pain & Gain

With stock prices, even bond prices, falling faster than they rise the next day, fear is dominating many investors’ thinking about investing and many current life activities.  Schools, restaurants, churches are closed, temporarily.  Gatherings of even a few people are discouraged.  Numerous US states are implementing business lockdowns and stay-at-home strategies to contain the spread of COVID-19.  At current, there are no tools (vaccine, drug) to address this novel virus, other than shutting economic activity down to buy time for the doctors and drug scientists.  Unclear is when we are going to open the economy back up (April? May?), or if we can make it through the year without shutting down again in the Fall.  Closing the economy is adding to everyone’s fear of the unknown – a multi-dimensional fear not limited to just Coronavirus, and including the prospects of severe economic/financial damage.  Put simply, most all news seems bad.

Last week, the stock market lost -15%, its worst weekly decline since 2008.  Since the last Bull market high achieved February 19th, the S&P500 declined -31.8%, registering it officially as a Bear market (decline in excess of 20%).  Even bonds are giving up some value as yields are rising (prices falling), and riskier low quality bonds are widening their spread (losing value) to Treasuries.  That’s because the financial markets expect significant government (fiscal policy) spending to support the rising number of unemployed workers, rising health care costs, and the prospects of significant declines in state tax revenues (as state economies shrink).

As China was the epicenter of the pandemic, it may offer a few clues regarding the virus’ duration and slowdown effect on the economic and financial systems.  China experienced a very weak 1Q (industrial production, retail sales, and etc.), but looks to be starting to bounce back; the spread of the virus is flat (limited new cases reported); and their stock market is rising again.  But the Chinese government owns an enormous stake in that economy, and it chose to absorb the losses.  The health situation in Italy is worse and more long-lasting.  In the US, economic losses will be borne by private business owners and workers who rely on a functioning economy.  We, the US public, cannot rely on a state balance sheet to fall back on in total.

It appears certain that the US economic system will not experience a 1929 depression – wherein the economy was crippled through repeated policy errors (monetary, fiscal, trade, and regulatory; all 4 were wrong actions that further constrained economic recovery).  Today, we are just shutting the economy down to fight the COVID-19 virus.  IMPORTANT – Washington is expected to provide significant BIG fiscal stimulus (almost $2T) to stabilize economic and market uncertainty at any moment.  The process may not look pretty to start, yet it will be completed as the stakes are high; the market will be the vigilante in getting it done.  Also, other world governments are enacting big fiscal spending remedies in addition to aggressive global interest rate reductions and bond purchasing programs.  Critical is how/when to “reopen” – there is quiet recognition in recent days by some policymakers that the remedy (presently shutting down the economy) cannot be allowed to be more costly than the threat itself.

Let’s share some quick thoughts for such a time as this:

  • Nothing is so much to be feared as fear” written by Henry David Thoreau in his journal for September 7, 1851. On March 4, 1933 Franklin D. Roosevelt spoke, “… the only thing we have to fear is fear itself” as he delivered his first inaugural address.  The last sentence of President Roosevelt’s inaugural address requested, “In this dedication of a Nation we humbly ask the blessing of God. May He protect each and every one of us.  May He guide me in the days to come.”
    • Fear is the dark room where negatives are developed.” Fear develops two ways: from what we cannot control; and from what we are not familiar (used) to.  If you are reading and watching a lot of news reports, you are not helping your mindset regarding working through these events – the news creates more fear than basic fear/caution.  Avoid too much news and market watching – nothing good will develop; just increased fear; worry will kill you!
  • The stock market is a leading economic indicator, providing directional insight by about 4 months. The stock market will rise before the bad headlines end and economy recovers from a recession; the market always leads.
  • Successful long-term investors are characterized as Rip Van Winkle – he took a very long nap, say for 20 years. Such long-term investors awake to amazement at what their beginning value grew as they did not observe or become nervous about the dips and falls (a mental accounter cannot handle them; they monitor every up/down wiggle).
    • Benjamin Graham (father of value investing) wrote, “The primary reason many individuals fail as long-term investors, is that they pay too much attention to what the stock market is doing currently.”
    • Further, investors “would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.”
  • You make most of your money in a bear market; you just don’t realize/understand it at the time” – Shelby Davis.
    • Adjust your investment focus from this or the next quarter – where vision is fogged by current/recent happenings – to years ahead, where paradoxically there is greater clarity.
    • It’s easy to look at the current decline as a curse, but a few years out will prove this sell-off provided opportunity to buy undervalued stocks on the cheap.
    • “Stock prices today are the transitory opinions of Mr. Market, who often is emotionally unstable. Market did not carefully value your companies today to decide they are now worth less.  No, he woke up in a panicked mood and indiscriminately marked them down as if they were overripe bananas at the grocery store.”
    • “The stock prices quoted today say nothing about what these companies are worth; nothing at all. The value of your stocks doesn’t change 8% to 10% a day, day after day.  Valuation is all that is going to matter in the long run.”
    • Repeat: “You make most of your money in a bear market by how you act during that time; you just don’t realize/understand it at the time.”  Be prepared for the possibility that every decision may look wrong tomorrow, as no one knows how long this market decline will continue.
  • “It never feels like the bottom near the bottom.”
      • Historical analogues that come close to matching the speed from new highs (a month ago) to crash (last several days) is 1987 and 1962 market declines. Exhaustion is now appearing.
      • The aftermath of ’87 is striking – investor sentiment was impaired for 5+ years into the future, even as the market recovered to new highs. Lesson – psychologically, many will be challenged to overcome the mental obstacle of recency bias, and remain uninvested whereby wealth is permanently destroyed.

Did you hear about the Christian who said his dream was to be a retired missionary?  How about the person who wanted to be an author but not a writer?  Or the little boy who said he’d like to be the Most Valuable Player on his team?  These folks are looking at what only comes after years of work, practice and suffering.  Missionaries must toil thanklessly; authors must learn to write; and young athletes must practice repeatedly.  It’s a cliché because it is often true: there is no gain without a measure of pain.  Be faithful, diligent and persistent during the difficult things along the way.  This is oh so true with investing – pain to realize gain.

We are concerned by the current events.  We do not know where, how long, or how bad things will become.  We do observe all governments are trying to return to more normal living, with economic and financial systems operating in more rational ways.   We are all in this together, and will see sunshine erase this storm.  We are here to talk and help – call us; we can also schedule a virtual meeting.

PS:  During such a time as this, I would advocate that prayer should be our first and ongoing action, not a last resort.  And, we should try to stay positive – count your many blessings naming them one by one.

Bill Henderly, CFA

Chart Source: Strategas Research Partners

Posted in Blog Post.