Holy Crap - It’s Corono Time
I’ve been busy due to all the recent disruptions so haven’t been as regular in my writing. But I wanted to jot down some notes today.
What a few weeks it’s been.
So, What’s Happened?
This has been the fastest correction from an all-time high...all after the longest bull market in history.
After 4 weeks of damage, here is where we stand right now:
$SPY US Large -32%
$IWM US Small -40%
$QQQ US Tech -28%
$VNQ US REITs -39%
$EWJ Japan -22%
$VGK Europe -36%
$EWU UK - 39%
$EWG Germany - 38%
$EEM EM -29%
$MCHI China -20%
$INDA India -35%
What Happens Next?
No one knows with absolute certainty. But I expect continued volatility. We may see bounces in the market, but probably won’t see a durable improvement in market sentiment until we see less uncertainty about the future impact of the virus. Remember, the market hates uncertainty.
The selling has been relentless. Stock market indices haven't even put together a two day rally. This may suggest the economy is in big trouble and more downside is ahead.
What Should You Do?
The market is pricing in a bad scenario....of course no one can say whether it’s worse than reality. No one knows what the reality will be in terms of the disease or the future response of the economy.
We are down 30% from the high…so perhaps there are some values here?
A really bad bust historically has probably been down, say 50% plus-minus...if that’s the case, we’re 60% of the way there. So one can argue you can spend some money here...Buying here is therefore not irrational...
That said, no one can tell you the market is not going lower.
There are no easy answers/no sure thing...
So you need to ask yourself what’s important to you?
Get values that exist today OR
Have your dry power (cash) ready if it goes lower
Well there is also option 3...Wait until we are back in a bull market…markets always go down faster than they go up, so this could take a while...
So if I had to guess, there will be plenty of time to get back in the market. If you go this route, the challenge will be that you will need to have the psychological strength to re-enter even with prices significantly higher than where they are today.
Option 3 may be an acceptable approach because it’s always easier to make money in a bull market. BUT you will need to wait for one. And no one knows how long.
Like I said...no easy answers.
The Spanish Flu
I came across the following charts, which were intriguing.
Notice how when the Spanish Flu happened, the market fell 33%. The Corona virus has resulted in pretty much the same decline, except it has been viscously fast.
Of course this doesn’t mean the market is near a bottom.
Broken Sectors
So many sectors are now beaten down:
Airlines
Autos
Banks
Hotels
Restaurants
Do we need these industries in the future?
I’d argue yes:
Capitalism doesn’t work without banks.
People are not going to sit at home forever. Transportation will be needed.
People will ultimately fly. It may take some time. But they will.
Restaurants are already starting to evolve, now focused on takeout...
The challenge however with buying distressed companies is that even if the companies survive, their shareholders may not. This is exactly what happened during the financial crisis. GM got bailed out, but their shareholders got wiped out.
If you plan to buy companies in these sectors, you better be certain they have great management and balance sheets to avoid the above...you need to stress test how the company will be impacted if we are in a prolonged recession.
A Few Parting Thoughts
It may be difficult to remain positive in the current environment. But history is on the side of the optimist. It remains to be seen how long or severe a recession we may have. If you’re a long term investor, the bet you need to make is on the resiliency of capitalism.
In 2009, many smart people said that a depression was inevitable and that stimulus was going to destroy the economy. They were wrong. Remember that pessimists always sound smarter than optimists.
There has been tremendous stimulus put in place already. Ultimately, the stimulus will be as large as it needs to be. The government will do everything it needs to, to re-kickstart the economy. The open question is how long it takes for the economy to respond. No one can answer that question.
Bear markets accompanied by recessions have lasted ~18 months on average and we are only a few weeks into this one. So it is highly likely that we have NOT seen the bottom in the market yet. But we don’t know.
That said, I do believe the recession will ultimately end. We just don’t know when.
The world has made it through World Wars, the Great Depression, other pandemics etc. And I think it will make it through this virus as well.
Let’s see what happens.
I leave you with an intriguing quote I recently read:
“It doesn't make sense to bet on the end of the world because even if you're right, there's no one left to pay you off.” --anonymous?