The correction we are now in has cascaded into a full-blown bear market as of yesterday’s decline. Technical action during the day, especially leading into the close, had the earmarks of a capitulation day, whereby fear crescendos, holdouts finally have had enough and throw in the towel, and very few sellers are left in the market. Whether or not that turns out to be the case, and today’s early market-open stabilization forms a bottom, remains to be seen. However, the action of the last few weeks has been that of classic panic selling. That is always difficult to assess along the way because it isn’t based on sober analysis and rational thinking. It’s emotional and fear-based and therefore impossible to quantify.
The media are in the business of creating sensational, attention-grabbing headlines and talking points. This doesn’t help in sifting through the actual facts to make informed decisions. Some of what is said is just plain false. The press widely reported last week that President Trump characterized the coronavirus as a hoax. This was done to present the notion that he appeared cavalier, unconcerned and lacking in leadership. But that’s not what he said. What he said was the criticism of his administration over this issue was a hoax. It can be left up to each individual to determine if that mischaracterization was intentional. Other media reports are merely misleading. Just today, the Wall Street Journal’s front-page headline reads, “Virus Batters Economy”. But that remains to be seen. Yesterday, the virus battered the markets. The markets are an estimated reflection of the future of the economy. But they are not the economy. But it’s scarier to claim the economy is being battered. Further, we have to look deep and far to find news that puts this into perspective. For example, it is not widely reported, but can be discovered, that nearly 70% of all the cumulatively-infected people worldwide have already recovered. They are back to the level of health they had before they contracted the virus, or if they’d never have gotten it. We don’t want to appear callous, but let’s also remember that just in America alone, every year, about 29 million people get the flu and on average between 30,000 and 70,000 die of it. That doesn’t tank the markets and send people running to the store to clear out shelves. And the vast majority of casualties have been among the old and already weak, not the general population. Globally, since this outbreak started in China several months ago, about 138,000 have been infected, and a little over 5,000 have resulted in deaths. Already, the pace of new infections is declining in most areas, due to measures being taken to prevent exposure. As we move into warmer months in the northern hemisphere, people will be opening windows and flushing stale air out of buildings, and spending more time outside where the atmosphere dissipates concentrations of germs. This is not to say we shouldn’t take reasonable precautions, or dismiss the disease entirely. But let’s not lose our heads. How many months’ supply of toilet paper do you really need? Is Advanced Micro Devices really worth only 60% of what it was three weeks ago?
To be sure, there is no doubt there will be deleterious effects on the global economy, and this has not fully yet run its course. Certain sectors like travel, leisure, conventions, sports, and retail will take hits. Other sectors of the economy will weather the storm more successfully. But this will blow over, and likely sooner than many think. We can expect the total infection and death count to rise all the way up until this is over. So don’t be surprised to read that. But as the rate continues to level off, this will not afford us any new news we can’t already anticipate. Markets will start pricing in the calculation of the actual economic damage and its expected duration and it will very likely reveal this panic selling to be overdone, and recalibration to the upside may well be quite swift. Warren Buffet has warned that the market is a mechanism for transferring wealth from the impatient to the patient. Let’s be the beneficiaries of patience.
In times like this, and we’ve seen plenty of them over the decades, it helps to keep in mind what really drives long-term market trends. Those factors are economic fundamentals which impact corporate earnings, and therefore the value of companies. That’s what stock prices reflect. Let’s review where that stood before this correction started, because they are still in place. Economic growth was accelerating. The labor market is the best it’s been in over 50 years, and just a week ago non-farm payrolls, which were expected to rise 177,000, instead came in at 273,000, and the previous two months’ job gains were revised up a total of 85,000. Inflation is non-existent. Interest rates are more than just accommodative, and are loosening further. The other cloud over the economy, trade battles, have been dissipated. Corporate earnings were on the rise. The point is, prior to the Covid-19 coronavirus spreading across the globe, the American economy was in an uptrend. It is well positioned to withstand this shock. Since then, the government has announced a series of policies to provide assistance to the most highly-impacted among us. The Federal Reserve has injected an additional $1.5 trillion of liquidity into the economy. Last week they lowered the Fed Funds rate 50 basis points, and they’ll likely loosen more next week. We actually think this will not do any good because lower interest rates will not create a vaccine. Economic activity is not contracting because borrowing costs are too high. It’s happening because people are self-quarantining to halt the virus’ spread. Still, lowering rates may provide a bit of a positive psychological boost, which should not be discounted, as we’ve seen the negative psychology of this pandemic become un-moored from reason. Our hope is that the Fed has the discipline and presence of mind to walk back these rate movements when the anxiety subsides.
Already, we’re seeing previously-shuttered factories, manufacturing facilities, and businesses in China reopen – even in Wuhan. This will also happen in South Korea, Italy, and other hard-hit countries. The incubation period for the virus has been revealed to be about five days, not the two weeks previously thought, and the illness period runs a couple weeks. So, with the quarantining measures being taken, which are lowering infection rates, we will soon see this thing die down. The decline in economic activity has, and will continue to, deplete inventories. Those inventories will have to be replenished, and pent-up demand will drive a new wave of growth. We don’t know when that will start, but we do know it will happen. The market will recover from this and go on to new highs. It always has. Just a year and a half ago, the fourth quarter of 2018 looked pretty bleak. But 2019 was a stellar year, and just a month ago, all the major indexes were at all-time highs. This will happen again. Down the road, when viewed in the rear-view mirror, this will be known as a great buying opportunity for those with fresh cash to deploy. This is why many of our clients are making substantial deposits to their portfolios. But even if we can’t come up with new cash, not selling near a bottom is wise. That will pay off.
Leave a comment