On Thursday, the market declined 10%, marking its worst day since the 1987 crash. This was immediately followed on Friday with a market gain 9.4%, the largest single day gain since 2009.
What in the world is going on?
The markets are spooked by a supply and demand conundrum. In a capitalist economy, everything is a function of supply and demand. Markets react very negatively to a significant disruption of either.
After 9/11, the markets plummeted into well below today’s levels because of a disruption in demand. Before the drop ended, the S&P 500 had cratered 44%, with the NASDAQ down 78%. In the days, weeks and months following the terrorist event, factories, businesses and services remained open and operating all over the world. The issue certainly wasn’t a lack of supply. The problem was that everyone stayed cooped up in their homes, reluctant to go about doing things that make an economy go, like buying things. Americans wondered if there would be other terrorist events to follow, if the government could put measures in place to prevent them from happening, and how long it would take to feel generally safe. Over time, people did start to return to normalcy, demand resumed, and the markets fully recovered, moving on to new highs.
The 2008 and 2009 financial crisis was the opposite. We all know the story: the big banks were reckless with their own money and their investors’ money and before it was over, the financial system became paralyzed because of a lack of supply. The lending world had frozen. No one could get or maintain a loan to do nearly anything. Without a supply of funds, businesses began to fail, contracting the supply of all sorts of things. At the same time, Americans felt less wealthy, and were consumed with a healthy dose of fear. That combination resulted in Americans not wanting to buy anything until they felt secure. When the market bottomed on March 9th, 2009, it was down 53% from its high. In this case, the crisis was eventually resolved by the federal government backing up banks (taking care of the supply side) and giving consumers tax breaks, lowering the cost of borrowing and providing many other financial incentives to consumers. That combination, along with other measures, finally stabilized the system and incentivized individuals to spend money (taking care of the demand side). Over time, people did start to return to normalcy and the markets fully recovered, moving on to new highs.
Today’s bear market cause is a combination of both a supply and demand shock.
Much like 9/11, this is driven by a fear related to personal safety and the wellbeing of our fellow citizens. Normal financial incentives are not going to work to resolve this issue. Imagine if after 9/11, a major terrorist event happened every single week, with no end in sight? Would you start going to the movies, out to dinner, to work, and on vacation? No amount of tax breaks or financial incentives would likely work to get the average American to do that. Most don’t think about it until it’s an issue, but for all of us, our personal health, and the health of our loved ones, is our number one, two and three priority. The situation is similar today. Some very smart health care officials think things will get worse, but likely get better in a month or two. Some very smart health care officials think the rate of contagion will double every few days, that it can’t be stopped with the measures we are taking, and that the mortality rate may be 1% or even higher. If the latter scenario unfolds, this is the equivalent of a new terrorist event every week, without an end in sight. In a nutshell, this is a health care crisis with serious financial side effects.
From a financial perspective, to really resolve the market turmoil, investors are going to have to see a turning of events. Specifically, the markets will need to believe the coronavirus is contained and that there is a path to defeating it.
This can happen several ways, including:
Once investors see there is a path to defeat the current trajectory of cases, it will then respond to financial incentives, such as tax breaks, lower interest rates and so on. This is precisely why the market tanked after President Trump’s first address to the nation on the coronavirus. His address included largely financial solutions. Investors simply didn’t think financial incentives were going to work when the number of people infected and dying keeps doubling every few days. It is also precisely why the market reacted favorably when President Trump had his Friday press conference covering his action plan to contain and beat back the coronavirus. Investors believed the administration was focused on real actions to tackle the health care crisis, including a plan to test as many people as quickly as possible with a public and private partnership.
First, the markets need to see there is a path to health, then the market will gladly welcome financial incentives that provide a path to restoring wealth.
Once there is evidence the health care part of the crisis is over, markets are likely to react positively in a very immediate and sharp fashion. In the meantime, expect wild swings as we get new information, whether it points to a deepening health crisis or signals that we have turned a corner for the better. Any timing in markets like this is ill advised and usually results in permanent, damaging financial consequences.
America has ultimately defeated every crisis it has faced. This one will be no different. What none of us knows is how or when this will be over. In the meantime, we will do exactly what it took to help our clients come out of the 9/11 crisis and 2008/2009 crisis in better shape than they went into it.
As with every financial crisis, there are things we can control and things we cannot control. We don’t know when the market will go down, when it will go up, where the bottom is, or when it will recover. No one has conviction around where this healthcare crisis is going, and anyone that does is telling you how ignorant they really are and should be ignored. The wisest healthcare officials are frank that we know what we know, but there is a lot we don’t. The day to day wild swings we see in the market are because of just that: a lack of conviction. Some think this will pass soon, but aren’t positive. Some think millions will die, but aren’t positive. The market is taking every new piece of information and betting on who is right. Until we get conviction on one side of the argument, we will see more of this.
This is going to be a tough paragraph to read, but it needs to be said. In times like this, the most important people to listen to are health care professionals. Perhaps some also lean on their religious and spiritual guides. But that is not what you are here for. You are reading this specific letter because you are counting on us to protect your wealth. Let’s play out the worst-case scenario currently presented by some healthcare officials, but certainly a very real scenario. Let’s assume the death toll is in line with the worst case predictions. This would be horrible and every one of us would know someone that lost their life to this crisis. And as for the markets? Well, the other 326 million Americans and people all over the world will eventually do what every society has ever done: go on living their lives. That is just the cold, hard reality. It is how the human spirit works. And it is ultimately what makes markets work. At some point, supply and demand reconvene.
So what is our position?
We have no conviction that this will get better soon. We have no conviction that the worst case scenarios will play out.
We are convicted that it will be a wild ride until we get clarity. We are convicted that it will, someday, somehow pass. And when it does, the markets will recover as well.
It is that conviction that enables us to do what we did through the 9/11 crisis and 2008/2009. Our clients came out not only with their portfolios in one piece, but all that followed our advice saw their portfolio move on to new highs, with each of our recommended investments fully recovering and going on to new highs as well.
There is opportunity here for the patient and the disciplined. We will seize it.
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.