We understand the level of fear associated with both the Coronavirus and the market's sudden drop over the last few weeks. Further, we understand the feeling that this is a "new" crisis, the likes of which we've never seen before. In reality, Coronavirus is a new crisis, but that was also true of every crisis we have ever seen.
We have been doing this a long time, and we have seen many crises come and go, each of them "new" and "unprecedented." In 1997, we faced the ASIAN FINANCIAL CRISIS. Debt to GDP surpassed 180% of GDP in the four large Association of Southeast Asian Countries. The crisis was so large it caused fear of a global financial crash. Shortly after the Asian Financial Crisis, we faced the bursting of the TECH BUBBLE in the United States, driving the Nasdaq down 76% from its peak to its trough. While Tech Bubble was bursting, we also faced the ARGENTINE ECONOMIC CRISIS. Following these, we faced the FINANCIAL CRISIS OF 2008 (also known as "the great recession"). Then we faced the EUROPEAN SOVEREIGN DEBT CRISIS, followed by the RUSSIAN FINANCIAL CRISIS and the GREEK GOVERNMENT BAILOUT.
Each of these crises was unique, but each had something in common too; they were all resolved. Investors who did not panic and try to time the market not only survived the crisis, but actually thrived as the crisis was resolved and markets resumed their normal trends. Sadly, this cannot necessarily be said of many of those who tried to time the market. Many got out of the market well off its highs, and failed to return until well after it had left its lows behind. Ultimately, those who time the market tend to under-perform the market quite significantly.
That said, we understand the desire to "time" the market. We might even feel compelled to replace the word "time" with the world "control." We believe many people don't set out to "time" the market, but rather get to a point where they feel out of control, and react in a way to "take back control." We can feel rather helpless as we watch the market drop, and eventually, we may feel the need to regain control. When the decision to sell out of the market is made, control is taken back; the market will NOT give us any more losses.
Peter Noel Murray, a member of the New York Psychological Association, explained it this way when speaking of consumer behavior during the Coronavirus outbreak:
“There’s an over-representation of fear and people’s minds need to respond to those kinds of feelings. The need for self-affirmation is triggered, and that drives us to do unreasonable things like buying a year’s worth of toilet paper. It overwhelms the knowledge that we don’t need to be doing that.”
Sadly, when we "take back control," we often focus on loss prevention; we will not lose any more money in the market. However, we also "control" whether or not we will MAKE any money in the market. A portfolio invested in cash will not participate in the market's gains when it finally begins to rebound. And all too often, we can only identify the "bottom" long after we've moved above it. In the financial crisis of 2008, the stock market finally hit bottom on March 9, 2009. By April 9, 2009, the S&P 500 had already gained over 27%. Within 12 months, the S&P 500 was up over 70%. Sadly, very many of those who sold out some time during the financial crisis of 2008 never got back into the market in 2008 or 2009. Their need for control held them back from participating in the market's gains during 2009.
Our experience of helping clients navigate the markets has been that those who maintain a disciplined investment approach have the best outcomes. This does not mean blindly staying the course, but rather making informed decisions with eyes wide open. Observing the markets now, we see governments around the world stepping up to offer solutions to get through the short-term economic damage being done by Coronavirus. We see that pre-Coronavirus, the US economy was on track to produce a GDP of more than 3% in 2020. We see that employment data remains strong. We see that corporate balance sheets are strong for many companies, and that our financial sector is healthier than it has been in a very long time. We see that we are as well positioned to survive the damage Coronavirus will do as we have probably ever been.
This does not mean that there will be no more pain, or that we are calling a bottom - we are not. We expect there may continue to be volatility while our government and others put forth plans to deal with the challenges brought about because of Coronavirus. We even concede it is possible Congress will leave on their break before they pass a complete solution to address Coronavirus (even if we think it would be irresponsible). However, we return to the lessons history has taught us. We should not panic, and we should not act as if we know things we do not (i.e. time the market).
We should rather focus on that which we do know. We thought Dan Clifton at Strategas put together some nicely organized thoughts about what we do know right now, and we wanted to share them with you. Please continue reading below to read his comments:
Last night, President Trump addressed the nation to discuss the government’s efforts to respond to the Coronavirus, which includes some new initiatives, including shutting down travel from Europe for a month. White House officials are walking back the comments about cargo being restricted. Additionally, the House is moving on legislation to respond to the Coronavirus.
The combination of the efforts is a lot of spinach and little candy. As such, financial markets will likely read the efforts as not sufficient for a market looking for a shock and awe response. Directionally, we are moving towards a response (finally) but more work will need to get Congress’ attention.
There is real health and economic pain associated with fighting the virus. Washington is too caught up in the coincident economic data and failing to understand the economic impact of what happens when the economy freezes as it is about to do. Financial markets will continue to be the vigilante to force more urgency on Washington.
Below is a summary of the current efforts:
Speaker Pelosi and the Trump Administration are negotiating a Coronavirus relief package. The House is expected to vote tomorrow before lawmakers leave for a weeklong recess. Both parties agree that a plan including paid sick leave, assistance for small and medium-size businesses, and free Coronavirus testing is necessary to help confront the spread of the virus. This relief package is being expedited because of the severity of the crisis and the impact on the economy. We provide a summary of this legislation further below.
The President acknowledged he supported these efforts.
In his speech Trump outlined new initiatives. These include the following:
- Shutting down travel from Europe for 30 days. This is a very big deal and will be viewed as a large negative economic impact. We are being told this applies only to humans, not cargo as Trump spoke about.
- Treasury will defer tax payments for individuals and businesses impacted by the virus. The President said this will add $200bn of liquidity. We will need to see specifics because we only collect slightly more than $200bn of corporate taxes annually. Some of this could be a delay in the April 15th deadline for individuals which could help small businesses. Details will be important here.
- Small Business Administration will provide loans for companies impacted by the virus. These are low interest loans to help smaller companies with disruptions to their businesses.
- Trump is asking Congress for $50bn of new capacity for these loans.
- Trump also asked for payroll tax relief but did not make a forceful case which is needed in light of Congress’ skepticism.
The President did not declare a national emergency which would have freed up $35bn of FEMA emergency money or declare tariff waivers to expedite critical medical supplies. Additionally, the president can take action on energy, like purchasing US produced oil in the SPR and lowering the royalty payments for drilling on public lands to lower the breakeven rate for drilling. There are tools available that could be used in the future.
Below is a summary of the legislative package for individual assistance. There is some discussion of adding industry-specific relief included for those sectors that have been adversely impacted by the pandemic.
- Paid Sick Leave: Workers impacted by quarantine orders or responsible for caring for children impacted by school closures will receive paid sick leave to alleviate the consequences of lost wages.
- Enhanced Unemployment Insurance: Unemployment insurance benefits will be increased to help workers who lose their jobs from the virus.
- Food Stamps: We believe this provision is targeted at rolling back Trump rules to reduce some of the generosity of the food stamp program.
- Free Coronavirus Testing: Would pay for Coronavirus testing of individuals so everyone will be tested without facing economic hardship.
- Affordable Treatment for All: Patients will be reimbursed for any non-covered Coronavirus-related costs.
- Increase Capacity of Medical System: Emergency response mechanisms must be used to mobilize resources and facilities in order to respond to surges in demand.
- Protections for Frontline Workers: Healthcare workers and other workers in contact with people suffering from, or exposed to, the virus must have clear standards of operation and sufficient distribution of protective equipment.
Our read of these proposals is that these are vital measures needed to deal with the health epidemic. They should be coupled with large fiscal stimulus, particularly since the economic costs of defeating the virus are starting to accrue. As I am writing this, the NBA is cancelling its season. This should be proof positive that the economy faces a freeze and a large stimulus is needed to counter these effects.
Source: Dan Cliffton, Strategas
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Sincerely,
Fortem Financial
www.fortemfin.com
(760) 206-8500
