Hello. We hope & trust your family is safe during these crazy times.
Today we want to take a few minutes and imagine “What can go right?” as we muddle thru this global pandemic. We are not going to spend much time on what can go wrong. All it takes to imagine those scenarios is turning on most any TV news channel.
Before we go any further, we want to reiterate, again, these notes are NOT meant to diminish the sickness and tragic loss of life COVID-19 has brought to thousands around the globe. Our role is to communicate our thoughts relative to the financial markets. We empathize with those affected and are thankful for the healthcare heroes and other front-line workers giving it their ALL every day.
In round #s the US Stock Indexes have fallen 35% (high to low) over the last 5 weeks. As discussed, the velocity of the decline is unprecedented. Typically, the economy/markets slow down a bit and we have some time to re-position before any severe damage is done. This time the markets went from ‘all good’ to ‘stop’ in a matter of days.
There is a LOT of ‘bad’ baked into the current markets. The markets are confused, as evidenced by the record levels of volatility over the last few weeks. And this will be the first ‘Recession by Proclamation’ in history. In other words, we’re choosing to shut down the economy and may, by definition, experience a recession.
Before we consider what can go right, please review this chart showing annualized forward market returns AFTER losses of X% (since 1950). In our opinion, the risk/reward from current levels are very favorable over time frames beyond one year.
Maybe look at it this way: If the market is down 33%, it takes a 50% gain to get back to the old high. For over 100 years the market has never not revisited old highs. So, assuming history repeats itself, forward returns are 50%ish from current levels. If it takes 7 years, simplistically, we’ll average +7% annually from here. If it takes 5, we’ll average 10% annually. It doesn’t add much value to try and predict how long it will take but, considering the market downturn was 33 days (again, a record), combined with the stimulus coming, we doubt it takes 5 years.
So, lets ponder what can go right with this pandemic, the economy and/or the financial markets…
- The entire global scientific community (medical, biotech, pharmaceutical) is working frantically 24/7 to create/improve testing for the virus. What if they get it right? What if it’s faster than anticipated?
- The same community is working on medicine and a vaccine. What if they get THAT right SOON?
- Most of America is sheltering in place/practicing social distancing/self-quarantined. What if that REALLY does flatten the curve quickly?
- Banks can, should, and will provide ‘borrower relief’ for various loan programs. This buys us time.
- The Federal Reserve is providing record monetary stimulus. The Fed is undefeated over time.
- Fiscal Stimulus is coming, at record levels. What if it works (as it did in 2008)?
- Weather matters. The calendar is on our side.
- China is arguably the template for how this ends: The CEO of FedEX said, Sunday, on ‘Face the Nation’: “China’s factories are back to 90%. Their small businesses are back to 70%.” What if America is back to similar levels in May?
We feel it makes no sense to bet against America. Or capitalism. Or the global science community. We are optimistic – especially from current levels in the financial markets. The news will get worse. But the market typically bottoms when the news is terrible.
Financially, relief is coming. Medically, a LOT could go right. We feel the current environment is temporary. Choose patience over panic. It worked in 1974 when the market fell 50%. It worked during the Crash of ’87, the tech bubble/Sept 11th of 2001, and during the mortgage crisis. In time, A LOT could go right from here. Together let’s get through this, stay invested, and reap the rewards that should come in time.
Sincerely,
Your LJI Team