03/23/2020
This month is probably the largest equity market decline that many investors have ever seen. Many declines grow out of imbalances in the business cycle; some exacerbating or causing tightening in monetary or fiscal policy. Much earlier in the 19th century, a considerable portion were caused by crop failures or financial collapse and panic. This month, declines reflect the negative effects of responses to the Coronavirus pandemic.
While there were already some cracks appearing in our expansion, we did not experience a tightening of monetary policy. In January and February, the S&P 500 appeared somewhat richly valued to us and others. If an economic decline grew out of business cycle imbalances, fiscal policy is likely to be the most appropriate and commonly applied response--monetary policy placing a secondary role. However, if a decline is the result of credit tightening, monetary policy may be more effective. Much of the Coronavirus’ economic damage is being caused by government imposition of rules against economic activity based upon efforts to control the virus. Despite such unfavorable effects, what else could be done to resolve the situation? We aren’t suffering from hostile monetary policy, and monetary policy is not likely to be that effective. This is a real problem, but not one directly caused by economic factors. The total of reported Coronavirus cases in the United States appears to be doubling about every four days, reaching almost 43,000 on March 23rd. Is this just because more are being reported? As tests become increasingly accessible to the public, can we expect this number to significantly escalate?
As information has become available, it has been incorporated into prevailing market prices. Markets look ahead, and quickly integrate contemporary knowledge regarding current events. This month, that information was manifested into one of the sharpest declines on record.
Provided that markets look ahead, will they soon foresee the bottom coming abyss, or will they foresee a return to the conditions of seven months ago? If so, to what extent of an abyss will they see? Some governments and medical professionals have affirmed that we will have a vaccine in a year or less. They predict positive medical advances, noting the benefit of having a larger percent of the population immune from having recovered from the virus.
Historically, one has generally been better off to sit on one’s hands and be patient during market corrections. Can we infer if this time different? Do the current levels of the DOW and S&P 500 effectively reflect forthcoming and future economic conditions? Elements of the cure, mandated by our authorities, appear to be causing a considerable amount of economic damage by themselves. As we continue to gain new information regarding how the Coronavirus will behave and how the pandemic will unfold, newfound knowledge will be useful for focusing on our financial future.
We are very cognizant that we play an important part in many of our clients’ current and future retirement plans. In the past, investors that panic and sell often either tended to do so near a bottom, or fail to buy back in after the turnaround. An investor’s circumstances and coming liquidity needs are important considerations for us.
Looking back from three years into the future, this period is likely to be one of some attractive values. It will be a different economy, with various sectors having diverse experiences. Petroleum and shopping malls are currently facing difficult times. Technology firms may take this time period as an opportunity to evolve. The shares of many firms are now much more “normal” than they were four months ago, and a few are at prices that would be viewed as great values a year from now if the economy bounces back to its previous success. On the other hand, today’s quite disturbed prices may appear quite ill-advised if it does not. Ordering most of the economy to come to a halt by fiat vaporizes a chunk of GDP value very quickly. While more values and information will increasingly appear, for the moment, the trend of the market is down, and a recession has almost certainly begun.
