March 27, 2020
I read the news today, oh boy.
Here’s to social distancing. I can think of no other period in my life that has been so untethered from its predecessor, not only in how hours are spent, but in emotions felt, and thoughts explored. This has been an extraordinary exercise in evaluation, of not only the self, but of society and one’s place in it, one’s role in it, one’s obligation to it. Equally, what month in living memory has prompted such a discourse regarding society’s relationship with the individual? I can’t help but think of the Beatles masterpiece A Day In The Life, in which dreams and newspaper snippets form the basis of a melody that is simultaneously pleasant, melancholy, playful and absurd.
4,000 holes in Blackburn, Lancashire
The disjointedness of daily experience creates a sense of mistrust about everything we are experiencing in our personal and professional lives. Perhaps not surprisingly, the financial markets have exhibited a certain amount of, shall we say, disjointedness. Let’s take a trip down memory lane all the way back to February 19, 2020, just 37 days before the time of this writing.
On February 19th, the headlines in The New York Times were about the president’s pardoning of three colorful individuals, Bernie Kerik, Rod Blagojevich, and Michael Milken. The coronavirus was getting coverage, but below the fold. Locally, the N.C. State men’s basketball team had just beaten Duke, 88-66, giving the Wolfpack hope of making the NCAA tournament. Also on February 19, the S&P 500 closed at 3386, its highest close of the year, up 4.81 percent from year end. Again, I’d like to point out that we are talking about February 19, 2020.
And though the news was rather sad…
Since February 19, we have seen a grand total of three trading days in which the S&P 500 changed less than 1 percent. On 17 of the 26 trading days since, we have seen moves of more than 3 percent. The VIX index, which measures volatility, had only moved above 50 twice since the Great Financial Crisis. On March 10, the VIX leaped above 50 and has generally stayed there or substantially higher for the last 14 trading days. While volatility is down substantially from the March 18th peak of 85 (within a nose of the GFC’s high of 89), volatility remains at nosebleed levels.
Well, I just had to laugh…
In the rules that governed the world on February 19, this would have represented a major buying opportunity for long-term investors. Remember buy low, sell high? A rational thinker in that prehistoric era might have concluded that if he could get long fear at historical highs, he’d be making a good long-term decision. After all, the S&P 500 would fall 34 percent from its high close. The trouble is, Mr. Prehistoric Rational Thinker would have had to act fast, because the market would also be up 20 percent from the lows, making the last three days, at least on an intraday basis, the shortest bear market in history. And of course, at this moment, the VIX has jumped back above 65 and the markets are headed lower.
I woke up… got out of bed… dragged a comb across my head…
The human mind is, as always, frantically drawing lines between points in an attempt to create patterns, but there are none. Well, actually, there is one. It is an exponential curve. And ironically, it seems as though most people still don’t quite comprehend what is coming.
The virus is basically unchecked in the United States. We are taking measures to mitigate and suppress its growth, but the positive impact of these measures is as yet undetectable in this country. The worst of the health crisis is yet to come. While we can debate whether we should force millions of people into near or total bankruptcy to help millions of other people, it seems quite likely that as the number of cases continues to exponentiate, citizens will not need to be told to stay home—they will soon shelter at home of their own volition. (Note: one of my closest friends has been hospitalized in New York City with COVID-19 and a 105 degree fever—you don’t need to tell me to wash my hands.)
The English army had just won the war…
Does this mean the worst of the financial impact is still ahead? Perhaps, though the Fed and Congress have taken actions of truly epic proportions. As our chief investment officer Larry Adam pointed out earlier this week, the $2 trillion fiscal stimulus unleashed today by Congress is almost enough to offset a 40 percent decline in 2Q GDP. That’s a ginormous help. The combined effect of the stimulus package with the Fed’s numerous asset-purchasing programs, backstops, and credit facilities is truly awe-inspiring and will go a long way in staving off financial cataclysm for companies and individuals alike.
Even so, that doesn’t mean that the market might not continue to decline. Warren Buffett has often said his favorite broad measure of equity valuation is the ratio of the broad market capitalization of equities to gross domestic product. By this measure, at 118 percent, equity markets do not appear particularly inexpensive. In the dotcom bust and in the Great Recession, this ratio went well below 80 percent, which demonstrates a relatively recent precedent for a significant drawdown. With unemployment poised to climb to Depression-era levels, it does not take much imagination to envision nasty market declines. However, if what we are witnessing is not a financial apocalypse and instead just a brutal and perhaps not protracted recession, there is an argument to be made that multiples should reflect that cyclicality and not contract, perhaps even expanding to help pave over the sharp earnings declines ahead.
In short, we are in largely uncharted territory. Does this mean we throw out the book? Do we dare invoke the most dangerous words in investing, the equivalent to invoking Voldemort’s name in public: this time is different? Maybe this time is different. There is a wonderful story circulating now about a 24-year-old student named Isaac Newton being chased out of London by the plague and using his time in exile, unfettered by formal education, to invent infinitesimal calculus. This time might be different. But it might not be different. For those of us not named Isaac Newton, the course might be just as simple as tracking the course of the disease, watching for the curve to bend, watching for a cure or a treatment, and watching for our formidable industrial base to respond with care capacity. If you’re not using this volatile time to go on the offensive, then at least you should be sticking to your long-term plan.
Having read the book…
One of my favorite investing maxims is that the market is a device to transfer money from the impatient to the patient. Another is that in bear markets, stocks return to their rightful owners. Both maxims were applicable just this week. Maybe times aren’t so different after all. Maybe it’s times like these when we lean hardest on the most timeless of principles.
The most memorable part of A Day In The Life is the final note; after the cacophonous orchestral buildup, there’s the pause, then the resounding resolution. The payoff. It’s relief from the chaos and the discord.
We are all in search of relief from the spread of the virus and the human suffering it brings. Until we find resolution, be brave and be smart (and wash your hands). You will be glad you did.
I’d love to turn you on.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance may not be indicative of future results. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.