In the middle of a garden-variety bear market–i.e., one orchestrated by the Fed to stop the economy from running too hot–I remember a prominent strategist saying she thought the market had fallen far enough to be already discounting the slowdown in profits but that the signs of recovery were yet to be seen. So, she said, we were in a bear market in time.
We’re in a different situation today, though:
–most importantly, we don’t know for sure how much damage the coronavirus will do, only that it’s bad and we unfortunately have someone of frightening incompetence at the helm (think: the Knicks on steroids) who continues to make the situation worse (while claiming we’re in the playoffs)
–with most of the seasoned investment professionals fired in the aftermath of the financial crisis, and replaced by AI and talking heads, it’s hard to gauge what’s driving day-to-day market moves
–if we assume that the US economy is 70% consumption and that this drops by 20% in the June quarter, then COVID-19 will reduce GDP by 14% for those three months. This is a far steeper and deeper drop than most of us have ever seen before
–on the other hand, I think it’s reasonable to guess that the worst of the pandemic will be behind us by mid-year and that people released from quarantine will go back to living the same lives they did before they locked themselves up.
It seems to me, the key question for us as investors is how to navigate the next three months. In a pre-2008 market what would happen would be that in, say, six or eight weeks, companies would be seeing the first signs that the worst was past. That might come with more foot traffic in stores or the hectic pace of online orders for basic necessities beginning to slow.
Astute analysts would detect these little signs, write reports and savvy portfolio managers reading them would begin to become more aggressive in their portfolio composition and in the prices they were willing to pay for stocks.
How the market will play out in today’s world is an open question. AI seem to act much more dramatically and erratically than humans, but to wait for newsfeeds for stop/go signals. (My guess is that the bottom for the market ends up lower than history would predict and comes closer to June. At the same time as the market starts to rise again, it will rotate toward the sectors that have been hurt the worst. Am I willing to act on this? –on the first part, no; on the second part, looking at hotels, restaurants…when the time comes, yes)
A wild card: Mr. Trump now seems to be indicating he will end quarantine earlier than medical experts say is safe. At the very least, this will likely bring him into conflict with the governors of states, like NY, NJ and CA, who have been leading efforts to fight the pandemic. At the worst, it will prolong and intensify the virus effects in areas that follow his direction. Scary.
As always, Dan, you are a beacon of sanity in a scary financial landscape. Thanks!
Hi Bob, Hope you’re doing well and dealing with quarantine. See you in LA when this is over.