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News & Notes – March 2020

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First quarter 2020 was truly remarkable! The stock market hit an all-time high on February 27th only to drop over 30% by March 23rd. The COVID -19 virus began as a humanitarian crisis and then erupted into fears of a major, global economic crisis. This is a perfect example of a black swan – a rare event that no one sees coming leading to unexpected results and panic and fear. Our health, safety and financial well-being are under attack at once.

It does not feel right to focus on the economy and the stock market when so many lives have been lost and people are adjusting to very limit interaction with others. But the concern for financial safety is heightened at this time. We move into the second quarter of 2020 with major uncertainty how the virus will play out and if the cancellation of events, closure of businesses and limited economic activity will lead to a major recession. The answer lies in how long we remain sheltered in place and how long the virus persists as a US and global threat. No one knows the answer and this uncertainty leads to fear and volatility in the capital markets.

The Federal Reserve, unlike 2008, stepped in right away and announced several new lending programs, buying bonds to support the financial markets and avoid a run on the banking system. The small business loan program is a major safety net. Companies with fewer than 500 employees can borrow money at a very low rate to keep their employees working and in some instances the loans may be forgiven. This helps the travel industry, retailers and restaurants in particular. The sense of urgency on the part of regulators and Congress may mean less of a long-term, negative impact for investors. It is hoped that the aggressive actions taken right away may limit corporate losses and employee loss of income.

Some individual stocks are down to levels not seen since 2009. Short term traders, who attempt to capture and benefit from wide swings in value, are frustrated. Investors on the other hand, those with longer time horizons, have to look at each company and ask if the business is impaired or if the stock price is down along with the market but the company is fine. Earnings per share will be lower in the short run and there will be pressure on managements to give cautious outlooks for the remainder of the year. This environment offers opportunity as uncertainty creates fear, fear causes panic and high-quality companies trade at prices that discount the issues and then some.

The stock market rewards the contrarian view. Buy when others are fearful and sell when they are greedy. It works! History has proven that wealth is created, not by following the herd but by opportunistically taking advantage of investor exuberance and trimming stocks when the market is high, like it was in February, and buying when everyone is fearful. If we are not at the most fearful point now, we may be in the near future as we focus less on new COVID-19 cases and more on the impact this pandemic has had on the global economy.

Market timing doesn’t work but the discipline of rebalancing portfolios does. Don’t try to call the top or bottom of the stock market. Restore stock weights when the market is down and reduce stocks when the market moves to lofty levels. Fortunes have been made in our country during the great depression and recessions by contrarian investors who saw value when others were fearful.

The stock market always recovers. Recessions are painful but in 5-7 years stock prices are typically higher than they were before the recession started. We won’t have confidence in the economy until the rate of new cases of COVID-19 subside and the impact of social distancing on our lives is known. Specific company news is now almost entirely coronavirus related. We can’t know what will happen in the near term but this market decline offers opportunity if we look out several years.

This financial downturn is not driven by excesses or” bubbles” in the economy like 2008. Downturns that result from a specific event, like 9/11 or in this case a pandemic, usually recover faster. The US economy was in pretty good shape when this happened but this is something new. The job losses were sudden and businesses and the Fed responded quickly. We don’t know how this will play out but the stock market already reflects a pretty poor outcome. When it is clear the worst is behind us the stock market should react positively.

The bond market has not escaped the fear. Both our government and corporate America are awash in debt. This is a concern for smaller, weaker companies that have stayed alive since 2008 because of low interest rates and the ease of getting loans. Debt defaults are a concern as bonds mature and need to be repaid. The banks are one of this year’s worst performing sectors of the S&P 500 as fear of customer default grows and more and more people ask to delay mortgage payments. However, the banks are in much better shape than they were in 2008 and this time around will prove to be part of the solution, not the problem.

Emotional investors fear losing money as the stock market declines only to fear missing out when the stock market advances. This volatility may be with us for a while, offering a rare opportunity to buy quality companies at very reasonable prices. We can’t time the recovery but we can take advantage of panic and fear. Stocks may again decline to the lowest of March prices but over time they will recover. They always do. Those who panic and sell today risk missing the recovery tomorrow.

We wish you and your family health during this difficult time.