We have implemented a recession in order to control the outbreak of the Coronavirus. While we’re all wondering when this pandemic will end, and if the economy will recover within a reasonable length of time, I have been thinking about this extensively. And rather than annoying my wife with more out loud thoughts, I’ll share them with all of you.
This Too Will Pass and This Time It Is Different
Yes I did reiterate on March 6th in this article that no one likes hearing the words “this too will pass”. We all want to know “WHEN will it pass”. That’s the problem, no one knows. The range of potential outcomes is quite large. The global reaction to this virus is unlike any of us have ever seen (unless we have a centenarian+ reader who recalls the Spanish flu of 1918). Many clients have stated “I think it gets worse before it gets better” and that’s probably right in terms of the outbreak, but financial markets are forward looking and already pricing in those expectations of the future so unless we have some insight that is not being priced in, then it cannot be used to your advantage.
Is This a Massive Overreaction?
This thought has entered and exited my head a few dozen times since this all began. First reports were that this virus has had a 2% – 3% fatality rate, and it spreads like wildfire. That would be a good enough reason to shut things down, to save a few million people from dying and most of us are willing to engage in that collective sacrifice for the greater good of society.
BUT, it has had a 2% – 3% fatality rate of those who were confirmed having the virus, which is much different from 2% – 3% of those who actually have the virus. A very high percentage who are infected are asymptomatic and thus they never will get tested to confirm whether or not they’re infected, because they feel fine. If that is true, the fatality rate is much much lower than the 2% – 3% number and we may have forced higher unemployment, a stock market crash, and quarantine in order to save as many people who are killed by influenza every year.
No one knows the true answer to this question yet, and there are wildly differing opinions even from within the medical community. Everyone has a family member or friend who is an “expert”, but it’s probably best if we all be responsible to try and limit a terrible scenario from happening.
The airlines want a bailout. Of course. Some analysts are predicting a few will go bankrupt by May.
During the 2008-2009 financial crisis, we were led to believe bailouts were a once in a lifetime aberration caused by extreme consequences. Here we are 12 years later considering it again. Any time a bailout occurs, the government is taking money from those who lived within their means and giving it to those who did not. In theory, one of the beauties of a capitalist system is that you reap all the rewards of the upside, because you could go bust at any point in time. Now, for certain industries and companies that are deemed systematically important, we seem to have removed the “bust” feature. Companies go bankrupt in America everyday, very few are saved from the grave with taxpayer money.
The flip side is that if the airlines go bust, hundreds of thousands of workers will lose their jobs, at least until new airlines are created. So a bailout is not just helping the rich get richer, its helping the rank and file employees keep their jobs and feed their families.
What you hope is that the 13 million restaurant workers in America are not forgotten in all of this.
The Fed continues to swing for the fences in cutting rates to zero and essentially bringing back quantitative easing. For someone that is looking at the next 6 months, I have no idea if stocks are a good buy at current levels or not (although I suspect they are). For someone looking at the next 6 years, I think we have quite a tremendous opportunity on our hands. Valuations in some segments of the market are pretty close to Great Recession valuations, and stocks did quite well if you bought in at those levels.
The price to earnings ratio is a guess at the moment, as no one knows what the earnings will be, but that was also the case in 2009.
Times are indeed looking dark for corporate America so the market has discounted prices to account for choppier times ahead, and when you look at the alternatives to owning equity at the moment, prices look even more attractive. For every seller there is a buyer, and the seller is getting out thinking stocks are not a good place to be going forward while the buyer thinks the opposite. In the long run, it’s been quite difficult to make money betting against the market.
As market volatility increases, the volatility of opinions increases.
I’ve heard this a few times: “I want to buy XYZ company because they’re not going anywhere”. I have a secret to share, a company can still exist in 10 years and the stock can still go to $0 today. How? Ask someone who owned General Motors in 2008.
Sure you can hit a home run finding needles in a haystack, or you could buy a haystack and ensure ownership of all the needles.