“Those who say one person can’t change the world never ate an under cooked bat.”
– Anonymous Meme
It’s been a few weeks now since we touched base with readers on the state of things. As the pandemic continues to run its course (both medically and economically), we thought it would be timely to provide some updates and our thoughts on what may be to come.
Imagine on December 31st, 2019, we told you that a then little-known virus in China would quickly spread to every country in the world, put the global economy into deep freeze, cause governments to order people to stay at home, put tens of millions of people out of work, cut air travel by 90%, and cause thousands of businesses to fail. And, by December 31st, 2020, these were the resulting effects on stocks and bonds:
- S&P 500: -11%
- Russell 2000 (small stocks): -23%
- ACWI All Country Stock Index (All developed world stock markets): -15%
- Barclays Aggregate Bond Index: +4%
Hypothetically, the return of diversified portfolios would range between -2% on the Conservative end to -15% on the Aggressive end.
Looking at the results, you might think to yourself, “That doesn’t sound so bad given the disastrous set-up you just described.” Well – those are the results year-to-date as of May 5th*. December is a long way off. So where do we go from here?
There are a couple of reasons things aren’t worse from an asset value perspective. First, stock prices are wagering there is virtually zero chance that a US economic restart will result in a second wave that’s bad enough to shut things down again. Valuations are simply too high for that. Second, markets are betting the swift monetary and fiscal actions by the government to prop up jobs and provide liquidity will blunt the economic damage. Third, markets expect there will be effective treatments for those infected and a vaccine to keep people from getting it sooner rather than later. Finally, markets are expecting a steady diet of slowly improving good news as state economies open back up and things return to normal – whatever that looks like. The key states to watch for this are California, Texas, New York, Florida, Illinois, Pennsylvania, Ohio, and New Jersey. These states are 50% of US GDP. In terms of the 2020-2021 estimates for economic growth for the US and the global economy, Infographics has produced this handy map of the world reflecting the IMF’s latest estimates.
The US stock market is 19% away from its highs in February before all this started, and 21% higher than its March lows – pretty evenly balanced. It’s our view that the next few months may be a “two steps forward/one step back” environment, as good news and bad news continue to develop. This means continued volatility both up and down in markets. If the current pattern emerging is any clue, this means stocks will benefit more from good news than they will be hurt by bad news. We will see.
Of course, all this is speculative. We study the data and draw conclusions accordingly. Frankly, we’re surprised markets have shown this much resilience and optimism. But remember well: Markets are forward looking. Simply put, prices of assets are nothing more than the markets expectation of their future values. Markets are telling us they think the worst has passed and the expected damage to the economy is priced into things. Again -time will tell. Our advice hasn’t and won’t change. If you’re fully invested, stand fast. If you have funds on the sidelines, let’s discuss how to responsibly put them to work to take advantage of today’s temporary sale.
You may also wonder, “How have average investors (like me) responded to all this?”. The best indicators are looking at money flows into and out of mutual funds and ETF’s, where the majority of average investors place their money. In sum, the average investor has simply hunkered down and stayed put. It seems most people have concluded this is a temporary setback and nothing more. Personally, we’ve received more calls from investors wishing to take advantage of today’s lower prices than those who may be nervous about the long-term effects of this episode. We agree with them. This doesn’t mean the road back won’t be bumpy – it most assuredly will. But this will pass as the vast medical and technological resources of the US and other developed countries are thrown at finding a vaccine and effective treatments.
Today, Pfizer started trials of an experimental vaccine. Dozens of other biopharmaceutical companies and academic outfits are in a race to discover and produce an effective and safe solution. This will likely result in the fastest start-to-finish vaccine development in history. The day a vaccine is announced and approved will be one for the ages.
In closing, these are difficult times for us all. We’re reminded of Jimmy Buffett’s lyrics from his iconic song, “Boat Drinks”, dreaming of sandy beaches, steel drums, tropical islands, and fruity drinks in the middle of a long cold winter. (Sing along with us)
“This morning, I shot six holes in my freezer.
I think I’ve got cabin fever.
Somebody sound the alarm.”
We’ll be back with an update as condition dictate. As always, call us with any questions.