“Nothing in life is to be feared. It is only to be understood.” – Marie Curie
The Bull Market Has Officially Come to an End
It really was a momentous run. On March 9, 2009, the S&P 500 closed at 676.5, and on February 19, 2020, the S&P 500 closed at 3,386. That means the S&P 500 more than quadrupled in less than 11 years (without dividends!). That is quite an amazing upsweep for the bellwether index for US stocks. The Dow entered bear territory on March 11, 2020. While the S&P 500 opened in bear territory on March 12th, it was technically not in bear territory until the end of the day Thursday when it closed down more than 20% from its previous high closing level.
So, the most unloved bull market ever finally came to an end with its demise predicted no less than a dozen times. Does anyone remember the fiscal cliff fears as we exited 2012 and headed into 2013? How about the downgrade of US debt in 2011? What about the “New Normal” where slower growth was supposed to keep equity prices at suppressed levels permanently? The Swine flu, Ebola, or Zika viruses? Jerome Powell taking over leadership of the Fed from Janet Yellen and saying we were a long way from neutral and rates would go higher? All of these (and more) were supposed to derail the US economy and send us spiraling into bear territory, yet none did.
Now, fast forward to 2020, who would have known that a virus, which was supposedly “not our problem” as late as mid-February, would send the markets plummeting more than 20% in just 16 trading sessions? Let’s take a further look.
The Market Trades on a Combination of Economics AND Emotion
It is at times like these that rational thought evades even the most introspective and reflective. Feeling takes over, and we cannot help but extrapolate negativity. Statistics can exacerbate when we are not thinking clearly. So, courtesy of Johns Hopkins University and the World Health Organization (WHO), I will provide some statistics that should help give some perspective on the current situation, which is an extremely fluid one:
Data on the coronavirus (as of 9:33 a.m. on 3/12/2020)
- Total confirmed cases = 127,863
- Total deaths = 4,718
- Total recovered = 68,310
Source: Coronavirus Resource Center, Johns Hopkins University
Global Coronavirus Fatality Rate by Age
80+ years old
70-79 years old
60-69 years old
50-59 years old
40-49 years old
30-39 years old
20-29 years old
10-19 years old
0-9 years old
Source: World Health Organization, 2/29/2020
Pre-existing Conditions Increase Fatality Rate
Chronic respiratory disease
No pre-existing conditions
Source: World Health Organization, 2/29/2020
Make Sure You Have Accurate Data and Information
Hopefully, the statistics above provide some context into what we are facing. This is not news to anyone; however, I feel compelled to mention it during these turbulent times that misinformation is everywhere. From the potential fatality rate of the virus to one’s chances of catching the virus to the fallout from the virus, there are reports stating opinions as fact. If the story is intuitive and compelling, we accept the information at face value. This is not a beneficial approach. I suggest that you follow reliable information sources, such as the World Health Organization (WHO) and Centers for Disease Control and Prevention (CDC) websites.
Based on the above, these numbers are likely understated as testing has been slow in many countries. Also, many with mild symptoms can be unaware that they have the virus, while others may be bed-ridden or self-quarantined and not captured in the numbers. Of course, if the denominator in the equation is too low, then the fatality rate being cited is likely too high. Based on the above, you would conclude the fatality rate is nearly 3.7%, very high.
A conference call I listened to this past Monday stated that South Korea is administering over 10,000 tests per day, whereas the US had only administered 1,500 tests in total! Therefore, it stands to reason that the fatality rate in South Korea would be much more accurate. The fatality rate being cited in South Korea is closer to 0.6%-0.7%. Tom Frieden, former director of the CDC, said he expected the death rate to hover around 1% eventually. This also seems more reasonable an estimate. Of course, Frieden’s estimate is also speculation, but at least it is an educated and plausible one given the current landscape.
More Perspective on Financial Markets
The markets are now trading at levels not seen since…last year? Yes, as difficult as it is to believe, the S&P 500 was trading at lower levels in early January of 2019 than it was at the open on March 12. While it is disappointing to see the gains obtained in 2019 no longer in the equity markets, it is crucial to keep in mind that equities were worth less than they are right now about fourteen short months ago.
The number of reported cases of humans infected with coronavirus will continue to rise. The number of deaths reported resulting from those infected with the coronavirus will increase. Businesses will temporarily shut down. Schools and universities will temporarily shut down, and students will be forced to attend online classes. Sports leagues will be suspended. Work from home policies will be put in place, and the global economy will most certainly slow, and there is a good chance it will enter a recession. The economic toll will be high. The human suffering that will be endured will be painful.
Through all the pain and suffering, we must keep in mind that we are a resilient species. We will come back stronger. We will eventually produce a vaccine to fight this hideous virus and, in the meantime, will continue to use our human ingenuity and common sense to limit its damage. We will, eventually, get back to our normal everyday lives.
From an economic and financial perspective, the stock market is a leading indicator. It is anticipating that things will look grim 3-6 months from now. What about in 9-12 months? Will the economy look brighter? Perhaps it will, maybe it won’t. What about in 18-24 months? Odds are things will look brighter than the cloudy murkiness we see today. Ultimately, things should get back to normal, and economic activity should not only resume but get back to normal levels. And economic activity will also, over time, get back to higher levels than we saw at the peak of the 2009-2020 bull market.
While what we are experiencing now is quite painful, it is not the type of pain that lasts indefinitely. We know that opinion can be wrong and, we make allowances for that in our portfolio management techniques. Nevertheless, the violent downward move that we just experienced on the way down tends to have a way of repeating itself on the way back up. That is to say that volatility works in both directions. Most investors just seem to associate volatility with downward moves but not upward moves. It is helpful to remember that there was more volatility, as measured by standard deviation of returns, in 2009 when the S&P 500 increased 26.5% than there was in 2008 when the S&P 500 decreased 37%.
In our opinion, the prudent investor would anticipate more of a V-shaped recovery. Markets typically move quickly to the upside as they realize that health crises, though tragic, are temporary. I’ll finish with a quote from our February 28, 2020 post. I think it applies more than ever in today’s uncertain market environment. “While these types of market events do sometimes get worse before they get better, when the market sentiment changes, it usually occurs swiftly. Because sentiment is so fickle and we do not know when exactly things will calm down, we would not recommend selling risk assets now only to miss out on the upside when they are back in favor. We caution our clients from pursuing their long-term goals with a short-term strategy.”