Market Update 03-18-2020

The situation in the markets feels bad. We know it. We also know that our clients are in a position to weather the current crisis. So far, the current effects on the market are less severe than the effects of the 2008 crisis. For comparison, as of now stocks have fallen around 30% from their peak, compared with a 59% peak to bottom during the financial crisis. Another significant difference between the current situation and the financial crisis is that the financial crisis came from systemic bad practices within the financial system, while our banks are currently on very good footing and the current situation is inspired by a health crisis which, however dire, will pass.

The critical difference is that today, while the immediate future is relatively uncertain, it is fairly certain that within the next three to six months the situation will resolve itself. In contrast, the financial crisis was a period of great uncertainty where both the short- and long-term behavior of the market and the economy were complete mysteries and required remedial measures for years afterwards.

The current market distress is most directly related to the uncertainty surrounding the future of the corona-virus (and not underlying economic weakness). In regards to the current number of confirmed cases, there has been a significant increase over the past week. This is likely due in part to the increases in testing, however it is still cause for concern, as the increase makes it likely that businesses will close.

It is also quite difficult to predict how the virus will fare in the next several months. There are multiple unknowns, such as how the virus responds to increased temperatures, and whether people who have survived the virus can contract it a second time. Again, these known unknowns will continue to create market volatility.

In the absence of clear direction, it has become clear that some investors are largely responding to headlines. Instead of calmly determining the long-term risks of the current situation, investors are basing their trades on emotions instead of on the numbers. This has caused significant market volatility over the past week as each day brings different news from the day before.

This graph shows that the market has been experiencing significant gains and losses with seemingly no rhyme or reason. Unfortunately, the market volatility will continue until there is a clear path forward from the present crisis. This path would likely take one of three forms: (1) a sustained decrease in cases, (2) a sustained decrease in deaths, or (3) the creation of an effective and trusted vaccine.

Having said all that, here is the bottom line: We may be headed into a recession, but it is likely that any recession we have would be short lived, and would merely qualify as a “technical recession.” In addition, remember that January and February numbers were sound, and the banking system is also fundamentally sound, unlike in 2008. The old investment mantra is to buy low and sell high. In theory, the strategy is fairly simple: purchase stocks at low prices and sell them at higher prices. Unfortunately, implementing the strategy is much more complicated because emotions and timing issues come into play. We are working on this for you. Watching the markets. Looking at allocations and opportunities. Please do not to hesitate call any time!