Yesterday the governor of PA issued a stay at home mandate for most people, other than going out for essential items. We are in unchartered waters with the coronavirus. That is true even in the investments markets. As of yesterday, the S&P 500 was down over 34% from its peak on February 19th. It is the quickest decline of 30% or more in history, even quicker than drops during the Great Depression.
This is not to say we are entering a Great Depression. Please see the JP Morgan thoughts about the coming recession which I posted yesterday. The market drop has been so quick because the economy was in great shape and quickly it is slowing down due to implementation of measures to combat the virus.
Even though we are in uncharted waters because a recession has never been created by intentional social distancing because of a virus, everything is not different.
The first thing to note is that the market has gone down BEFORE a recession occurs or is known to occur. That is NORMAL. The stock market is about where profits are going in the future and when a recession with the resulting falling profits is expected, the market declines. It usually declines over a longer period of time because things don’t typically go from good to bad as quickly as they have this time.
The second thing that is NORMAL is related to the first and has not happened yet. The markets are likely rebound BEFORE the recession is over or at least before we know it is over. And it is quite possible markets will rise as quickly as they fell. When that will happen depend on economic factors, but also on medical factors.
One scenario is that a vaccine and/or cure is readily available sooner rather than later. Or that the social distancing actually stops the virus, which I can’t see happening as it only takes one person to begin the spread all over again. If either a cure or vaccine is announced, the markets could turn up quickly. Hard to know if that would put off a recession, but it would certainly signal to the market that the recession would be short lived.
Another scenario is that a vaccine and/or cure takes a bit longer to come. In this scenario, it is quite possible that the market could decline more as economic data comes out which verifies the layoffs and resulting lower consumer spending, particularly from the recreation and entertainment industries.
No one knows for sure whether the market will go down more BEFORE it goes up, but let’s summarize what we can know from history…
- Recessions tend to be short, and are following by economic and stock market expansions
- We are in a secular bear stock market cycle in which stocks tend to go down more in recessions. The last two secular bear stock market cycles had market declines between -25 and -54%. We are already in that range. For those who are overly worried about the 54% drop, that was during the last recession which included a financial system crisis, which we do not have today.
- Selling at low points like we are at today has been a recipe for losing money long term. Though we don’t know for sure when the market will bottom out, at this point it is likely that missing a violent upswing is a bigger risk than suffering some more downside
- As mentioned earlier, stocks are likely to rebound before everything gets better, and the increase could be very swift.
- There is a real fear for investors today as they see their balances decline that they may lose all their money. This is real fear, but also an irrational fear. Remember, your investments are in businesses which sell goods and services to people. As long as there are people who are buying goods and services companies will prosper long term as will their stocks.
- One of the investment axioms that most people know is to buy low and sell high. Selling now is definitely not selling high! But we may be approaching a time for buying low. For those with investments, this could take place by taking MORE risk, not LESS risk. For those with new money to invest, the low markets could be a buying opportunity.
If you have any questions about this post, please do not hesitate to contact me. Also, feel free to send a link to this post to anyone you know who may benefit from it. Thank you very much. We at Myers Capital Management wish you God’s blessing.