Staying Focused in a Fluctuation Market
It is already clear when economic historians parse through the data in the years ahead, March 2020 will be labelled the beginning of a recession, marking the end of an economic expansion that began a decade ago. The cessation of economic activity due to the COVID-10 pandemic has brought on the most rapid economic breakdown in U.S. history as well as negatively impacted the entire global economy. As terrible as is the tragic human toll and elevated uncertainty for investors, there is light at the end of the tunnel.
It is important to remember there was nothing fundamentally wrong in the economy to trigger this recession – no asset bubble popping or runaway inflation to be stopped. The shock is from outside the economy and if the health shock can be controlled, good policy may be able to steer the economy to a reasonable return to normalcy. The combination of fiscal and monetary policy is unprecedented. Fiscal policy includes the $2 trillion fiscal plan stimulus now being executed. Monetary policy by the Fed is extraordinary: cutting interest rates to zero, announcing open-ended asset purchases, buying U.S. Treasuries, mortgage-backed securities and corporate debt (including bonds in ETF’s). This combined effort may not help the immediate needs of Americans most impacted by the pandemic but it does provide a backstop to limit the economic fallout which may not be evident until the second half of this year.
Parts of the world are already in recovery, including China and South Korea as you can see in the chart below. Even the Chinese city of Wuhan, the epicenter of the epidemic is reopening this week. Together these two countries account for about 20% of the world’s population and economy.With the threat of the virus receding, economic activity is reviving in Asia. Early official data for March supports these signs of recovery. For example, last week’s data on South Korean exports measuring the first 20 days of March showed a monthly rebound of over 50% in goods sent to China. As shutdowns migrate from Asia to Europe to the U.S. we can see the impact in the economic data and can expect the U.S. to deteriorate further while Asia rebounds. We don’t know how deep or how long this deterioration will take place, but we can look at the data both in these countries and in previous recessions for clarity. During the last major economic downturn, the global financial crisis in 2008, those who stayed invested in the S&P 500 recorded double the returns of those who moved to cash for as little as 3 months, as seen in the following graph:
We believe staying focused, disciplined and invested is as important now as ever. Further, if appropriate for risk tolerance and asset allocation, this may be another “once in a lifetime opportunity” to buy quality stocks at bargain prices comparable to 1987 and 2008. We are already seeing both major fund managers and private equity either exit their market hedge positions and/or bulk up on new and existing positions. The noted legendary investor, Sir John Templeton famously said “buy when there’s maximum pessimism” which is how some view the current market outlook amid a wave of selling.
So, stay focused. Stay disciplined. Everyone stay well.