I have a better than average understanding of investing and the capital markets, but I never give investment advice nor do I tout individual stocks. I do listen to what others think and I pay attention to who is investing in what. I read a lot of articles and research reports every day and I frequently speak with professional investors and advisors.
Correction or Crash
Last week’s market correction was the 7th or 8th I have been through since I began on Wall Street in the 1970s. No two were exactly alike. I learned a few things each time.
No one can accurately predict where the DJIA will be in 30 days or 60. That has always been true; but the underlying cause of this correction, the portent of a global pandemic, adds some unique variables.
I know this article will likely just get lost in the blizzard of financial content that a 3,500 point drop in the Dow will generate. Still, the opportunity to take a stab at “Investing for a Global Pandemic” was just too good for me to pass up.
I already know the advice that customers of the large wire houses will get. They will be told not to panic, but rather that it is always best to hold for the long term. They will be told that the market always comes back so there is no need for them to liquidate anything.
That advice is nothing more than an uneducated coin flip. Professionals who are paid to help people invest should be able to do much better than that.
Even worse, that advice is conflicted. Financial firms know to the dollar the cost of acquiring new customers. They do not want existing customers to cash out and potentially move away. Advising the customers to “stay the course”, strongly implies “stay with us”.
Shares owned by customers can also be used to collateralize the aggregate borrowing that the large firms must do to finance the margin debt held by their customers. The margin rate “spread” goes right to the firms’ bottom line.
“Always hold for the long term”
The “always hold for the long term” strategy is also designed to cover up the fact that much of what passes for financial advice is just wrong. Many customers have portfolios using “asset allocation” which was supposed to contain “non-correlated” assets to hedge against catastrophic losses and yet their balances are down substantially.
Many customers will be looking at their account balances and wondering what happened. This is especially true as this is tax time, when many people will have their year-end 2019 statements in hand as they prepare their tax returns.
The “big lie” of course will be that no one could have predicted this correction would happen. The brokers will claim that they saw nothing that might make them want to suggest to their customers that they might consider actually realizing the profits they have accumulated during this long bull run.
The underlying economic conditions are still good. Interest rates are still low and employment is still high. Still, a lot of people have predicted a correction because the primary market indicator, the overall price/equity ratio has been way out of its normal range for some time. Even after last week the P/E for the S&P 500 it is still high. It should eventually be expected to revert to its normal range even if everything had remained “normal”. With the reality of reduced profits next quarter and next year because of the pandemic I can find nothing to support the idea that the market will be higher next year.
There are always external events that can traumatize the market. One good blizzard or hurricane can cause billions in lost sales across wide regions of the US. The US frequently gets more than one blizzard and hurricane each year.
There is always political discord or a war somewhere. Unions have gone on strike and closed industries and ports for months. There is always a fair amount of news about events that can and do disrupt markets. Still, the markets survive. A global pandemic, however, conjures up the image of the potential for a truly mass disruption.
Governments
The world spent several weeks watching people trapped on cruise ships being quarantined while the virus spread. Cruise ship passengers tend to be middle class and their plight was clearly noticed by the middle class investors many of whom no longer saw the wisdom of holding cruise line shares in their portfolios.
I certainly noticed how poor the reaction was of the various government agencies involved. The Japanese, by leaving infected passengers on board the cruise ship and in proximity to uninfected passengers did not contain the virus very well. The Chinese were filmed adding thousands of hospital beds when the story everyone wanted to hear was that they had effectively contained the virus, not that they were expecting thousands more to get sick.
The governments of several hot spots of the infection around the world have been accused of under-reporting the number of infections and deaths. The corker was the US government which flew several infected passengers to an air force base in Solano County in California only to have people off the base become infected very quickly.
Is it improper of me to expect that modern governments in the 21st Century should respond differently to a pandemic than the characters in Monty Python who wheeled a wagon around a plague-ridden medieval town singing “Bring out your dead”?
Good, Bad or Really Bad?
From the standpoint of the stock market the question may not be how bad this crisis gets, but how long it lasts. The next 10 weeks are likely to tell the tale. If not contained by then, with the number of new cases significantly down from their peak, the DJIA may truly reflect an apocalypse.
The virus might be contained and crisis might be downsized by May. The market might have resumed its climb with new highs by then. Japan Airlines might be adding extra flights for the overbooked Olympics in August. But right now, that is not the way people are likely to bet. If they do not think that will happen, there is no reason for them to stay in the stock market.
If the Olympics are postponed or cancelled, it will mean that containment is not in the offing. The number of people infected by then will be significant and the fear widespread.
The crisis will hit the US hard when people stop going to restaurants, sporting events, super markets and malls. Recessions start when waiters get laid off and cannot pay their rent. Given that so much of what is manufactured and sold in the US relies upon parts made elsewhere, a slowdown, at the very least, seems inevitable.
Stock Picker
If I had to pick out stocks to invest in right now I would think that a good recession would be positive for companies that sell alcohol or cannabis. If Americans can’t work, it is a safe bet that some will be on their couches with a joint, a six pack or both.
For serious investors the drop in the DJIA and the market in general has lowered the price and increased the yield of a lot of stocks of good companies that pay a steady dividend. Buy some this week and if the market continues to crash you buy more and average down.
I am not really expecting a pandemic that will kill millions of people, but it would not be the first time. And, given that we live in an interconnected global marketplace, a much smaller event could still have devastating economic consequences.
The fact that there is so much discussion about this spreading virus and that its impact could be huge, is scary in and of itself. That alone is not good news for anyone still holding stocks which is roughly ½ of the households in the US.
The real story should be the very pedestrian and ineffective steps taken in the US that might contain it. When action is needed right now the worst thing that the government can do is fail to act even if the actions it does take are the wrong ones. This government, our government, has been remarkably slow to act.
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