CORONAVIRUS = SHEER PANIC
COVID-19. It’s a word I never heard of until five weeks ago.
Now it’s everywhere — a microscopic organism that destroyed nearly $15 Trillion in global stock market wealth in just over a month. In 34 years of investing and managing through some of the worst bear markets in history (i.e., 1987, 1998, 2000 & 2008), I have never seen anything like this.
Bear markets are usually caused by financial fundamentals becoming extreme and out of synch. This bear market was caused by a tiny virus, media hype and distortions. That led to uncertainty, followed by extreme fear, and then finally panic. The damage to the financial markets is far worse than the damage from the virus itself.
On Feb. 19, the Dow Industrials hit a new high of 29,348. Consumer sentiment was at an all-time high. The economy was hitting on all cylinders, and unemployment was at an all-time low. Workers in all economic classes were experiencing the best economy of their lifetimes.
On March 23, just 33 days later, the Dow Industrials had fallen 10,757 points, or 37%, to 18,591. This was the fastest decline in history, with the second, third, and fourth fastest being in 1934, 1931 and 1929, respectively. From March 12-19, the VIX, which measures volatility, was stuck at extreme, unprecedented levels between 75 and 85.
This decline literally came out of nowhere and certainly qualifies as a black swan event. Its speed and depth were unprecedented. To find a decline this fast you have to go back to the Great Depression.
Since the low on March 23, the market has been bouncing up and down with more ups than downs. Daily, we are still seeing extreme point swings in all indexes. Every time we think we get a hint of where this is going, it is met with a new extreme market move.
For the first quarter, the Dow ended down -22.5%, one of the worst quarters in U.S. stock market history. The S&P 500 was down -19.4% and the small-cap Russell 2000 down -30.7%, which was its worst quarterly loss since 1979.
Thankfully, there is positive news. In general, our accounts outperformed the market and went down less than the market.
For the first quarter of 2020, Managed Income, which is our most conservative portfolio, was down -5.85%. Among our growth portfolios, Top Flight was down -18.48% and Fundamental 20 was down -18.61%. Finally, Fast Movers, which is our most aggressive portfolio, reacted the best and was down only -3.59%. Over time, all of those portfolios have outperformed their benchmarks.
Losses are never enjoyable, but considering the context of what we just experienced, we are pleased with how the portfolios performed. In a perfect world, we would get out of the way and avoid more of the downturn. This time, it came so fast there was no way to directly avoid it.
When the markets go down, our first objective is to get out of the way. If that is impossible, the next goal is to minimize our losses on the way down. That is what we have done.
Bottoming is a process that happens over time. In the short term, the massive $2.2 Trillion stimulus package should be a positive for the market. Additionally, once we start to see the numbers on the virus improve, combined with clarity on opening up our economy, that is when things should stabilize.
Once the market puts in its bottom, we will rely on our models to move into stocks that have the most potential on the way up. This is where our historic outperformance and success have come from.
What is reality?
In order for us to make the best decisions, we have to wade through the different voices and decide what is real and what is emotion. Then we make our investment decisions accordingly.
New York City definitely has a problem. It is the most densely populated city in the U.S. with 9 million living downtown and about 20 million in the entire metro area. With that many people and an infectious disease, you are obviously going to have a major issue. Other large metro areas — where people are stacked on top of each other — will also need to be proactive to flatten the curve for their hospitals.
Beyond New York and other large cities, however, we believe this is incredibly exaggerated. The media always exaggerates everything. It’s their business model. It typically doesn’t matter, because most rational people don’t pay attention. This time it does matter, however, because everyone is paying attention and being scared to death.
The government has been basing all their decisions on models. But models are only as good as their inputs. Since no one knows what the inputs really are, the numbers keep changing. Projections have come down drastically compared to what the first models projected.
Everyone keeps focused on the number of new cases. They are bigger numbers, so they are more sensational. Cases don’t really matter, though. The number of deaths is what really matters, because that is what you can make concrete comparisons with.
If you only report in absolute numbers, the numbers seem high. If you report the numbers in context, it changes everything. Since this started, there have been 12,370 deaths from Covid-19 in the USA (as of 4-7-2020). During that same period of time, there were 234,458 deaths from all other causes in the USA. Apparently no one cared about the 234,458 other people who died last month — because they weren’t aware of it.
Going global, since those numbers sound bigger and scarier, 81,103 in total have died of Covid-19 since this started (as of 4-7-2020). By comparison, globally, 4,750,000 died during that same time from all causes. The numbers naturally look big when you start including an entire planet that holds 7,800,000,000 people and 57,000,000 die each year.
This is an issue of focus. You could pick virtually any other means of death, and if you put a spotlight on it, charted it daily, and looked at it nationally and globally, it would scare people and become an issue.
Shutting down the economy is another conversation. It’s a very dangerous, high-stakes experiment. It has never been done before. We do know that 10 million people were just put out of work in the first two weeks of the experiment. We also know we just put everyone $2 Trillion dollars deeper in debt because of it.
The strength of this recovery is completely dependent on how long they keep our economy closed. If it is closed for a short time, we could see things move higher quickly. If it gets dragged out, it could take much longer. Either way, markets will recover like they always have before. The only question is how long it will take.