Before I share my thoughts on markets, investing and the economy, please know that all of you, our clients and thousands of weekly subscribers, are very much in my thoughts. The coronavirus is a threat we never imagined, and it is bringing dire consequences that are still mounting. I pray that all of you and your families will stay healthy and well and escape this illness.
Stock and bond markets have endured profound volatility in recent weeks. Numerically the S&P 500 has recorded a full Bear market collapse and a Bull market recovery in a three-week period in the month of March. This is without precedent. Concurrent with these downs and ups has been a major drop in the price of oil. This drop has taken the price of crude from $61.94 per barrel in early January to $20.45 today. The drop in price has a two causes: first Saudi Arabia and Russia failed to agree on curbing output, and supply flooded markets. Second, as China shut down because of the coronavirus and was quickly followed by a majority of the developed economic world, demand for oil fell. Huge supply and decreasing demand is a bad formula for prices.
As I write on March 31st, I’m struck by how much we don’t and can’t know about the course of this virus, the length of the social isolation protocols and the resulting economic collapse. During uncertain periods, all conversations become versions of ‘what do you think?’ Orators with facts and figures combined with a firsthand experience or two make compelling cases for their personal thesis. The rub is that no matter how persuasive they may be, they don’t know what’s going to happen either.
Investing in a ‘don’t know what’s going to happen’ environment feels awful. It feels awful not to be able to offer insights and comfort to worried business owners and hourly workers who are furloughed or unemployed and investors and healthcare workers, etc. But the truth is that we do not know and cannot know. While this period of not knowing unsettles all of us, investing is always a process of researching and studying in order to de-risk decisions made to navigate uncertain market and economic conditions. While the world felt much more certain last fall, no one had any idea what Q4 economic numbers would show or if the consumer would spend robustly during the December holiday shopping period or if the tensions with Iran would cause some sort of war in the Middle East. My point is that investors are perpetually accompanied by the unknown. No matter how we try to explain the trends in manufacturing output or employment, we are kidding ourselves to think we know.
When I’ve attended various Investor Conferences over the years, I’ve found despicable guys with bright charts and graphs claiming that if you had used their fool-proof software, you would have had the precise buy and sell alerts that would have made you a gazillion percent return on your money. I’m not making it up. They are the same booths that offer the coolest pens and fidget spinners. And these are the guys who always attract crowds. The frumpy Warren Buffet-looking guy at the plain table espousing strong balance sheets, cash flow, sound business models and experienced management could die of loneliness. Investing done properly is a dispassionate, disciplined, dogmatic process that is largely boring but delivers exciting results over time.
High-stress market periods, like the one we are in now, reveal cool heads and hot heads. Less experienced investors always seem to want to do something about their investments. Faced with a stark lack of control, they want to take control and DO SOMETHING! ANYTHING! And sadly, they often do. They make a move to make themselves feel better in the moment that hurts them in the longer term. We had clients call in 2008 and tell us that they knew it was a mistake, but they couldn’t take being investors for another minute. Sell everything! We did. They remained clients and called us a few years later after the Dow Jones Industrial Average had increased 5,000 points and said, “OK. Please reinvest our accounts.” The market had increased almost 75%. They are still invested with us, but you can imagine where their account balances would be if they had benefited from a 75% move in the entire market. Did they do the right thing for themselves? Maybe. It was the wrong thing financially, but perhaps it was the best they could muster. Experienced hands are steady hands. It’s not that I don’t worry and feel anxious and awful because I do. What I don’t do as a professional investor is fall prey to the emotional decisions that feel good in the moment.
My best advice to clients is to come up with an estimate for the potential downside move and add another 10% or 20%. If you can envision your account balances looking so awful, you will feel better if it never gets that bad, or you will be better steeled for the nadir and able to endure it.
This is a time when investors need to be data- and fact-dependent. Theories abound and are not productive. Turn a deaf ear to theories and to dramatic hype. The US Economy will prevail over time. Stay healthy. Stay away from others. Let this virus run its course without you and yours. Farr, Miller & Washington is hard at work, everyday, pursuing, protecting and defending the interests and well-being of our clients. It is a privilege we relish. Thank you and please call if we can be more helpful to you.
Hang in there.