How low will it go and when will it end???
As we conclude another tumultuous week for the stock market, the two biggest questions on every investor mind are: how low will the market go and when will the selling end? No one has a crystal ball to give exact answers but there are some interesting facts to consider. A drop of 20% or more from a previous market high is universally accepted as the beginning of a bear market. Historically, on average, it has taken 136 days from a market high to retrace 20% of the markets gains and to enter a bear market. On February 19th, the market reached its most recent all-time high. Twenty-one days later, on March 11th, we had given back 20% of those gains. Rapid selloffs like this are extremely rare and typically involve an impending financial crisis (2008-2009). This recent correction is not based on a financial crisis but on a biological one, COVID-19. Economic models are familiar with financial crises but have not, till now, had to contemplate a biological one. This lack of familiarity has created a broad-based fear of the unknown. The market hates uncertainty, and the virus is providing it with plenty.
How low will it go?
When in doubt (or unable to mathematically model a security or situation) the market hits the sell button. The major financial institutions and investment firms do not know how to objectively analyze or model a biological event. That is what is driving the market lower. It is not a fundamental problem with the economy or financial system, it is the inability to project/predict what the economy will look like six months from now. There is no textbook or template to refer to for guidance. Due to this, selling has been indiscriminate. Eighty percent of the S&P 500 stocks are down more than 20% in less than three weeks. Excellent companies with thriving businesses are being sold without regard. This is not a sane way for long-term investors to manage money. Sentiment can change on a dime and those under invested will be quickly left behind. News of a vaccine or treatment or slowdown of the virus spread will rocket the market higher. Selling good companies today, without a strong fundamental reason, will ultimately backfire. No one is that nimble or prescient at predicting that they will be able to call the precise bottom. Since fear is the basis of this selling, and not rational financial analysis, it is difficult to determine where the bottom will be. Our internal analysis indicates we are very close to an over-sold bottom that will lead to a short-term rebound of approximately 10% from the recent lows. After that, we will most likely have a final leg down to retest or slightly undercut the previous low. The expectation is that this final bottom will coincide with a surge in reporting of new cases of the virus in the U.S. That peak in reporting will indicate the low.
When will it end?
Most school districts and universities have canceled classes for at least two weeks and in some cases for the remainder of the school year. All major professional sports associations have suspended their seasons until further notice. Airline travel has been severely curtailed. Gatherings of more than 100 people are canceled. All these steps are crucial in the attempt to mitigate the spread of COVID-19. Our country has been behind in testing and that has led to more fear about how many people have the virus and how big the numbers may get. Today, it was announced that over 10,000 people per day can be tested. It will take one-two weeks before these test numbers begin to come in. As the cases mount, as they surely will, and the number of deaths in this country increase, expect the market to be extremely volatile. Our expectation is that it will take four-six weeks for this to reach a climax. At that point the experts will have a better handle on whether the spread and death rate are more than our typical flu season. This will be extremely important to those conducting the financial analysis of companies and the economy. As the revised corporate and economic numbers roll in, the market will start to calm down and rational buying and selling will return. The last thing we want to do is sell good investments without good reason just because others are panicking. Warren Buffet became one of the wealthiest individuals and is one of the greatest investors of all time by not succumbing to panic. In fact, he buys good companies during events like the one we are in. Prior to February 19th our portfolios were performing extremely well because we were properly allocated and had an excellent mix of growth opportunities. Our expectation is that performance will resume when this event subsides. This week we made more adjustments to the portfolios and will continue to do so over the coming weeks. These adjustments are not always immediately reflected in performance and sometimes need time to play out. We are long-term investors and not traders. We will continue to pare the weak positions and add to or initiate strong ones.
Finally, the health and safety of you and your family supersedes all. Please take an abundance of precautions as nothing is worth the risk. The most effective prevention is the simplest to do, as our mothers always told us as children: “Wash your hands”.