The last eight weeks have proved one for the ages so far:
- From February 19th to March 23rd, the S&P 500 recorded the fastest drop in history, a loss of 34%. Since the 23rd, we have seen a rebound of epic proportions to the tune of 25%, also the quickest on record, including last week’s gain, the best week for US equities since 1973.
- Volatility, as measured by the VIX, spiked to its highest level on record during this period. We also witnessed 18 trading days in a row with more than a 2% move, the second largest single-day drop (exceeded only by Black Monday in 1987) and the largest single-day gain since 1933.
- Industry professionals who had predicted a re-test of lows are now paralyzed between that prediction and a growing “fear of missing out” (FOMO).
- How to handicap this dislocation and unprecedented volatility with both a short and long term lens is requiring the patience of Gandhi combined with the steely nerves of Lincoln.
The corona pandemic, which created this economic crisis, is still gaining ground in some areas and losing steam in others. It’s consensus belief that the battle against coronavirus has pushed most global economies into a recession. The short term impact is still being assessed but will be quite devastating even if quarantines are lifted earlier than expected. Figuring out whether financial assets have priced in these short term effects has really been a fool’s errand given the level of uncertainty and the complete lack of reliable historical precedent. In addition, predicting future earnings and economic growth as we slowly climb out from under this black cloud is going to be very difficult.
What’s easier to forecast is that the government and central banks’ shock and awe campaigns will continue for as long as necessary, as a replacement for both lost GDP and market liquidity. This is evidenced by the Fed’s move last Thursday, adding another $2 trillion to its balance sheet to support investment grade debt that had dropped into junk territory, as well as providing support for municipal bonds. Right behind this we should see an addition to the Payroll Protection Program (PPP) of another $250 billion, $150 billion for direct low income aid, followed by a possible trillion-plus dollar infrastructure bill. This unprecedented backstop to risk assets should continue to the point where we will need to strike a balance between offense and defense, and truly consider the twin risks that are building between losing money and missing opportunity. We may also find ourselves in the midst of an extreme version of the TINA trade (there is no alternative) in US large cap equities, leading to extreme PE multiple expansion based on depressed underlying earnings.
With that in mind, we are choosing to move forward with caution. The fundamentals have deteriorated and may deteriorate further, but market bottoms are almost impossible to call. Based on my experience, the rearview mirror tends to expose underinvestment and extreme cautiousness rather than a methodical focus on buying companies that are undervalued and, if they cheapen further, buying more. We will be following a gradual and disciplined process as market and economic dislocation give us the opportunity to invest in companies that will thrive and grow in the future. The old saying goes, “The perfect is the enemy of the good,” and waiting for the bottom or a perfect re-test of the lows can keep investors from making good investments. Our goal should be to make a large number of good buys, not just a few perfect ones. Please call or email with any questions at 804-774-2087 or email@example.com
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