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March 2020 was one for the history books, a period of our lives that will forever be cemented in our minds both personally and professionally. The wake of devastation this pandemic has caused is almost unfathomable and still difficult to fully digest. As I write this, in the U.S. there are more than 245,573 confirmed cases and 6,058 deaths, according to Johns Hopkins University. And we are not yet near the apex. Staying healthy and dealing with stress are the most important things on which to focus. Millions of people are out of work as much of the country has shut down. Not only will workers miss paychecks and businesses miss revenues, but businesses’ physical output will tail off, meaning essentials like food may run short.
The S&P 500 posted a 20% loss for the quarter—its biggest quarterly decline since 2008 as the Covid-19 disease continued to proliferate nationally. Daily volatility hit all-time highs in the month of March. From February 19 to March 23, the U.S. stock market saw the quickest meltdown in history, for a loss of 33.9% on the S&P 500. Then from Tuesday through Thursday last week it gained 17.5% marking the best three-day stretch since the 1930s. No one knows when or at what level the market will bottom, but certainly, well above average volatility will mark the next several months.
Obviously, the coronavirus is still gaining in the U.S. and elsewhere. The economy is destined for a serious recession. First quarter GDP and earnings reports will be bad; April and May data are both likely to be horrid. But markets have already priced in much of that. The key is whether the worst is priced in or not. Expect markets to churn over the next few weeks as we approach the apex of new Covid-19 cases. Telling people to stay home – and thus causing businesses to close – is the economic equivalent of putting a patient into a coma to facilitate curing a serious disease. The government will provide life support to the economy during the coma and bring the patient out of the coma after the cure has been affected. But for many small businesses and over-leveraged firms, that help will not be sufficient, and they will fail. It will be very challenging to resolve the conflict between social isolation and economic recovery. There’s no doubt that the government’s and the Fed’s massive cash injections will make things better in the short run. How we reemerge from our collective cocoons remains the unknown that markets still must resolve.
Jason Klein, the CIO of Memorial Sloan Kettering wrote the following: "The bull case from here seems to be that monetary policy will work, fiscal policy will kick-in, valuations have reset, society will follow effective healthcare policies (e.g. social distancing) that will be effective, the real economy will adapt, and geopolitics will remain subdued. The bear market seems to be the flip side of each issue…."
The notion that by mid-April we would all be freed from quarantine and life as we knew it 60 days ago would resume as if nothing happened, is now a fantasy. We all now realize that normality will take months to restore, not weeks. No one has any idea when baseball will start or when outdoor concerts can begin again. But there could be additional good news on the therapy front. Several old and new medicines offer signs that they can help mitigate the worst damage of the virus. Vaccine development is progressing.
At some point, there will be an end game to this virus story. There is always an end, even to the worst pandemics. Ultimately, the virus will run its course. There will be life on the other side. Families will return to Disneyworld, travel will come back, social gatherings at restaurants and bars will occur, hair salons and barbershops will be busy, housing construction and home improvements will resume, elective surgeries will be scheduled. Investors know that stocks look ahead and that they will start to move up while the news is still quite ugly. Bear-market bottoms offer generational opportunities to buy great companies. Those companies gain share in bad times. Rock solid balance sheets and strong free cash flow are excellent characteristics for companies to have always, but particularly now. What stock market history teaches us is that whenever the bottom comes, the results over the next several years are quite excellent. Indeed, average returns following bear markets have been 52%, 89% and 132% respectively over the ensuing one, three, and five-year periods. The key is to maintain sufficient liquidity to get through the down cycle.
Ben Carlson, CFA, recently wrote the following: "Positive outcomes during down markets have more to do with your time horizon as an investor than your ability to call the bottom. When the stock market took a nosedive in the 1960s, one of Buffett’s clients called to warn him that stocks would surely fall further. Buffett responded with two questions:
• If you knew in February that the Dow was going to 865 in May, why didn’t you let me know it then? • And if you didn’t know what was going to happen during the ensuing three months back in February, how do you know in May?
Markets are driven by trends and psychology in the short-term so it’s possible stocks continue their downward trajectory. But the truth is no one knows how far these things will go or what expectations investors have already baked into current prices. Markets feel more uncertain today than they have in some time. Just know that no investor has ever had complete clarity about the path markets will take over the short-to-intermediate-term. There are far too many variables at play to know what will happen with anything approaching certainty when it comes to market psychology."
All of us at LVM are concerned about the health and safety of our employees and clients. We urge everyone to follow the CDC and government guidelines (wash your hands!). Most of our staff is working remotely and we have full operational functionality. We do have a rotating 2-3 people in the Portage, MI office each day, but are not allowing others into the building. We will maintain contact through emails, phone calls, virtual meetings, etc. Should you have a need to sign or drop off documents, please contact us ahead of time to obtain specific instructions for doing so. Above all, stay safe and healthy!
The LVM Team