This past week was the third week in what looks to be one of the all-time epic market panics. And just like the panic that occurred in the fall of 2008, this is sure to be one for the history books. As of yesterday’s close, the Dow is down 35%, the more global All Country World Index a bit less. As of today, the novel coronavirus has taken hold in the U.S. and in 185 other countries. Although the economic damage from the virus itself may have been low, countries around the world are rightly taking measures to slow its spread to avoid an overrun of their healthcare delivery systems and to protect their most at-risk citizens. The goal is not to battle back the transmission count to zero, but to slow the spread to a manageable level until herd immunity can be achieved through gradual community spread or, eventually, vaccination. These measures will undoubtedly come at the cost of a significant recession for at least the second quarter of this year and perhaps longer.
As I’ve written previously, there are parallels—both economic and otherwise—between this crisis and those that have come before. The global nature of the effort and dramatic change in resource utilization is reminiscent of WWII; the eeriness of empty streets and airports feels like the week following 9/11; the panic in markets—especially these past two weeks—looks very much like the September - November stretch of 2008; and, in one other important respect, this is similar to the 1982 recession engineered by Ronald Reagan’s Federal Reserve chairman, Paul Volker. For those of a certain age, you will recall that in 1981, inflation was an out of control fire, raging at nearly 13% per year and, in the process, destroying prospects for future economic growth. In 1982, Volker raised overnight lending rates sharply from 10% to 20%, willingly plunging the country into the deepest recession it had seen since the end of WWII. Unemployment skyrocketed to nearly 11%, but the gambit worked. That bold but painful action put the U.S. economy on the solid footing that would underpin the go-go decade of the 1980s. So, in as far as what we’re about to endure economically will be painful, but self-inflicted, this recession echoes that of the early 80s. I say all of this because, while much of what we’re going through is unprecedented, some of it is not, and that is worth remembering.
As we watch China emerge from it’s two-month society-wide quarantine, with life returning just this week to restaurants and public transportation, and Korea having successfully pursued a different approach (test, test, test, and then selectively quarantine, but with no broad shutdown), we might ask ourselves, how long will this last and what lies ahead? And the answer, of course, is that no one knows. No one knows how effective our approach will be, or quite how sharp or how long the economic downturn will be. But this was true in WWII, just as it was in the aftermath of 9/11, and during the depths of the 2008-9 financial crisis. When Warren Buffet penned his now-famous op-ed in October 2008, saying “I’m buying stocks,” he didn’t know either.
So, what do we know then? We know that historically markets have overreacted to both scary news and to good news, overshooting to the upside and the downside, often well beyond what is warranted by reality; and we know that all bear markets—no matter how short or long, how steep or shallow—have always been followed by bull markets that eventually created much more wealth during the upswing than was lost in the downswing; and we know that trying to dodge a bullet is a classic mistake repeated by many investors in every cycle. Waiting for better news, or the all-clear sign, or whatever the news will be that turns investor sentiment this time, is like waiting to hop on the train after it’s left the station. It typically hasn’t worked out well.
Every cycle we have been through—and most who are reading this have been through many—is unique in how it unfolds and in the pain and glory it eventually brings with it. While we can never know the specifics of what will unfold, what has always been true in the past is still true today: Owning stocks is an act of faith…faith in markets, faith in capitalism, and faith in human ingenuity and perseverance. And that is the faith all investors need if they are to capture the historically superior long-term returns that owning stocks has offered.
I have heard it said that even an imperfect plan well-executed is better than a perfect plan abandoned in the heat of battle. We will get through this, but in the meantime, we’ll be doing the things we always have been doing for our clients: rebalancing portfolios back to our agreed-upon targets, looking for opportunities to harvest tax losses where appropriate, and ultimately working with our clients to stay true to their plan. If there is anything we can do for you—or if you have questions about your specific situation, please don’t hesitate to reach out. That’s what we’re here for.
1. During the worst twelve months of the great 1918-19 influenza pandemic that killed 675,000 Americans and upward of 50 million worldwide, much went on as usual and the U.S. stock market increased by 25%.