At the time of my note on March 6th the S&P 500 was at 2,972 having fallen 13% from its record highs set only 12 business days previously. We said we were cashed up and ready to “feast.” The next 11 days saw the market fall an additional 781 points bringing the total collapse to 34%. In 22 days, approximately $10 trillion of valuation was obliterated from these 500 companies. Evidently, that’s how pandemics change the way we value companies. This makes sense to us. When everything stops, it’s bad and the longer it lasts, the worse it gets. We felt and still feel that the current situation will impair profits by about 45% this year. Depending on how fast the recovery is, in 18 months, earnings might get back to 2018 levels, if everything about the science of virology goes super well.
During our internal investment committee meetings in mid-March, we felt that caution was the best strategy. Yes, eventually Trump will find the cure. We understand he is a genius. We just aren’t sure whether we’ll get the dose before or after the election. In the interim, pretty much everyone is getting bailed out. So, anyways…
The next 34 business days have seen stocks bounce 30% adding back about $6 trillion in value from the lows (we are collectively still missing $4 trillion). As of today, the market thinks things are slightly worse than our March note two months ago. However, between then and this morning we as investors have run a temperature landing us in the ICU and now, convalescing at home, hopeful of recovery but deeply shaken, weakened and living on financial stimulants supplied “free” of charge by governments. We are keeping our distance, increasingly feeling like breaking out but succoured by the comforting news of unlimited bailouts.
What? Me, worry?
Some argue that with all the money being printed and distributed to those in “need” (but really, mostly special interest groups), that aggressive investing is the right strategy. They are of the “money cures all” investment club. I guess. One might argue that the worse it gets, the more money is printed, and the higher stocks will go. I will call this the Zimbabwe Investment Technique. Other optimists point out that while the scientists are cautious about the timing and cure of the pandemic (caution we agree with) it’s still bullish. These optimists argue that regardless of sickness, it’s the hope for a cure, (along with printing money) that will drive stocks higher.
Yes, things are bad, and they surely could get worse, but someone is buying (other than the government?!) Have we missed something? Perhaps. That is completely possible! We look at the scientific and the financial facts as they may unfold in their various scenarios. We examine the behaviours and surveys of businesses and consumers and map those statistics against historical precedents (pandemics are not new). Most importantly, we consider those facts and make judgements in relation to the risk or rewards it may present for you and your portfolio. Our judgement is that there is a lot of change coming, to which you can add existential uncertainty and mountains of debt piling up. The old rule says investors hate uncertainty. We do not think it’s different this time. That leaves us invested, but not entirely comfortable, hence unchanged with our ample cash reserves. Like the markets since March 6th we have bounced, but we have lots of cash just in case.
Our sense is that behaviours are, and will continue, changing. Businesses and consumers are trembling under the weight of this shock. Government intervention is the aspirin to a heart attack. The drug may get you to the hospital, but your life may be forever changed. We just do not know. So, we hope for the best but feel time and more data are needed to make informed decisions.
The investment community that is quoted in the popular press is very bright and has legions of computer scientists and engineers mapping out the future—but not one modeled this situation. Few have a pulse on the real economy because it’s just too abstract and distant. Unemployment is 20%+. Businesses are failing. Households are failing. The government is paying for all of it. What could go wrong? We don’t know but it seems to us that caution is warranted just in case money doesn’t solve the health crisis. If we look foolish being prudent, that is fine. But it is out of the question to act foolishly in the pursuit of being superstars.
We always strive to separate the signal from the noise, but we thought this was interesting to note. The most popular news site right now in the U.S. is Fox Business News, with traffic growing 140% year over year. Perhaps the best investment strategy right now is following Fox & Friends. It’s good to be a fox and the most powerful Fox in the world (Trump) is going into battle with a virus known as the “Crown.” A fitting metaphor perhaps. The Fox may be learning that he is not as sly as the Crown and exit visas may be issued. We just don’t know. Fox & Friends may be playing musical chairs, but the real world seems to have stepped into something and it stinks to us.