By any measure, it was a very difficult week in the markets – the most volatile ever, for instance. Round the clock coverage of every new infection, every death and every action taken by governments to stem the spread of the virus has been dour and downright scary (not to downplay the true human tragedy of this virus in any way). On top of that, many well-known investors appeared on networks to “talk their book” (discuss issues from the perspective of how they are already positioned). Not surprisingly, many of these investors are hedged, or downright short the market and therefore, they tend to focus on all the things that can go wrong. Optimism is in very short supply.
For the near future, the news is likely to get worse on the virus front. In addition, we can expect more stories about layoffs, rising unemployment, revenue shortfalls, dividend suspensions, horrible economic statistics, etc. Further, certain companies that are looking for government support are likely to provide extreme outlooks in order to get fiscal authorities to act and act quickly.
Finally, many of the extreme moves this week were the result of trades unwinding and liquidity being raised at almost any cost. Unfortunately, this often happens in times of crisis. This has led to repricing of certain securities and asset classes that are completely disconnected from the underlying value of the securities and/or businesses that they hold. Specifically, we are aware of certain fixed income ETFs liquidating impacting mortgage and floating rate securities and creating mispricing in the BDC market.
And all of this has happened very fast – faster than many of us can comprehend or process. In fact, from a market perspective, according to Bespoke Investments, the pullback, while not the most on a percentage basis, has happened in the blink of an eye relative to the two other most extreme pullbacks in history. As they relate: “[w]e all know about the 1929 and 1987 market crashes, but this one has even those beat in terms of the time it took to fall this much. And the two major peaks and subsequent bear markets of the 21st century both took basically a year to fall the same amount that we’ve fallen in just 20 trading days this time.”
No wonder we feel so bad. Time for a deep breath. A few things to keep in mind.
First, eventually, equity markets will bounce back. Historically, they always have. Every exogenous shock in history seemed hopeless at the time. And yet humanity, and markets find a way. Typically, with respect to a short-term shock, the quicker the down move, the quicker the bounce-back. Which is why it is so important to shorten the duration of the economic shock. This fact is not lost on anyone. Further, the equity markets will anticipate the turn before the turn comes in economic terms, or even in terms of the number of cases of COVID-19. And that takes me to the second point.
We need to remember that the economic dislocation is largely self-induced. In order to beat this virus in the quickest time, governments around the world are shutting down economic activity, almost across the board. At the same time, fiscal and monetary authorities around the world have provided and are continuing to deliver support on an unprecedented scale so that hopefully, we can emerge after the crisis with as little permanent damage as possible. For instance, the Federal Reserve (“Fed”) is using all of its tools effectively intending to provide unlimited liquidity and ensuring market “plumbing” continues to function as intended although not always as smoothly as the markets would like. While not directly addressing the virus and its spread, this pro-active stance – an “anything it takes” approach – will likely prove to be life-saving for many businesses and perhaps the economy as a whole in our opinion.
Secondly, unlike other crises (9/11, Great Recession, etc.), the virus and our collective reaction to it have been very much an “every man for himself” approach. Hoarding toilet paper and masks. Beaches filled to brim for spring break in Florida. We could go on. Perhaps it is also a sad commentary on the state of political discourse coming into the crisis. That said, we think Americans will eventually rally around the cause, and when things normalize, will open their wallets to support American businesses, especially smaller ones.
Third, China is back on line and almost back to full capacity (everywhere expect Wuhan – and even there, recent signs are positive). Wow. Remember how dire the situation was there a few weeks ago? Certainly the measures taken in China were severe and invasive. But they are recovering and that should inspire confidence that in the hottest of hot spots (so far), things can get back to normal and can do so rather quickly.
These are just a few real reasons for optimism in the face of adversity. While not putting our figurative “head in the sand,” we prefer to focus on the positives (as so few are) even as we cautiously and carefully manage client portfolios during this difficult times.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of March 2020 and are provided for informational purposes only. Investing involves risk, loss of principal is possible. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.
