March 21st, 2020 –
It was another horrible week in the markets, with the S&P 500 Index falling 15% since Monday and now marking a 32% decline from February 19. Under the surface, the carnage is even worse with companies like JP Morgan dropping 40% since February 12, and Exxon Mobil’s 53% decline for the year. World class franchise companies are not immune, with Coca Cola shedding 36% since Feb 21 and Pepsi dropping 29% since Feb 18. The market has been in free fall and this week it became clear that stocks were sold at any price regardless of industry, regardless of valuation and regardless of future prospects. While I have no idea if this will mark a bottom, I can tell you it is this precise panic selling that often leads to the best opportunities.
Speculation abounds as to where we go from here with this virus. On one hand, there are dire predictions that forecast hospitals being overrun, further country-wide lockdowns and depression era unemployment. I have even begun to hear the strong opinions that COVID-19 will only mutate into the fall and we will once again face a similar situation with no hope in sight. On the other hand, I continue to read and hear positive updates regarding the flattening of the curve in China, their return to production, and how our social distancing measures will help our country greatly. I’ve read articles suggesting just how effective the HydroxyChloroquine is for fighting the virus, and how this 50-year old medicine will make an incredible difference. While I am sure you are also examining similar information, I want to caution all to be very careful adopting either extremes. The end result will probably be somewhere in the middle of these predictions, and I think it paramount to remember that, at some point, this will pass. When it does, the opportunities will potentially be amazing.
While everyone is focused on the virus, and rightly so, the financial markets are also dealing with the ripple effects from the recent crash in oil. While a lesser publicized story is the recent Saudi Arabia-Russia oil spat, which has resulted in an oil free fall and serves to cripple an industry reliant on higher prices to remain in production. As mentioned before, I highly recommend the podcast Boomtown which presents an excellent overview on this industry, specifically shale. To understand the ramifications of this oil drop, consider that the industry has approximately $85B in debt, maturing in the next 4 years. Should oil prices not rebound, much of these companies would default. Many of the country’s banks are financing this debt, and this is why this specific sector is seeing such brutal selling. The concern, of course, is that, should this debt default, it would dramatically impact many of these financial institutions as well as the countless additional institutions, pensions endowments and the like that also own the bonds within this sector. So, not only is the country dealing with an economic collapse due to the current virus crisis, but we are concurrently facing an energy industry debt crisis which may also significantly hurt our banking sector as well as some of the largest investment pools that American’s rely on daily.
Once one grasps the magnitude of the situation, it is easy to lose hope; however, there is another side of the argument that must be discussed, and it is what is keeping me focused on the future and diligently preparing for the other side of this craziness.
First off, it is worth reiterating, since it is easily lost on all of us, that this virus will pass. I realize that, each passing day, it becomes more and more difficult to keep our heads held high. Rest assured that, at some point in the coming weeks, we will see a light at the end of this tunnel and will have a very good idea of a clear date when we can all leave our homes and resume business as usual.
So, what does this look like? Well, what it looks like is a country rallying together to get back out in force. Yes, there will be many businesses which will not survive, and this will be horrible collateral damage, but we will quickly see a rebuilding of the economy and the resurgence of the consumer. Make no mistake that restaurants will be filled, trips will be taken, beaches will resume operations and families will, once again, venture back to Disney World.
In addition to a return to normalcy, we will have the full force and bi-partisn cooperation of our government to aid in any way possible to stimulate our economy. The amount of money that will be pumped into the system, via indirect and direct fiscal stimulus, will be astronomical and rival anything ever seen since World War II. Think public works programs, infrastructure spending, tax breaks, stimulus checks, etc. Inflation will not be a concern, and yet, it will be something we will be focused on intently (more on this later). Interest rates will be at basement prices for a long time, and I wouldn’t be surprised to see such things as a 50-year bond or an economic stimulus bond made available for purchase. Again, the key to remember here is that we are in an election year and we have an administration that does not want to go out on a whimper. Make no mistake, money will be spent and debt concerns will be kicked far, far down the road. (If you just cringed a bit, you’re not alone. Yes, I’ll write more on this time and again.)
Finally and probably most importantly, the trade war is now over. In order for the US and the rest of the world to emerge from this current situation, it will be of critical importance to work together opening up markets for trade. China no longer has any bargaining chip when it comes to trade, and if the trade war had folks questioning their reliance on Chinese manufacturing, you can bet that a complete China shut down, due to mandatory quarantine, will result in the spreading of manufacturing all throughout the globe and possibly even a major shift back to the US. Regardless of where manufacturing goes, understand that China’s 1.4B consumers should now be open for business. I believe we’ll see cooperation with China like never before, and this new consumer base will be a welcome opportunity for our US corporations.
In summary, NO, this is not the end of the world. Yes, it is a terrible and devastating setback but it has not thrust us back into the Stone Age. I am a firm believer that this is temporary, and that we will soon start to see the light at the end of the tunnel which will give us the hope and motivation we need to push forward.
Considering the black swan market that we’ve just experienced, I am very pleased with our actions. As I look through our general managed accounts I observe cash levels not held in years, and it is with this dry powder that we will be able to take advantage of the opportunities on the other side when they present themselves. There is no rush and patience is key, but you can be sure that, as others panic, we will continue to move strategically, with a calm head and objective view; this is precisely why we’re in this business.
While I know this goes out to thousands of people, both clients and non clientele, I want to continue to express the gratitude for those who have reached out and sent well wishes and wonderful comments. I speak for our entire team when I say they are greatly appreciated. I also want to restate that, for our local folks, if there is anything at all we can do for you, errands that need to be run, products that need to be found, we can certainly help and will do our best to oblige. We will continue to reach out to you, one by one, and please just let us know how we can help.
We will get through this.