Wow, what a crazy week. The S&P 500 ended up down about 20%, developed markets in dollar terms are down about 24% according to the price action in IEFA, and we’re down about 18% in emerging markets (IEMG). Global equities were worth about $90 trillion at the start, and are about $72 trillion today. Does that mean we’ve hit the bottom? Do we have another 20% or even 40% to go? No one really knows. I’m just a random guy on the internet, but hopefully this helps or at least gives some folks food for thought.
The bear case seems obvious, unprecedented supply chain disruption, long-lived demand destruction, highly leveraged companies going bankrupt with the whole junk market imploding, contagion, hospital systems being overwhelmed, liquidity seizing up, mass foreclosures from people not being able to work, commercial real estate failures, oil and gas companies laying off tons of employees killing further demand etc… Bears are always convinced that the world is going to end, and these are all good reasons to be bearish, but there’s always something worrying the markets that the markets have to climb over, whether it’s trade wars or actual wars.
The bull case seems less obvious (which is not a bad sign, usually the time to buy is when all the bulls have bought 7 layers of dip and are all dead, in hiding, or converted to the bear army like in 2009). With that said, there’s substantial tail winds in the market. Pandemics, whether it’s H1N1, SARS, MERS, even the Spanish flu, only have a material economic effect of at most a year when it comes to virulence for a couple of reasons. It’s a combination of existing drugs that help (some anti-virals for other drugs already help against coronavirus), antibiotics to soften the secondary issues like bacterial pneumonia, the fact that less dangerous mutations tend to be successful and more dangerous ones die off so mortality rate drops over time, and herd immunity, I don’t expect we’ll be talking about coronavirus really beyond this year, and possibly not materially even 3-4 months from now. Gas prices are dropping fast and that’s putting money into the pockets of consumers, and it’ll help soften the blow for many businesses like airlines (most are still unhedged), trucking, shipping, etc… Even if you don’t believe Chinese numbers (which is fair imho), the S. Korean numbers are reliable and show that you don’t need incredibly draconian measures to resolve the coronavirus threat.
Interest rates are going to be cut globally, and we had a trailing P/E of about 15.3 if you take VT, which was at 16.8 at the end of Feb and apply today’s prices. Assuming this year is a wash after a brutal Q1, Q2, and a still bad Q3, by 2021 we’ll likely be back to around a forward P/E of 15 or so globally (obviously cheaper in emerging/developed non-US, more expensive US). Jobs numbers were actually still really strong in the US and fine globally before this happened, there will be a ton of pent up demand and possibly a baby boom with all the quarantines in 9 months. With interest rates at effectively 0, institutions, pension funds, and even retail investors, all of whom collectively are sitting on very low yield bonds and tons of cash, and who are hoping to retire can’t stay in 10 year t-bills for long, and will come rushing back once the market looks even remotely ok (which will be well before the headlines start to improve). Add to that whatever fiscal stimulus comes out of this, and it does seem like we’ll get a ton of fiscal stimulus (even the Germans are doing it, which I never thought I’d see), and it’s easy to see that stocks are the only game in town for long-term appreciation and a 2021 PE of 15 is a bargain in a 0% interest rate world, and ripe for future multiple expansion and EPS growth.
So what’s the play here? We have two risks. The short term risk for the bulls is that it keeps going down, and you could’ve gotten in for 20% (or more) on sale later. The long-term for bears is similar to selling in 2008, if they wait too long and don’t get back in until it’s obvious that things are fine because they think the rally is fake or a double dip is coming, they’ll have lost out heavily as well in potential appreciation.
Here’s how I’m advising friends and family right now, given the likely market psychology of these three groups of people on average, and please take it with a huge grain of salt as I’m just a random internet stranger.
The easy money has already been made, buying puts on cruise lines 3 weeks ago made sense, buying puts on cruise lines or oil and gas companies when they’re already down 80% (like NCLH or OXY), the risk/reward calculus is very different and even bad news can cause the stocks to moon if it’s not as bad as expected.
If you’re heavily to entirely cash now, I would respectfully suggest that it’s time to deploy some of that cash, even if you are incredibly bearish, because if we do have a V-shaped rally, odds are you aren’t getting back in and will keep waiting for a dip that’ll never come. At a minimum, take a 5%-10% leg in, and if you think America is screwed, buy emerging market equities where they allegedly appear to have this already under control and that are trading at 2016 levels now with much cheaper valuations, or buy some US blue chips like Alphabet that should be very resilient even in a bear market.
If you are substantially cash (e.g. 20%-40% cash position), it may be worth waiting. If the equity markets do recover, you’ll still capture a lot of that upside, but the market may very well keep going down rapidly from here (heck, it was down about 10% more on Thursday) and could go up or down 10% on Monday and no one would really be that surprised. You have limited dry powder, and if you miss the first leg up with some cash, you’re still mostly in the market, and it may be worth trying to save some money on the chance we get once in a lifetime prices on some of these individual stocks or indexes that you’ve been looking at. I’ve also found that people who keep some cash, generally, the cash helps to avoid panic and capitulation when markets go down since you win a little either way in either higher portfolio prices or cheaper entry points. This way, you’ll also kick yourself whether it goes up or down, but if it goes down another 10% it’s time start averaging in too.
If you’re all-in or less than 20% cash, the only way you screw up at this point is if you panic and lock in losses, best thing to do at this point is to avoid all that stress like you’ve been doing, keep DCA the whole way, and it’ll be a blip when you look at your portfolio 10 years from now and you’ll be glad you ignored all the noise.
Yes, I know, this is a Wendys.