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Stock markets hit at least a temporary bottom on Monday, March 23rd (the day after my last update). That was followed by a powerful three-day rally of approximately 20%. Since then, markets have bounced down and up with a little less volatility and volume, which was making it look less likely that we would get a full re-test or two of those lows, as would be typical in most market corrections. However, yesterday afternoon’s somber coronavirus task force briefing (predicting “a very painful next two weeks before we see light at the end of the tunnel”) triggered another market setback today. The S&P 500 index just closed down 4.4% to 2470, which is still about 12% above the March 23rd low.
Nothing at all is typical about this correction and economic shutdown, since it was and remains event and news driven, rather than structural, so we may or may not re-visit the lows before a sustainable recovery begins. For now, everyone is trying to anticipate the same things…when the pandemic and economic shutdown news will get less worse, then better, and finally back to normal…and how much economic damage will be done between now and then.
Whether markets go lower from here or not, we still think this is likely the best stock-buying opportunity we are likely to see in the next twenty years, so we don’t feel comfortable trying to get out and back in and risking being left in the dust if the right news breaks. As I’ve mentioned before, auction markets like the stock market can fall frighteningly far and fast when there is panic selling and few buyers like this, but the opposite can happen just as fast once the situation reverses and there are a lot of buyers and few sellers. Last week’s three-day 20% rally was a little preview. That happened in my opinion because investors perceived the market red light temporarily turning slightly yellow. When that light looks green again, there will likely be trillions of dollars trying to buy from few sellers.
As long as the economy isn’t shut down for too long (which is definitely a risk), we think the ingredients remain in place for a fairly rapid economic recovery. As expected, the government is pulling out all the stops to support the economy and credit markets until this shutdown ends. First the Fed cut interest rates to zero, then added $1.5 trillion of liquidity to the banking system, then spent close to a trillion more on additional quantitative easing to backstop credit markets, then congress passed the massive $2.3 trillion aid bill. Now they’re already working on further monetary and fiscal stimulus. As economist Ed Yardeni put it, “First the Fed pulled out the bazooka, then they moved to helicopter money, and now they’re preparing to use B-52’s to drop more money into the economy”. And to top it all off, Fed Chairman Powell said last week that “we’re not going to run out of ammunition.” In other words, the worse this crisis gets, the more the government will essentially print more money to stimulate the economy if needed. Similar actions are being taken by central banks and governments around the world.
All of this increased money supply should further devalue our currency, boosting inflation, and that further favors owning stocks and real estate over bonds and cash in our opinion (other than for near-term savings and liquidity needs of course). Stocks/businesses and real estate can raise prices and rents with inflation, to keep their earnings, dividends and stock/asset prices growing with the rate of inflation.
As painful as this market correction is, it is temporary, and so far the government’s response and comments give us confidence that they are willing to do whatever it takes to keep the economy primed during this down time, so that strong economic growth can resume once this difficult virus is contained. The economy was strong heading into this crisis, and it will come out of the crisis with additional money supply in the economy, lower mortgage/borrowing rates, lower energy price, and some significant pent-up consumer demand.
Corporate earnings and stock markets on average have doubled about every ten years. From today’s depressed stock market levels, and with all of this additional government fiscal and monetary stimulus, we believe markets are likely to double from here in a significantly shorter period.
I know that doesn’t make us feel any better while trying not to look too closely at our currently depressed account values, but we are still confident that markets are likely to hit new highs again before too long (I still think within a year).
Call or email me any time as we continue to navigate the rest of the way through this storm.