The unprecedented market movement from the first five months of 2020 will leave an impression on
the investing public for years to come. With the onset of the worldwide COVID-19 pandemic and the
associated economic forced shutdown, both the stock and bond markets were severely impacted.
Most notable was the rapid decent of major stock market indexes from the all-time-record highs of mid-
February, to the lows recorded on March 23 rd . In less than 5 weeks, stock indexes tumbled by 30-40+%.
It was by far the quickest 30+% plunge from an all-time high in recorded history.
Fortunately, government action and central bank policy changes came to the aid of the public and most
businesses. This helped to mitigate the economic damage, shorten the likely duration of the decline, and
restore liquidity to the severely stressed banking industry and fixed income markets. It will still take time for the liquidity measures to have their full effect, but for now, the crisis appears to be over. Risk factors now seem to be the concern over a 2nd wave of the pandemic, trade relations with China, and the ability to re-start the economy and ramp it back up to full capacity.
With the markets now up some 30+% from their lows, the past 3 months have been the craziest ride I’ve seen in my 45+ years of investing. Even the 1987 melt-up and subsequent crash seemed less bizarre than the recent events. How is it that the markets can go up when everything seems so bad? Unemployment has ballooned to over 13%, corporate profits are plunging, business are failing, and yet the stock market has gone up so much from the lows. How can it be? And why?
The stock and bond markets are ordinarily priced on expectations of the future. In February, the future
was looking very good. We thought 2020 would see a modest rate of growth and the likelihood of a
recession was still far off into the distance. Interest rates were low and corporate profit growth
appeared to be trending upward at a healthy clip.
As a result, prices were at all-time highs. Then, in a matter of days, the pandemic hit and the forced closure of much of the economy created a drastic short-term change. We instantly went into a recession with an awful lot of uncertainty as to how long things would stay closed and how severe the impact would be. The markets had not priced this outcome into its “expectations of the future”. Once some of the smoke cleared and the duration of the crisis became more measurable, the market was priced too low, based on the more distant future.
In all likelihood, corporate earnings 4-6 years into the future are going to be about what the
expectations were before the pandemic was declared. Therefore, pricing needed to adjust to the reality that things were going to get a lot better over a few years’ time. When circumstances are scary and emotions are running high, it’s best to take a long-term view.
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This commentary contains forward-looking statements and opinions. These opinions may not develop
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