Over the last few weeks, we’ve heard the comment a number of times that “the world has never seen something like Coronavirus,” and the reference is in relation to more than just the spread of the virus. The reference has been in relation to the market’s movements and to the economic impact the virus will take on the global economy.
The genesis of these comments could be a variety of things. We have seen both record daily losses and record gains in the stock market. We have seen the swiftest market selloff in the market’s history. We have seen large events (like the BNP Paribas Tennis Tournament) cancelled. We are hearing rumors of basketball tournaments being played in empty stadiums. Corporate travel has been cancelled or restricted by many companies around the world. And last but not least, we have seen a significant uptick in the spreading of information. We live in the “information age.” We have Twitter, Facebook, Instagram, Snapchat, and many other sources of data. Further, we get all of this “news” on our phones, immediately.
This immediate global connection to news makes everything go faster. The market reacts to news, and many times the first reaction is emotional. The two questions on everyone’s minds are (1) how bad will this get, and (2) how long will it take to recover. Thankfully, we have history to give us insight. We all know the Depression took 20 years to recover, but we also know that the “Great Recession” of 2008 (the worst recession the world has known since the great depression) only took 3 years to recover. Further, we can look at the growth of social media. Statista put together a chart of the number of regular users of Twitter between 2010 and 2019, and you can see that it’s been very strong.
Chart: Number or Regular Twitter Users (in millions)
All social media has seen this type of growth. And with this growth, the flow of information reaches even more people even faster. So returning to the comment, we have never before seen something like this, we agree – but there are two sides to the statement. We believe there is potentially as much “GOOD” in this statement as there is “BAD.” Yes, the market selloff came very quickly. But the news that will support the recovery will come out just as quickly. There will come a day when the news is reporting that the Coronavirus is over. We will get the reports of businesses operating at 100% again, global travel will resume, and life will go back to normal. We have seen strong evidence in the record-setting up days that this recovery is NOT likely to take years to come. The markets price in current and future earnings. This selloff is a result of the uncertainty around future earnings. When the uncertainty abates, new estimates will be generated, and the markets will climb again.
Another thing that is different (although not being discussed much) is how agile the world has become. Major business are asking employees to work from home for a period until the worst of the risk has passed, and they CAN. The widespread availability of high speed, reliable internet connectivity has allowed hundreds of thousands of people to continue working without having to go into the office. Further, the economy has shifted. There was a time when energy and industrials drove our economy, but now together they account for only 11% of the S&P 500. Further, the rest of the economy is inversely related to energy – the cheaper energy is, the better the other 89% of the economy does. Over the last decade job growth and wages have been inversely correlated to energy prices. So the drop in energy should contribute to more job growth and higher wages.
When we think of some of the new players in the economy, Coronavirus will very likely not have as large an impact on them. While Coronavirus may stop us from getting on a cruise ship or going to a concert, it will not stop users from posting on Twitter and Facebook. Companies like Netflix may even see a pickup in traffic as people stay in more until after this passes. Cloud computing companies (Google, Apple, IBM, Box, DropBox, etc) are all likely to see an increase in business as a result of Coronavirus, not a drop.
Another thing that is “different” during this selloff is that we have seen a large uptick in the number of people who invest in ETFs (think index investing). Over the last 10 years we have seen more money move into ETFs than actively managed mutual funds. We think there is something important to observe in this change. When investors bought companies (not indexes) they would review the company, and make a decision based on the company. As an example, if you were considering an investment in Delta Airlines, you may elect to wait for the Coronavirus fears to dissipate knowing they will be very directly impacted by the virus. However, you may look at a company like Facebook and determine they should have very little direct impact, and therefore you would buy it. When you invest in ETFs, you cannot differentiate. You buy all or none. You also don’t spend the time analyzing the decision. The one question an ETF investor would ask is, “do I believe the index will go up or down.” Because so many investors are invested in ETFs today, many good strong companies (that are more insulated from Coronavirus) are being sold thoughtlessly, just because the index is being sold. For those willing to look for opportunities, we believe there will be many.
We believe in active management, i.e. choosing which companies to invest in and which not to invest in. We believe this market pullback is creating future opportunities for growth, just like 2008 did, and we believe the recovery from this may indeed come much more quickly than many imagine. That does not mean that it comes this month or this quarter, and it may not come this year. But it does not mean that it won’t or can’t either. So what can bring the end of this? A number of things could. A good, viable, widely available vaccine would end the panic. A better understanding of the mortality rate would also very likely end the panic. If the summer heat slows/kills the virus, that could also end the panic. History has taught us that making panic decisions is costly. It has also taught us that timing the market is a dangerous game. We don’t know when this will end, but we know it will end, and when it does, we have every reason to believe the market will respond positively, and the gains will very likely be sudden.
Please call or email us with any questions.
Sincerely,
Fortem Financial
www.fortemfin.com
(760) 206-8500
