Yesterday was another violent session, this time ending higher and recovering roughly half of Monday’s losses. After a very strong open, markets turned negative by mid-morning, then reversed and closed at their highs of the session. There was a general feeling that Monday’s losses were a bit overdone and there was hope that Washington would come through with some fiscal policy steps to mitigate economic damage caused by Covid-19.
But, as has been happening since President Trump was elected, partisanship gets in the way. Mr. Trump wants a payroll tax holiday while Democrats want to focus on paid sick leave. Trump is talking to Republicans in the Senate while the Democrats are left out in the cold. This is the worst time for partisanship but that’s the way it is. As a result, markets this morning appear ready to reverse course once again. My two-day rule suggests do nothing more than nibble until optimism can be sustained. We don’t appear to be there yet. Technicians will want to see yesterday’s mid-morning lows hold but who knows whether that will happen or not. Finding the bottom is a process. We seem to be in that process. The best that can be said is that we are close. Volatility has to recede before it happens.
While politics are interfering, the real elephant in the room is the impact of the virus itself. The U.S. clearly is not at a peak and no one knows (1) when the peak will be, (2) how severe the virus will be at its peak, and (3) how close to virtual economic lock-down we will get over the next few weeks. Already, my email is filled with notices of canceled meetings, many turned into virtual presentations. Airline bookings are down sharply. Selectively, schools are being closed, at least through the end of March. Sporting events threaten to lock out the fans in the name of public health safety.
We all know public health has to take precedence over short- term economics. The President has talked about giving economic aid to industries hardest hit as he did with farmers impacted by the Chinese tariff trade war. But he can’t write a check for every business that can’t survive 1-2 months of lost business. In the case of cruise ships, it could be many months.
Will Disney have to close all its theme parks around the world? Are movie theater screens about to go dark? Will towns and cities be forced to quarantine similar to steps Italy has put into place? These are all scary questions and we have no answers. We can hope that strong public health policy can mitigate the damage and limit the economic costs. But we don’t know.
What we do know is that with proper and strong public health policy, we will limit the reach of the virus and we will get to the other side sooner rather than later. In China, where the virus hit first and new cases are now in decline, businesses are reopening. But things are still nowhere near normal. Subway ridership, for instance, while increasing daily, is still a small fraction of normal in major cities that were most exposed.
Even ignoring the industries at the center of the storm, like leisure travel or energy, the short- term economic damage from all the reduced activity is likely to have a greater short- term negative consequence than many expect. Opinions, of course, are all over the place. Just turn on your television and listen to what comes out of Washington. What you hear from public health officials and what you hear from the White House are starkly different. We won’t know for a few more months who is right.
Markets hate uncertainty. Market bottoms occur when there is blood in the streets. Let me take you back to 2008. Right after that fateful weekend in September, when Lehman failed and the government had to rescue Fannie Mae, Freddie Mac, AIG, and Merrill Lynch, the S&P 500 fell to 800 in mid-October from a peak of over 1400 before the start of the Great Recession. That was the moment of proverbial blood in the streets. The commercial paper market froze. Congress had to pass TARP and a stimulus package. It took about a month of very erratic market moves for a bottom to be set. Stocks did rally into early January before retesting the lows in March. But virtually all the damage was done by mid-October while Congress wobbled getting the recovery measures like TARP in place.
I see the same thing happening here. To set the final bottom, two things have to happen. First, we need to see signs that the disease has peaked meaning the number of new cases is starting to decline both in the U.S. and around the world. Second, Washington as well as other governments worldwide need to step forward with fiscal plans to help offset the economic costs of the virus. At some point, Congress and the White House will come together just as, at some point, they reopened the government after butting heads about wall funding. They find a solution when they feel the heat of public pressure. It doesn’t have to happen today, but it will happen over the next month or two.
What no one can control is when the impact of the virus will peak. Public health action may lessen the impact and save lives. But it cannot stop the virus altogether. The reason so many large gatherings are being canceled is obvious. One infected participant spreads it to many, creating community spread that exponentially increases the overall impact. Much of the public is taking proper precautions. But not all and that is why large public venues must be avoided.
From a stock viewpoint, assuming this will pass and most businesses can get back to normal within months, the damage can be overcome. Oil companies may take a year or two, or more, to right size swollen inventories. Cruise ships may require more than a year before customers are confident enough to sail again. As an investor, you may want to buy into the dips but with caution. You want to invest, not speculate. When prices are low enough that you get paid to take the risks, nibbling is OK. Don’t try to guess the bottom. It may have occurred this week, but no one really knows. We can look back to SARS or MERS for some guidelines, but this time is different. The levels of closings, cancellations and quarantine are unprecedented.
Nothing in front of us is going to destroy our economy. But the pain is still increasing. As investors, while it may be tempting to buy the stocks most hurt, we don’t know who can survive the storm. There could be companies in several of the most severely impacted industries that will either fail or take years to recover. Buying any of the major banks before the damage of 2008 could be assessed proved to be a bad idea. Buy strong companies suffering peripheral damage before speculating on those that might take years to recover fully. There will be plenty of time to sift through the carnage.
Today, Rupert Murdoch is 89.
James M. Meyer, CFA 610-260-2220