While it is too soon to say that the worst is over with the recent panic in the stock market, we’re seeing real signs that the buyers may be ready to really jump in.
As bad as the fear has been in the markets over the last 5 weeks, and as out of proportion as the market sell-off has been over this time, this ordeal has presented some exciting opportunities that you just don’t see very often.
The last time we saw a big sell-off was in 2008, and while that did lay a beating to company fundamentals, it just didn’t make sense that we’d see stocks remain that beaten down for all that long, perhaps a couple of years at worst.
People sell stocks for a variety of reasons, and one of the bigger ones is long-term expectations of profitability. While a lot of investors don’t even try to time their positions and will even stick around during the worst of times, which the 2008 bear certainly qualified for, it wasn’t the long-term that scared people out of the market back then, nor is this the case today.
The Great Recession certainly wasn’t good for companies, but with the combination of monetary and fiscal stimulus that we saw back then, we at least should have known that this crisis couldn’t last for long and before too long we would be back on the road to recovery. When we did, this would present a situation of tremendous value for investors, and the result was an 11-year bull market that took the average stock twice has high 10 years later than it was back before this crisis blew down the house and had us rebuilding.
For those who held on, they were well rewarded, and those who did choose to step aside for most or at least some of this bashing were rewarded even more. While it’s not has hard to pick bottoms as many investors think, the spike down in March of 2009 followed by a big spike up over the next month could have been spotted pretty easy by any decent chartist.
We can’t expect investors to know much about reading charts though, but the good news is that in times of crisis like this, you don’t have to be any good at this as the change in mood and momentum is quite palatable if you are paying attention to these things at all. The biggest challenge to investors is to not be too eager and wait for the actual events to turn around, such as all that help that we provided companies starting to kick in and the mood changing from one of peril to one that saw a lot of opportunity.
Once we do turn the corner, there is no better time to invest in stocks, and nothing even comes close to this, because prices have been devalued so much and that value is ready to be recaptured. Fear has us taking prices far below levels that the facts of the matter should have allowed, because people are selling because prices are going down, not because the long-term view that normally guides stocks has been so shaken.
If we have a stock that was trading at $100 and is now falling fast, it is not because they think it won’t come back over time, they are selling either to avoid pain or to take advantage of the opportunity to buy it back considerably more cheaply. If it goes to $40 and then rises to $50, and we sold it at $90 on the way down, we’ve just made ourselves a quick 40% in a short period of time.
We can make that much or more pretty easily in a good bull market, but this strategy also allows us to take advantage of bear markets as well, and the 40% that we could have made by staying away from the bears gets added to the returns that we make over time when markets are running well to the upside.
The bear market this year hasn’t been anywhere near as powerful, but 35% in a few weeks is still pretty impressive, especially given how easy the drop has been to call. When people are literally afraid for their lives, this fear in itself translates pretty well to stock markets, who are even more easily spooked generally. When we shut down a lot of sectors and put so many people are out of work, that can really amplify the fear and the reasons why people would not want to be on the long side during these times.
At this point, if we had exited, the next move is to wait for the recovery. There are three elements we need for this, an appropriate response from the Fed, Congress spending huge sums to prop up the economy, and confidence building that the threat we were so worried about is going to go away soon.
The Fed has offered unprecedented support, and even though this did not diminish the level of panic the stock market felt, and may have actually increased the panic due to the massiveness of their reaction scaring many people even more, this was important and even crucial to our recovery. Without the added liquidity that the Fed has provided through their actions, things could have grinded to a halt and given us more to worry about than we had even back in 2008.
Unlike in 2008 though, the Fed’s actions this time were much more defensive, where back then the goal was to actually stimulate credit markets back to better health. Credit market collapses weren’t behind this one, but if this was allowed to happen on top of everything else, this would have added monumentally to the current problem. Keeping this monster out of our house was therefore critical, and the Fed erring greatly on the side of caution has certainly done that.
The Lust of Democrats to Score Politically from This Will Come Back to Bite Them
Fiscal stimulus by way of Congress passing spending bills and providing bailout money was extremely important to the 2008 recovery, and is even more important to this one. There’s nothing like your business being shut down by governments to take it to the mat, and when you need income to keep your boat afloat and you aren’t making any or are making very little, it doesn’t get any more perilous than this.
You can’t shut down a major part of the economy for too long before you literally starve it to death, like a military blockade would, although this is not quite as urgent as the situation was in 2008, when we had hours left before the world’s financial system would collapse if the right actions weren’t taken. Republicans might have too much of a sense of urgency, but something does need to be done soon, and we should be quite concerned that Democrats are holding the bill hostage to include trillions of dollars’ worth of pork in it, things that are not even related to the crisis.
Democrats remain at odds with the fact that a lot of the money will be going to bail out companies, and don’t understand that this is the whole point of the bill, and is needed in order to save us all. They are insisting that the bill include things like same-day voter registration, reductions in emissions, requirements that bailout recipients comply with their standards of employment diversity, forgiving a massive amount of student loans, funding the arts, protecting illegal immigrants, and all sorts of other non-related political ambitions of theirs.
They are holding this gun to the head of Republicans to look to coerce them into agreeing to at least some of this, and don’t understand that the gun is actually pointed at their own heads as well as at the heads of all Americans. This is a lot like our being in a plane that is about to crash and not opening the door until we agree to their demands enough. Even real hijackers have enough sense to know when to back off lest they be killed as well.
In anticipation of a deal getting done soon, which was the rumor, markets rose by double digits, giving us the biggest point gain ever and the biggest one-day percentage gain since the Great Depression. We’re not there yet though, as every time a deal gets close, Democrats pull off another stick-up.
There will be some lasting damage from this to be sure, but we need to keep this massive spending to what is actually needed and not turn it into a game of left-wing pinata. We do need a bail out, but we cannot allow ourselves to be looted like this and blow up the debt more than we need to. Republicans need to continue to resist paying a ransom for our lives anywhere near this foolish.
Ironically, this might be the best thing to ever happen to Donald Trump, as his approval rating is soaring, the highest of his presidency now. With the public so desperate, this is no time for politicians to be holding our recovery hostage to achieve political ends that at best greatly pale to the dire situation that does require quick action to prevent our economy and way of life being ripped apart.
While the stock market may not like it, the hope is that the Republican side will continue to resist the worst of this for a little while longer at least, not only for political gain by watching the other party clearly act against the country’s interests in such a blatant way, but to prevent the cost of all this being even more damaging.
The Probable Outcome of This Will Become Even More Transparent Soon
This brings us to the third key component to the recovery of the stock market, which is the threat diminishing. It’s not that this was much of a threat anyway, which we have been trying to hammer home just about every day since this all started, but we are now seeing signs that people are starting to get this at least somewhat and the trend toward sensibility is starting to gain some traction.
We mentioned last week that Italy’s numbers were starting to stabilize, and people are now starting to notice, We already had evidence that this was just a matter of time with both China and South Korea, where the coronavirus is now only a shadow of its former self, but none of this had much of an impact on the feelings of doom that so many had and still continue to have.
Now that Italy has peaked, it is being pointed out in the media that it peaked exactly 45 days after it started, the identical amount of time it took South Korea to peak. This is significant because Italy scared so many people and the situation there was far worse.
Both China and South Korea only had 2 deaths per million people, which is a ridiculously small amount to fret at all about. It’s not that Italy’s numbers should alarm us either, at least as far as the death rate from infectious diseases go generally, but 113 per million is a lot bigger number than 2 to be sure. Italy got struck with the most concentrated form of this virus out there, and seeing that situation stabilize should certainly put an end to all the Armageddon paranoia still out there.
Thankfully, President Trump, who for a time seemed to be almost as brainwashed as the rest, has started to regain his senses. It just wasn’t like him to fall prey to this iconic nonsense about how big of a threat that COVID-19 is supposed to be, but his fever has broken and he’s back to standing up again for rationality.
We had been lamenting the fact that Donald Trump was our last hope of having at least one person in power that hasn’t flown completely off the handle, with the rest of the world somehow thinking that this is the biggest health crisis of all time, and seeing a few of his remarks echoing what we’ve been saying such as how this measures up to the flu and the fact that we aren’t going to all die given that this has only affected such a very tiny percentage of China’s population did re-warm our hearts a bit.
Seeing the reality of the situation sink into anyone’s heads a little more may also be buoying stocks a bit at least, although there is still a long way to go here. Fortunately, we’re not talking about all that long of a time though, as the peaking of the cases in the U.S. and elsewhere won’t be that far behind.
There is only one explanation that makes any sense, and that’s the fact that this virus actually spreads at a very low rate compared to much hardier ones such as the flu. Given that the flu does kill about 50,000 Americans on average, and is 10 times deadlier, if it spread like the flu, we would be in much more trouble with half a million deaths, but the fact that China, with four times the population, only has seen 3,277, a far cry from half a million or even 50,000.
Public health officials were not just content to forecast just 500,000 deaths, as their numbers somehow had the death toll in the millions in the U.S. alone. This may have been pure madness, but the public loses their mind as well, they don’t feel the need to question anything.
The state of New York is the new epicenter of this little outbreak, who are up to 271 deaths now. Somehow, according to Gov. Andrew Cuomo, they are in desperate need of 50 million more surgical masks and 30,000 ventilators, among other things, which are held to be not something he may need one day, the need is supposed to be immediate. He seems to be preparing for everyone in the state to die at least once.
This is like the Fed removing all limits on quantitative easing, other than in this case, the limits to the level of ridiculousness that public officials stoop to. The biggest health crisis that we are facing right now is a psychiatric one, and people like Cuomo are leading the way.
This has simply been a bad trip so far, and all of this stands light years apart from all prior departures from reality that the world has ever seen, totally eclipsing things like cave people thinking that storms arose out of angering the gods. We don’t even have the thunder this time, unless you count the sheer volume of our collective screams.
The stock market is not out of the woods yet, but we’ve gotten closer. This recent turn of events may have an added bonus for stocks though. Donald Trump’s chances of re-election just got better, and the latest poll on Tuesday has him narrowing the gap with Joe Biden to only 3 points.
CNN and other fear mongering media outlets are still doing their best to promote insanity and especially are taking every opportunity to denigrate Trump, even more so than usual, but as the truth puts its arm around Trump soon, and sticks its tongue out at the fear promoters, this will have Trump looking even better in the eyes of voters and could make all the difference with his campaign.
The sooner we get enough of a grip to get back to real life once again, the better. This will take its toll though economically, and we are especially not ready for all the taxes that Joe Biden is planning, so if this can be prevented, the health of the stock market will really get a shot in the arm.
In the meantime, there are some real signs that the bulls are moving back into the room, but this is still a ping-pong match, and the bears may not be quite ready to resign the game just yet. One day does not make for a reversal, even one this big. That day is coming though, and like your car’s mirror, objects in it are closer than they appear.