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"Panic Selling" Needs to Remember Lessons from the Past

March 23, 2020
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Monday Morning QB - Market Observations:

  • Panic, Panic, Panic…
  • Dow Index Drops 17%
  • S&P 500 Index Drops 15%
  • Crude Oil Prices Continue to Crater
  • Gold is Down -11% from its March 9th High
  • The Bond Market Caved to Panic Selling…Record Outflows from Bond Mutual Funds and Bond ETFs
  • Fed Injects Liquidity, Hoping to Stabilize Commercial Paper, Money Market Funds, Corporate Debt, and Municipal Bonds
  • A Massive Fiscal Stimulus Package is Under Debate in the Senate
  • Sheltering-in-Place Mandates Bring Commerce to a Halt
  • Look for Unprecedented Numbers in Unemployment Claims starting this Thursday

Monday Morning QB - Market Performance:

Panic Selling is the only apt description for last week’s events. Stocks suffered another week of steep losses.

For the week, the Dow Jones Industrial Average plummeted over 4000 points, or -17.3%, ending the week at 19,173. The Nasdaq Composite was down another -12.6%.

By market cap, the large-cap S&P 500 shed -15.0%, while the mid-cap S&P 400 and the small-cap Russell 2000 finished down -18.7% and -16.2%, respectively.

Last Monday was the single worst day for the stock market in the 25 years we have been doing this.

To help with context, the Dow suffered its biggest percentage loss since the crash of 1987. The Nasdaq Composite experienced its sharpest daily decline on record.

Where Do We Go From Here?

No one can tell you how this will end!

So, if you have not already, stop listening to the people who are giving their guidance for the future. They don’t know any more than you do.

For the immediate future (as in today) the market looks like it will open lower.

The futures, which show us what to expect once the market opens, have been negative since the vote on stimulus failed in the Senate, and Nancy Pelosi signaled she would not accept the Senate’s bill anyway. So glad we can count on Congress to do the right thing (note the sarcasm).

They will get it right soon enough because politicians cave under pressure. Both sides are feeling the pressure to do the right thing and find a compromise solution as soon as humanly possible. There will come a time for politics, but people need help now!

We can debate the differences in economic theory and fiscal responsibility once all this is a memory.

So, rather than concentrating the rest of this post on how bad last week was (because we all know a 17% loss in the market is terrible), I find little value in only looking back at last week by itself.

Instead, we will concentrate our effort in looking to the past for direction, in stopping the pain and getting things moving in the right direction.

You can find hope in some concrete steps used in the past which helped make things better- eventually.

Problems are Unavoidable but Learning From Them is a Choice

I spent much of my weekend trying to put what we are all going through in context.

Unfortunately, just as my son’s cancer journey is a constant reminder, we can not skip ahead, we simply must keep moving forward. With that as the backdrop, we are learning more about the coronavirus (Covid-19 if you prefer) every day as we fight on!

We do not know how long this will last. The human spirit tells us that this, too, shall pass. We know this because, from the beginning, smart people are learning how to treat this virus, and eventually to stop it dead in its tracks.

We know that the virus, for most people, will only be a nuisance. We know that social distancing will help to lower the numbers of the infected. We know that life is hard right now, and some things will be forever changed going forward.

In the meantime, we expect the Government to stabilize things while we are trying to figure this virus out.

How can we help our neighbor who is suffering now? How can we creatively reach out in the face of social distancing?

We, as a country, will rally to the most affected people from this catastrophe once the social distancing requirement is lifted because that is what we do.

The stock market will eventually reflect this inevitability! For now, we can look to the future, knowing how we have dealt with the past.

We expect at first that this crisis will be mishandled by the Government, stoking our fears because the Government "players" have done this with almost every crisis in recent history. I use the word "almost" but probably could get away with "always" considering the players and the seeming need for drama.

Next, our Government "players" will get their act together and stabilize the situation by planting the seeds of our economic recovery.

Need proof in my optimism? Keep reading.

SARS (Severe Acute Respiratory Syndrome) in 2003

SARS started in China. The Chinese kept the virus a secret for as long as possible and used extreme quarantine measures to slow the spread of the virus.

Social distancing and mask-wearing became the norm in Hong Kong and elsewhere in Asia as the virus struck. Businesses and schools were shut down, and extraordinary measures were used to keep people and places sanitized.

The drastic social interruptions worked to stem the spread as the virus started in February and containment occurred by April. Their economies recovered, and serious governmental support was not required.

The Great Recession (Financial Crisis of 2008- 2009)

I know that many of you will wonder how this compares to the coronavirus.

The Great Recession of 2008-2009 was an economic virus that quickly spread through our entire economic structure.

Creative financial solutions combined with bailouts helped to lessen the impact and change the trajectory, kicking off an 11-year bull market cycle.

The Federal Reserve enacted quantitative easing, which dumped tons of money into the global economy. This mass liquidity injection led to the lowest borrowing rates in our lifetimes for both people and businesses.

The Bush administration enacted TARP (Troubled Asset Relief Program) and sent $600 checks to most Americans. The Obama administration bailed out the auto industry and implemented a $787 billion stimulus plan.

The economy did not collapse, and a blueprint for dealing with economic shocks was created.

Learning from the past

The trade-offs are real. The longer we must practice social distancing, the more economic pain we will experience, but, hopefully, the fewer people will be infected.

My take is, the more severe the shutdown, the sooner we can get to the other side-- recovery for both the sick and the economy.

I am writing this from my home office. Working from home is the new norm. Social distancing is the new reality for most Americans, similar to the Asian experience under SARS.

The Fed has taken steps beyond what they did in the Great Recession of 2008-2009. They have pumped the economic system with liquidity.

The Government is organizing a private/public cooperation to manufacture and distribute things that we are in desperate need of and that are in short supply. We shouldn't ignore the fact that the private sector stepped up voluntarily with offers of help before being asked.

The Government has already approved the first stages of a fiscal stimulus package to help support our communities, which in the end will likely be the most massive stimulus package in our history.

The lessons of the past both from SARS and the Great Recession are being implemented.

My optimism comes from our all hands-on deck approach!

What Does This Mean for MY Investment Portfolio?

History tells us that 20% plus stock market declines take more than a year or longer to recover from. History also shows the road to recovery is typically bumpy, so don’t expect the volatility in the stock market to end anytime soon.

Last week, for the first time since the end of January, we added to the small percentage of stock positions that remained in our portfolios.

Buying during anxiety is not easy, and, no, we are not leaping back into the stock market, but a little money coming back in when the market is down 35% is not without merit.

Remember, buy low and sell high.

Monitor, measure, and correct is not just a planning technique; it is what we believe to be part of sound money management.

Our current situation is fluid and requires constant monitoring. If you do not have someone experienced doing that for you, you should.

To our readers, client or not, if you have questions about anything or need a calming voice to help you get through these difficult times, we are always available to you and willing to help in any way we can!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
Hayden Royal is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.
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