As of today, the US stock markets have dipped into what is defined as a bear market. A bear market simply means that the market is down 20% or more from its highest point. It is important to remember that the term bear market tells us nothing about where we are going, it only tells us where we are right now. In other words, it is not a predictor of what may or may not happen next. Consider that in late 2018 the markets dipped quickly and were just shy of being labeled a bear market but then they quickly bounced back and moved on to new highs. If they had dropped slightly lower back then, and because so were labeled as a bear market, I doubt the outcome would have been different.
The markets are reacting so strongly to the COVID-19 outbreak for two reasons: uncertainty & possible negative economic impact. Uncertainty has always been the enemy of smooth markets. So many people in the finance industry are in the business of making predictions - economists, traders, analysts - so a major uncertainty like this one is difficult to manage. Due largely to our human cognitive negativity bias, often the worst is assumed when making predictions in uncertain times. As I've said to many of you countless times before, I am not in the business of making predictions because I believe it is a futile exercise and especially so given the circumstances surrounding the Coronavirus. No one knows where this is going or what overall impacts it will have. But that certainly doesn't mean that we should assume the worst. A better strategy would be to chose not to try to predict at all.
Regarding the negative economic impact, I believe this is unavoidable and we are already seeing it happen. Companies are reducing their earnings projections. Entire industries are suffering already: travel and tourism, hospitality, retail, and manufacturing to name a few. However, certain industries and sectors should weather this better. For example: healthcare, consumer staples, and technology and telecom. It's likely that as a result of the Coronavirus, US economic growth slows or retracts temporarily. A retraction in economic growth that lasts long enough is a recession. Although, keep in mind that a recession is a lagging economic indicator. It only tells us what has happened in the past. Whereas the stock market is a leading economic indicator. If the stock market thinks we may go into recession, then it reflects this information instantly in the price of stocks. This is what we are seeing happen right now and it is a healthy function of the markets. What is unhealthy however is that the markets tend to price into stocks the worst case scenario. That worst case often never comes to be and markets recover accordingly. We've seen this happen time and time again.
With all that we don't know, I think it's helpful to remember what we do know. We know that the measures currently being taken by governments and private companies will disrupt our lives temporarily, (and temporarily being the operative word there) but we also know that these measures are being taken to slow the rate of progression of the disease and ultimately to help manage it. We know from history that pandemics and epidemics, with varying degrees of severity, come and go. We know that for most infected with the Coronavirus, the symptoms are not severe.
Most importantly, in my view, we know that the human race endures. We know that we adjust, we problem solve, we adapt and we overcome. We come together in times like this and I believe come out the other side better off because of it.
COVID-19 will pass and when it does the sense of relief will quickly turn to optimism. We will remember that we have a strong economy and that unemployment is remarkably low. American and International companies will continue to earn profits. That we live in one of the wealthiest countries in the world at a time when the world has never enjoyed as much wealth.
Hang in there and don't panic. If you're a client of Breakwater then know that we have already planned for times like this together. This is when financial planning pays off. As always, I'm here to talk. So please do not hesitate to pick up the phone and call.
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