“May you live in interesting times” is purported to be the English translation of a Chinese curse. While I am not really sure if that is true or not, I can definitely understand how that rumour could have started as we continue to make our way through one of the scariest and most fascinating time periods I can remember in my lifetime. Week three of social isolation has me sporting a full isolation beard, showing a marked improvement in my pool playing skills and having picked up a somewhat guilt inducing addiction to Netflix docuseries. Tiger Kings completely fascinated me! After I binge watched my way through that, I moved on to McMillions and am now working on Wild Wild Country. My wife is convinced the social distancing has actually made me more social as no sports for me means more walks with her, regular family mealtimes, more board games and us all watching Tiger Kings and debating whether Carol really did kill her husband! (watch it if you haven’t already – it really is fascinating!).
Markets were down about 4% last week after bouncing the week before. Officially markets are down about 35% from their highs and 25% from the beginning of the year. The slightly lower volatility and lighter volume last week would seem to indicate we have at least begun the bottoming process. Markets are in a weird phase in that we have now gone through the initial shock, had a bit of a relief rally, and can expect the market to trade sideways (albeit with a lot of volatility) until we begin to see signs of recovery, but that can’t really happen until the virus is contained. This period of time is going to require patience as the markets need to play out the next few weeks as we wait to see fallout numbers on Covid19 in terms of number of cases, deaths and economic impact. Sadly the only thing we know for sure right now is that this news is going to be bad as we expect economic headlines to be dominated by more closures, more cancellations, more lockdowns, more businesses negatively impacted, more lay-offs and recession. Although none of this should be of surprise to the markets and is priced in already, it will wear on investor psyche and confidence, and will lend itself to more bad days in the short term. It is in our nature to want to move on to the next phase as quickly as possible or “rip off the band aid” quickly so we can begin to heal, but it is important to remember that this is a very normal stage in market cycles and that the bottoming process takes some time and will be filled with fits and starts and volatility.
We may not know exactly when, but the good news is that we do know that this virus will pass. We do know that there are literally trillions of dollars in stimulus and relief coming into markets over the next year. We do know that low interest rates and low oil prices are a boon to most businesses and consumers. We do know that when we do start back up again, businesses will be raring to make up for lost production. The dust has yet to settle, and until it does, there is limited visibility for the road ahead. We know that a road is there, just not exactly what it looks like and therefore stepping out is scary and requires some faith; however, waiting for the dust to settle will be too late.
“Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”
Jeremy Grantham (2009)
We don’t know exactly when that turning point will be, but as painful as it feels in the moment, we do know that this is a temporary episode of market upheaval that has provided a temporary window of opportunity to pick up quality companies on sale. The longer that this takes the better, in that it will allow us the time to add to and reposition portfolios to take advantage of cheap equities in a way that will be of tremendous benefit in years to come. This is when smart investors buy; this is where the discipline to hold the course is important!
Stay safe, stay healthy, try and find ways to appreciate living in interesting times!
Jeremy
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