Great Anxiety? Yes. Great Depression? We Think Not! Time to Hold Your Ground.

April 6, 2020
Great Anxiety? Yes. Great Depression? We think Not! Time to Hold your Ground, Market Commentary

“It’s déjà vu all over again.” – Yogi Berra

These are sobering times. I have three kids. My 24-year old daughter, who is studying to become a nurse practitioner, works in a hospital in Cincinnati and is responsible for serving patients in the critical care unit. I am proud that she is vocal about her unwavering respect and empathy for the courageous health care staff, caregivers, workers in essential services and patients in the United States, as well as across the globe. I respect the risks we face, and I am humbled when I talk to her and the above folks about macroeconomics and the financial markets. Somehow my occupation seems trivial when conversing with such individuals. But that is my role, and the economic story here is part of the coronavirus impact. 

This is true given the swift and severe financial pain emanating from the social distancing measures required to flatten the curve and blunt the disease…they absolutely affect people’s lives in a big way as well. In the world of finance, the word “unprecedented” is used often to describe what is going on in the financial markets. I agree that it is unprecedented in the source of the risk today—a pandemic with potential easy spread because of intensive globalization over the last 20 years and the stealth, asymptomatic feature of those who carry the virus in the early stages. But it is not unprecedented in terms of the level of market risk surrounding it versus other major challenging moments the market has faced in my lifetime and earlier in history. 

I have talked often with Bill Greiner, our experienced chief economist, about the last 40 years of market history during which both he and I have either been students of the market or professionals working in the industry…most of it the latter. During that tenure, we have seen multiple, so-called “unprecedented” moments in the financial world, and we’d like to think that studying them as closely as we have helps provide perspective about the ability to move through this one and get to the other side in an effective manner and in due course, although not without costs and sacrifice for many that we all find saddening. And with the additional warning that we are not virologists; we can only listen to experts such as Dr. Anthony Fauci and Dr. Scott Gottlieb who are at the forefront of this pandemic. We do find some comfort and resolve in what they are saying. 

Yes, the recent headlines as of this writing feature estimates of deaths that could rise to as many as 100,000 to 240,000 in the United States alone, but this is not new information and both doctors say that we are having positive impact in flattening the curve and that the models can be adjusted downward as easy as upward as we get new information over these next several critical weeks. These are worst-case prognostications that we hope are far too high. It makes sense to us to discuss worst-case to America right now almost as a deterrent…so worst-case doesn’t happen.

In this spirit, we review below other unprecedented moments in stock market history, which perhaps, make us better suited to deal with this one. The market has pushed through each of these, in quicker fashion in some chapters versus others, but all of these instances entailed so-called unprecedented risks. We remain cautiously optimistic regarding the current challenge and do believe the market can bottom and advance on the quicker side if indeed coronavirus cases in the United States peak in the next four weeks or so. 

We appreciate that the U.S. economy was accelerating in January and February of this year and this is important to help get us to the other side, economically…it is much better to see a strengthening economy going into the coronavirus battle as opposed to experiencing a troubled economy when entering the health danger zone suddenly. This abrupt slowing in economic activity is a forced shutdown to invest in our health and the long term, not a business cycle train wreck born of a structurally weak economy. We are also likely to benefit from the “cabin fever” building and the pent-up demand that can resurface when we can once again more freely socialize. In the interim, an unprecedented positive to help build the bridge and fill the gap in the economy during the weak Q2 and Q3 periods, is the enormous monetary and fiscal stimulus being employed. In fact, lessons learned from earlier unprecedented periods, e.g., the Great Recession of 2007/2008 appear to have aided us in employing this cruise missile level of stimulus so quickly. We applaud Treasury Secretary Steve Mnuchin with outstanding leadership on this front. At the end of the day, we believe the Yogi Berra quote above could be applied to the risk we face today. As in other unprecedented times, all of which we conquered with innovative thinking and grit—it’s déjà vu all over again…in more ways than one. 

We Are Not Advocates of a Buy on the Dips Mentality and Aggressive Rebalancing…Yet

With the above cautiously optimistic view outlined, we are in the “hold your ground” camp at this juncture rather than immediate buyers of equities and advocates of aggressive rebalancing. We want to see less worse coronavirus data in the United States and successful employment of the stimulus package before we signal the all clear. Given that these two points are still opaque—virus uptake data and stimulus money getting into the system—we expect the bottoming process to take on more of a 1973/74 and 1987 W shape (see charts below) where we have some retrenchment before advancing from here in sustainable fashion.

Chart Showing 20 Day Low Lines in 1973/1974 and 1987

Source:  Strategas

Quick Tour of Prior Unprecedented Moments

Let me list a couple of other unprecedented market challenges, and you can decide if I am exaggerating and downplaying today’s fears and dilemma. In 1973 and 1974, we had to wait in lines for hours at gas stations because of the Arab Oil Embargo imposed by the then new OPEC cartel. This largely shutdown the normal economy. It caused chaos in both our personal and economic lives. My father, for example, a very successful real estate investor and entrepreneur at the time, was forced into bankruptcy, having just completed building four major hotel projects with personal guarantees on the financing right before the embargo hit.

Then we had the unprecedented phenomenon known as “stagflation,” which abruptly made center stage in the late 70s and early 80s, with inflation running in the teens and prime rate at 20%. Trying to get a mortgage with those rates was quite fun. And how about a 22% drop in the S&P 500 in one day in 19871. That broke the fear gauge of many investors.

After a little more than a decade of good times, two, six-sigma catastrophe events hit—the bursting of the technology bubble, which book-ended the horrific and never-to-be forgotten events of 9-11, including many lost lives of victims of the attack as well as first responders. Airports and the NYSE were shut down for days. Only a short time following recovery from all this, we experienced the Great Recession of 2007/2008, and the associated housing implosion.

Recovery began in earnest in 2009, and stock investors have seen above-average, double-digit, annual stock market returns since that March trough over the last 11 years, but it has been accompanied by constant doubt and multiple panic attacks…the Arab Spring, fiscal cliff, Brexit, political campaigns with unprecedented divide and trade war chapters, to name a few. If we want to go farther back in unprecedented history, glance at the double-digit stock market returns from 1942 to 1947 in the midst of a world war2, when hundreds of thousands of Americans courageously sacrificed their lives against a visible enemy. The point is that downdrafts can be swift, deep and unexpected but so can recovery rallies…and the rallies can happen before the economic data becomes pretty again! Best not to take aggressive action to reduce equity holdings in advance of what we expect to be a swift correction and more of a swift recovery that can cause severe whiplash.

Let’s Be Careful of Labels

At the end of March, losses had been pared in the S&P 500 to -20%3 on a year-to-date basis from over 30% losses earlier in the month,  year-to-date. Similarly, the S&P 500 declined a relatively modest 7% on a 12-month trailing basis through March 31. Balanced portfolios were down less.

Does that sound like the buying opportunity and carnage of a lifetime? I think not. We were down more than that in December 2018. My point is, let’s be careful about embracing and trumpeting labels that are supposed to be “technical terms” to accurately describe the prevailing environment. This would apply to a plethora of so-called technical definitions we see the media using…recession, bear market, bull market, pandemic, inverted yield curve, earnings recession, etc. The cavalier use of these terms is dangerous, because they scare investors. They must be put in proper context.

With regard to the roots of a 20% decline being used to characterize what is the threshold level for a bear market…this didn’t arise from the professional investment community or academics coming together and critically agreeing to such a definition…it was a quote from someone in the newspaper in the 1950s. It was repeated by another person, and then another…and so forth until popular lore became fact and a technical definition4. Sounds kind of familiar to the undisciplined use of the term inverted yield curve. The latter shouldn’t have been embraced as fact or as a clear signal of looming recession only months ago when it was inverted for a nanosecond while the credit markets were just fine. By the way, it is positive in slope again in short order.

Similarly, the use of bear market to describe the early 2020 stock market was misused in our view…we use the term only when the market experiences an extended, multi-quarter or perhaps multi-year decline in the market (the average bear lasts 20 months)5 with an average peak-to-trough decline of 25% or more…potentially double this average 25% decline (i.e., 50%) or even worse. Most often, bear markets are accompanied by business cycle train wrecks.

Bottom line, just because we crossed the 20% decline threshold doesn’t mean we were/are in a secular bear market, nor does it mean all is clear just because we move to down less than 20% after a couple of good days.

Adjusted Crystal Ball Outlook

In the table below we adjust our outlook, post the global coronavirus attack. These are adjustments versus the prior S&P 500 targets we presented back in January. The summary is that our original base case and optimistic targets for calendar year 2020 have not been derailed, just deferred out until the second half of 2021. We still weigh the probabilities of these scenarios at a high level of 60%, but we have increased the probability of the disappointing and worst-case outcomes to 40% with the ugly scenario having a very modest likelihood. The rosier scenarios assume an improving trend in the economy and earnings in late 2020 and continuing into 2021. The upside from here is significant and realistic in our view in that it only gets us back to pre-coronavirus levels. The reason we are not suggesting a buy on the dips mentality just yet, despite this significant upside potential, is the fairly high probability of disappointing results until we get more data near-term on coronavirus uptake trend in the United States. We’re in the eye of the bad news storm right now on the economic front with the results from social distancing hitting the Q2 data. It’s one thing to know it’s coming; it’s another to read about it daily for several weeks. 

Chart showing updated Crystal Ball Outlook

Source: 2020 Crystal Ball


Indeed, the last several weeks have been a tough patch in which the bad news should peak in short order. The market knows bad is coming; it trades not on absolutes but on trend. All that we need to see is data getting less worse on the health front. That, coupled with effective execution of bridge/relief stimulus, should affirm the view that recovery can begin in earnest in Q4. The market will sniff that out in advance and move forward on that news. Let’s hope that news is delivered and act appropriately when we get it. Yogi Berra might be more vague and say, “When you come to the fork in the road, take it.” We’ll be more specific…we’re holding ground until we get the less-worse news on virus spread.


2NYU Stern School of Business, S&P 500 Annual Returns

The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation. 

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