Panic Sets In – But Should it?
Given what’s going on in the market this morning, I wanted to send some thoughts outside of my normal weekly email. Soon after the open, the Dow declined over 2,000 points triggering an automatic 15-minute halt in trading. Trading halts are in place to attempt to break the downward snowball effect and the first halts kicks in at a 7% decline from the prior day’s close. The market has ‘rallied’ since trading resumed and the Dow is now down just under 1,500 points. We continue to hold more cash than normal and I’m happy with that position. I’m not yet ready to start buying into this market and plan to take a conservative approach when reinvesting cash. There’s a lot going on and I wanted to work through the main ones.
It’s important to look back at where we’ve come from and what happened in the last market sell-off. Interestingly, today is the 11-year anniversary of the market low in 2009 following the financial crisis. The Dow closed at 6,547 that day. Today, the Dow is over 24,000. Late in 2018, the Dow declined over 17% from the prior high to an intraday low of 21,713 on December 26th. From there, stocks rallied over the next 14 month, reaching almost 30,000 just a few weeks ago. We are currently sitting at 24,469. We’re still 13% above the lows hit in the 2018, but we have given up essentially a year’s worth of gains in the past 2.5 weeks. This market is scared and confused. I don’t know where it will go, but testing the 2018 lows seems possible.
Big picture, this move is starting to feel overdone relative to the true risks in the market. That said, we still don’t understand the true ramifications of coronavirus, so while I believe this is a temporary situation that we’ll work through, it’s unclear how long this will take. While the problem remains very small in the US, and even in the world when you look at absolute numbers, the potential for this to significantly slow economic activity is pushing stocks lower. The number of cases continue to increase. The critical unknown is how many patients are truly infected. A higher number of undiagnosed cases means the death rate is much lower than being reported. Testing appears to be ramping up with Labcorp and Quest Diagnostics announcing over the last few days they can now process tests. Getting a handle on how many people have the virus would go a long way to calming the markets.
Oil is down almost 20% today and roughly 50% over the last two months. Oil notoriously ends up oversold or overbought and this feels like that. Part of today’s drop is OPEC’s failure to meet a production agreement, meaning oil producing countries could increase production to try and increase their market share. This failed agreement comes at a time when global demand is already dropping, making the matter worse. The drop in oil is pushing oil stocks lower and raising further concerns about global growth in the near-term. Oil under $40 is good for consumers, but it’s not great for the overall economy. Oil exploration and drilling employee a lot of Americans and many projects don’t make economic sense at today’s $33/barrel price. In addition to the energy sector, many segments of the economy that support the energy complex will be hurt as well. If this price proves more than temporary, we’ll see layoffs and a slowdown in business spending.
The Federal Reserve cut short-term interest rates by 0.5% last week. There is talk they will cut further this week. If they don’t, the next scheduled Fed meeting is next week and further cuts seem likely at that meeting. I appreciate the Fed trying to help the markets, but the risk today seems well outside the scope of Fed policy. Lowering interest rates is supposed to entice companies to invest and help stimulate the economy. I don’t think any company is considering the cost of financing right now. People are concerned about a potential pandemic and what that means for growth. South by Southwest didn’t cancel because borrowing costs were too high, they cancelled because they didn’t want to help spread coronavirus by bringing thousands of people from across the country/world together in one location. Facebook and other companies didn’t cancel planned attendance at SXSW and other conferences over costs. They cancelled over coronavirus fears. That is to say, the Fed is doing what it can, but lowering rates doesn’t address the underlying issue in any manner in my opinion.
As I finish typing this, the Dow continues to claw back some of the morning’s losses. We’re now down just over 1,200 on the index. While still an historically bad day, we’re 800 points off the lows from earlier. This volatility isn’t fun, but the underlying fundamentals of the economy are strong. This volatility could last months. Stocks could keep going lower, but the key for a long-term investor is to weather the storm and focus on growth over the next 5+ years, not the next 5-10 weeks.
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