When times are good, we go to great pains to show that there are under-recognized threats in the market. Case in point: the US stock market was up 30% last year and we spent most of the year talking about what could go wrong. That 30% gain was built on the assumption that there were no factors that would impact growth.
When times are bad, we try and point out the wisdom of the long-term approach. In the long-term approach, you will experience several bear markets. But if your time horizon is long enough, and you have the discipline to stomach multiple bear markets, you will be greatly rewarded for your patience and fortitude.
Narrowing our focus to the short-term, day-to-day experience that we all share… It certainly has been a busy week. The reduction in economic activity due to precautions about the COVID-19 coronavirus has been the catalyst for the current bear market. There are a lot of details to unpack: the Federal Reserve issued an emergency rate cut (essentially bringing the Federal Fund rate to 0%, again), the price war for oil is continuing between oil producers, the normal work-and-life rhythms have been deeply disrupted due to safety lock-downs, and there is a heightened sense of anxiety hanging over it all.
It is an alarming state of affairs, to be sure, but the occasional rough patch provides the tests necessary to ensure the underlying investment narrative being presented stands up to scrutiny. While it turned out to be a novel microbe that created a quick shock to earnings, it could have been anything such as an oil embargo, or a different natural disaster. The stock market crash of 1929 and 2008 didn’t start from one great event but underlying, under-recognized weaknesses in the system. The 2001 decline was punctuated by the 9/11 attacks, but the irrational exuberance around technology stocks took several years to fully deflate.
In the long term, the cycle of investing is always the same. First, a sense of invulnerability common to an untested economic expansion, next comes the panic of realizing that you, a typical investor, have gotten a little over your skis when trouble hits, and finally a resurgence of optimism. It has been 11 years since we’ve had a bear market to point out flaws in the collective investment thesis. Thus far, we’ve discovered weakness in the underlying stability of the energy producers. Going forward, it looks like we’ll discover some vulnerabilities in the high-yield and corporate credit market, but this will take time to come into focus.
The good news is that, once problems are acknowledged, identified, and monitored, they can be managed and avoided. This is as true for encompassing problems, like the coronavirus, as it is for economic health. The long-term case for investing is still solid despite the fact that earnings and growth are going to be necessarily muted for the next quarter or two.