The coronavirus pandemic continues to intensify, as a world that appeared mostly unconcerned just eight weeks ago has now gone into a full-blown meltdown. The best visual for this crisis in economic terms might be a medically induced coma. Governments in Europe and the U.S., following the examples of China and Japan, have enacted historic restrictions on social interaction. As discussed in my prior memo, the global economy has been interrupted in an extreme and unprecedented way as a means of “flattening the curve.”
The level of fear and panic in the general public has risen exponentially, much like the number of COVID-19 cases across the globe. Americans are adjusting to the closing of schools, hotels, bars, and cinemas. All sporting events have been cancelled, and restaurants are attempting to adapt to a take-out-only business model. Simply stated, we are living in abnormally bad conditions unlike anything seen in modern history. The good news is that this too shall pass.
“Abnormally good or abnormally bad conditions do not last forever.”
– Benjamin Graham
Unlike the Dust Bowl during the Great Depression, we know with reasonable scientific accuracy that this will be temporary. The best and brightest minds in the pharmaceutical industry are working on both treatments and vaccines. Treatments will save lives this year, and vaccines will help defend us from future outbreaks. Governments are developing monumental fiscal stimulus packages of unprecedented scale. The industries most adversely affected will likely need more help than they receive, but the sheer size of the stimulus being discussed should help calm markets and accelerate recovery.
The Federal Reserve is taking Herculean measures to stabilize frightened credit and equity markets until medical and fiscal aid arrives. These actions will not prevent a truly historic rise in the American unemployment rate. Europe will also experience unprecedented economic declines and job losses as it battles the spread of the virus. The news will be frightening and discouraging, but investors should also take heart that these headlines ensure governments will act to offset the economic damage.
It is also important to remember that many of these headlines reflect lagging economic indicators, such as unemployment. This data does not provide insight into the next move of the economy or the stock market; rather, it confirms what has already occurred. In this case, rising unemployment is by design, intended to slow the spread of the coronavirus. At some point in this crisis, restrictions will be lifted. Do not let fear cause you to doubt the resilience of the American people or the leadership of great businesses around the world.
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
– Winston Churchill
At a time of such immense uncertainty and fear, I find it helpful to look beyond the current crisis. None of us knows the duration or depth of this pandemic or the recession created to mitigate its spread, but at least 7½ billion people in the world and more than 325 million Americans will welcome in the new year. We don’t know how many businesses will close and fail to reopen. We do not know how high the unemployment rate may go during the downturn, nor do we know how quickly those furloughed and unemployed workers will find gainful employment.
However, we do know with very high certainty that 325 million Americans will be consuming every day. I am just as confident that the 500 million people in the European Union, along with billions of people in China, India, Japan, Korea, and the rest of Asia, will do the same. I am certain that my teenagers will be back at Starbucks. My young nephews will still get excited at the sight of a Happy Meal from McDonald’s. There will be Nestlé bottled water in my fridge and Gatorade (PepsiCo) at my daughter’s tennis match. My son will still like Polo (Ralph Lauren) shirts and Nike shoes almost as much as his X-Box (Microsoft). My friend Joel will still want a Polaris ATV for his military ministry, and my wife will still get my aftershave from Christian Dior (LVMH). Costco will still be full of eager shoppers looking for a deal, and there will be Walmart boxes on my door delivered by a FedEx truck. There will be new John Deere equipment at work on farms around the country, and the ABC stores will be open in case you need to pick up a bottle of Old Forester (Brown-Forman).
I do not believe that the rest of the developed world will be all that different from my family and friends. There are activities that may never be the same after COVID-19, but much of life will return to normal. The future earnings power for many companies will likewise be no different after this recession than it was before COVID-19. It is only fear and uncertainty that have shaken our confidence about the future. There will be some in every country that don’t recover financially or emotionally, but I am confident most of us will find that there is life after COVID-19.
“One principal that I have used throughout my career is to invest at the point of maximum pessimism. That is, the time to be most optimistic is at the point of maximum pessimism.”
– Sir John Templeton
Just like life, the stock market will eventually return to normal as well. Based on history, the stock market should look better long before the headlines about the pandemic or the recession are over. The stock market is a leading economic indicator. That means it will move in anticipation of changes in the economy, not at the same time as those changes. I do not believe this time will be any different. We are investors in high-quality businesses. We are confident that we can earn an attractive return by owning a diversified portfolio of the world’s leading companies. During moments of duress, stock prices for even high-quality businesses will fall, but a disciplined investor will recognize that today’s price may be significantly below the fair value of those shares and won’t sell at these prices. Instead, we will continue to seek opportunities to improve the quality of our portfolio and take advantage of the uncertainty.
Fear is both crippling and contagious. It leads to emotional decisions and panic. For an investor, panic inevitably leads to the destruction of wealth. In moments of fear, we look for reasons to be hopeful and to have faith that these abnormally bad times will not last forever. We care deeply about your long-term financial wellbeing and embrace our fiduciary responsibility. We won’t make emotional decisions but will make prudent portfolio changes as the situation and the facts change. We are invested with you, and our firm’s success is directly correlated to your success.
Winston Churchill is generally associated with the old adage that it is darkest before the dawn, but Thomas Fuller penned the original phrase back in the 17th century when he wrote, “It is said that the darkest hour of the night comes just before the dawn.” We do not yet know when this crisis will truly reach that darkest hour, but we do know that there will be dawn on the other side of it. We also know from history that the sun should shine on the stock market long before the economists and the politicians have the data to explain it.
“For 240 years, it has been a terrible mistake to bet against America.”
– Warren Buffett
The news has been overwhelmingly negative over the past month, but many of our companies have
also shown leadership amid the crisis.
A look back at historic market declines and the subsequent 1-year price gains for the S&P 500 index from the bottom. Large declines have historically been followed by large rallies.
