The stock market is a device for transferring money from the impatient to the patient.
Warren Buffett
What has transpired the past thirty-plus days truly is unprecedented in our lifetime in scope and velocity. Stocks have suffered declines that have more than wiped out the extraordinary gains of 2019, but, as defined by movements of twenty percent or more, we’ve seen bull to bear to bull markets in record time. As late as the week ended March 14, new unemployment claims were at a fifty-year low. Yesterday, it was announced new filings were almost 3.3 million, easily surpassing the previous weekly record of 695,000 recorded in 1982. While one would expect high yield debt to suffer in an equity market sell-off, so too have investment grade corporate bonds and state and local municipal bonds. These major areas of fixed income have all produced negative returns year to date. In fact, reminiscent of 2008-09, by last Friday, most everything had declined year to date, including silver (-30%), oil (-61%) and even corn (-14%). Gold was flat, down not even the value of a gram on its long-perceived store of value.
I have written before that markets abhor uncertainty. Unfortunately, this drives eyes to the likes of CNBC and other media in large numbers. It’s not enough for one to constantly voice conspiracy theory opinions in social media, but there has often been rampant and reckless speculation offered by many talking heads and so-called expert guests, whether on a national stage or local one. ‘This is compared to 9/11/ some say, others, the Great Depression or the panic of 2008-09, still others the Spanish Flu pandemic of 1918. Let’s spend a moment there.
The Spanish flu was the deadliest in history, afflicting an estimated 500 million people, or more than a quarter of the world’s population at the time. The Centers for Disease Control and Prevention (CDC) states an estimated 50 million people died over the course of a year and a half, including 675,000 Americans. The U.S. entered World War I a year before the outbreak, initially sending 378,000 of the eventual 4.7 million young men to one of 32 training camps in the country. By March of 1918, the first U.S. case of Spanish flu originated in one of those training camps. By this time, hundreds of thousands of American soldiers per month were being sent to Europe and, along with them, the virus. Coupled with overall troop movements in the European theater, malnourishment, poor hygiene and the lack of vaccines and treatments, a massive public health crisis developed that exacerbated the virus’ outbreak. To this day, no one knows where this virus originated or even why it was so lethal. Some state this strain of influenza originated in China, but Great Britain, France and the U.S. are also possible geographical sources. It was not Spain, however. Spain was blamed because they were not censoring their news media, as other countries were, including the U.S., to minimize the early illness and mortality rates. Because of the dire but more accurate reports coming out of Spain, most people assumed it must have originated there, especially after Spain’s king contracted it.
What do we actually know? We know China’s reported cases began to decline about two months from initial reports. A month later, except for citizens returning from abroad, China has reported no new cases late last week and early this week. The first case in America was January 21in Washington state. By the math above, this would have the U.S. seeing declines at this time, but I believe the many folks who took spring break vacations will push this out a good two to three weeks, if not a little longer.
The epicenter of the virus is now in the U.S. and Europe. The Great Depression, the technology/ dot.com bubble of 2000-2002, the panic of 2007-2009 all lasted in terms of greater than a year and were structural failures of the economy in some form. This market route was deliberately induced by the Federal Government and is expected to last a few months. If we must make a comparison, then look to August-December of 1987, when the market lost 22.6 percent on Black Monday, October 19 alone, and 33 percent overall in three months. (Our market was down 35 percent at one point on Monday.) In the fall of 1987, the S&P 500 traded to a low of 221.24. Today, the S&P 500 trades at 2,550 or more than ten times higher. We do make recoveries; we always have.
In combatting the virus, many pharmaceutical companies like the Swiss company Roche are claiming limited success with drugs already available, but these circumstances are not fully researched. It is likely a biotechnology company will find a true vaccine and cure. We are in a medical war and I hold great promise in companies like Gilead Sciences, that effectively cured hepatitis C a few years ago, and Regeneron, a pioneer in antibody medicine, to provide the vaccine. Regeneron already has phase 2 and 3 trials of drugs underway and expects human trials to begin for a vaccine against and cure for COVID-19 in June. There are three dozen such compounds being tested by researchers around the globe and I have complete confidence this will be overcome.
In the meantime, the U.S. Federal Reserve went from what the market saw as a timid response on March 15, by reducing the fed funds rate effectively to zero, to extensive measures on March 23 that pledges unlimited asset purchases so to “support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.” In other words, the Fed will employ everything monetarily possible to keep the flow of money and credit accommodative to the economic needs of the country. This surpasses the Fed’s response to even the financial panic of 2007-2009.
The fiscal response is also massive and becoming clear. The government can’t forcibly close businesses, even entire industries, and not do so. Because of this, think about the ridiculousness when certain Democrats continue to call foul by stating the relief package is a bailout for business, or worse, a slush fund. Perhaps Speaker Pelosi would like to explain why her little pet Porky, the Kennedy Center for the Performing Arts, steps ahead of unnamed thousands of small businesses in this bill to receive $25 million in “virus relief.” Of course, certain Republicans also come to the table, like Senator Richard Shelby, who, unable to garner even Republican support for deepening and widening the Port of Mobile, can siphon funds now. Despite this, our Government deserves credit for passing relief in as many days for what took months in late 2008 and early 2009. If only Washington could now pass, and our President sign, a bill in mutual civility.
For Legacy, xxx is completing her second week of working at home. We sent her with the tools to work there three weeks ago, not knowing we would implement this so quickly. No different from the office, she has access to Pershing, our/your custodian of assets, and other tools. This letter and the enclosed Form ADV Part 2A are evidence of this in motion. Her phone is also being forwarded to her cell. I remain at the office until an order forces me to stay at home. Given Governor Reeves’ response to the city of Tupelo Wednesday, overruling their city leaders’ who wanted to take prudent measures to slow the virus’ spread, this doesn’t appear likely. The market volatility has created a much busier day, but we are fully functional. A cure will be found, markets will be higher and hopefully people’s hearts will be surrendered such that we know with greater conviction and care that we not only need one another, we need our Creator. For our part, we can’t control Mr. Market, but for our clients at greater risk and not venturing out, we know where to obtain casseroles and the like. If we can help you in this way, please let us know.
With grateful hearts and kindest regards,
