March 26, 2020 - As we enter the fourth week of constant information and worry about COVID-19, I want to update you on Pitcairn’s efforts as we assimilate relevant information and strive to make the best decisions possible. Before discussing the current economic and investment ramifications, let me express my deepest hope that you and your family are in good health and are using your best judgement to avoid what is obviously a very serious illness. Concerns about depressed markets that will certainly recover pale in comparison to the importance of our health. Please be careful.
US equities have rapidly entered a bear market as the COVID-19 virus has resisted containment efforts and spread aggressively around the globe. The sharp decline has drawn comparisons to the 1987 and 2008 bear markets. All bear markets manifest themselves differently, but it is interesting to note that both the 1987 and 2008 events were financial crises that became societal crises. Today, we have a societal crisis that has become a financial crisis.
Both here in the US and globally, the choice has been made to accept significant economic pain to achieve the goal of rapidly eradicating the virus. That means we are all changing our lives and the way we work, while worrying more about our loved ones.
Against the backdrop of such dramatic change, it may seem hard to adhere to an investment strategy that sees beyond the current chaos, employs discipline over panic, and maintains a resolute belief in the permanence of our economic system. But that
is exactly what we must do.
This is an extremely challenging time to be a long-term, strategic investor. Everywhere around us, markets are fluctuating widely and pundits are expressing extreme opinions of all kinds. We at Pitcairn believe this is exactly the time to use your capital
and your long investment time frame as assets in the midst of the disorder.
Unfortunately, there are still more questions than answers regarding the COVID-19 virus and its potential impact on our society and economy. As of March 24th, here is what we do know:
- There are over 400,000 cases diagnosed worldwide, of which over 50,000 are in the US.
- New York City has emerged as a US hot spot with a significant increase in cases over the last few days.
- Most major cities and states in the US have instituted broad-based social controls. This deliberate suppression of economic activity both in the US and across the globe is unprecedented.
US equity markets are down approximately 35% for the year and the past few sessions have seen both the best and worst days since the 1933 market crash. Though we don’t think equities have reached their absolute low yet, we do believe the majority of the damage is behind us. Below is a graph depicting the current downtrend in comparison to the major bear markets of this century.
I find it interesting that economists are still trying to predict GDP rates (perhaps its shows they have a sense of humor) when we don’t know the extent of the self-inflicted economic pain we will experience in order to reduce the number of infected citizens. Nonetheless, I am reviewing second quarter GDP forecasts that range from negative 10% to an unbelievable negative 30%. On the flip side of such discouraging forecasts, most economists are calling for economic activity to rapidly snap back in the second half of this year. Recessions typically occur because of a policy error or other mistake. This is the first one that has been intentionally set in motion.
Both the Federal Reserve and Congress have stepped in with historic levels of fiscal and monetary stimulus (Congressional action was imminent at this writing). In sharp contrast to the 2008 crisis, cash is being pumped into the system more quickly and more comprehensively. Markets may react positively to news on this front, but we caution investors against thinking the current level of turmoil in the capital markets will resolve itself quickly. Getting to a bear market bottom has historically been a process that takes place over weeks and months, not hours and days. In all likelihood, that historical pattern will play out in this crisis as well.
Many of the technical and valuation indicators we follow suggest that equity markets are at, or near, a bottom. However, it is important to note that many indicators are less accurate and less useful in times of severe market dislocation. Evidence of slowing COVID-19 infection rates are the data points that will improve sentiment and signal an abatement of this crisis. Everyone on the planet is hoping improvement comes as quickly as possible.
On Tuesday, March 24th, markets responded to the various liquidity programs with a historic rally. As we stated above, there are likely to be more difficult days ahead. Market timing rarely works and those who sold stocks on Monday missed a strongly positive day on Tuesday. As we often point out to our clients, missing just a few positive days in the equity market can significantly impair long-term results. A recent study by Brown Brothers Harriman showed that if you had invested $1 on January 1st of 1988, you would have $18.35 today (this includes the recent 35% sell off). However, if you missed just the 10 best single trading days of those 30 plus years, that $1 would be worth only $8.35. Just as happened today, sharply positive days often come quickly after large sell offs, which makes market timing all the more difficult. The chart below shows the robust historical returns of the US equity market in the two years following major sell offs such as the one we are now experiencing.
Though it is important that we stay disciplined and resist the urge to time these markets, please be aware that the managers we employ are active and hard at work. This level of chaos creates great opportunity and all of our mangers are taking action
in this environment. Some are more aggressively buying as their valuation targets are met, while others are more deliberately upgrading the quality of their investments and awaiting greater clarity on the macro-economic environment.
In closing, please keep yourself and your loved ones safe during this unprecedented crisis. Patience and fortitude will get us through this scary time. The US people and economy will come back strongly once this has passed. We always have.