First of all, take a minute to congratulate yourself. If you stuck with your investment strategy (whatever the type) over the last two weeks, you did so in a period of historic volatility. Since March 6th, you have been witness to three of the worst 20 single day declines in the DJIA (percentages, people) and one of the best 20 single day jumps as well in all history. On average, bear markets take about 8 months to get down 20%. This one? Less than a month. That’s pretty fast. And we felt it, all of us. Real fear, real panic, really fast selling. So if you have thus far managed not to completely lose your mind, good job. Not too many investors have had to face something like what we have in just a few short weeks.
Safe to say these are uncharted waters, right? It’s been about 100 years since we faced a true pandemic of this nature. And in that 100 years we’ve seen only two markets comparable to this one, the prelude to the Great Depression and 1987’s Black Monday. It is pretty normal to think “we’ve never been here before.”
Tolstoy is famous for writing in Anna Karenina : “Happy families are all alike; every unhappy family is unhappy in its own way.”
You can say the same about bull and bear markets. All bull markets are happy families. Times are good, the numbers scrolling across the screen are green, everyone is feeling more comfortable and confident by the day. Investing is easy, we’re all geniuses.
Bear markets are uniquely unhappy. No one is like the other. Each and every time, the causes, the market environment, the economic impacts, the global economic/social/political cause and effect are different. It’s different this time. How unprecedented are bear markets? How about this:
- During the 2007-2009 bear market, the financial system as we know it appeared to be on the brink of collapse. Major banks were disappearing overnight. The traditional practice of overnight bank lending came to a crashing halt. One blue-chip mega bank wouldn’t give another $10 to satisfy their reserve requirements because they didn’t trust that the bank would be there in the morning to pay it back. Stalwarts of enterprise like GE were decimated by ridiculous lending practices. Central banks took actions that were previously unheard of! Buying publicly traded securities in open markets to provide liquidity, which we have now normalized, had never even been considered before then. Short term rates went to zero. The Fed backstopped money market products, and a public money market “broke the buck” for the first time. Liquidity seized up and everything went into a fire sale. High quality corporate bonds and municipal bonds fell in lockstep with stocks. Values in residential real estate fell farther than anyone had imagined. It was scary. You were scared. Unprecedented enough for you? How about:
- In 2001, there was a domestic terrorist attack in the United States. Suddenly, the world was unsafe. A sense of security held by nearly every American citizen disappeared in a matter of minutes. The market decline that started a year prior slipped further down to what would ultimately be a long, dragged out three year period that would wipe out 50% of the value of the S&P 500. The emotional and social impact of this attack could only be compared to the attacks at Pearl Harbor some 50+ years before. It was scary. You were scared. Or, try:
- On Monday, October 19th, 1987, the stock market had the single largest one-day decline in history, -22.6% (if you thought the last few weeks were stomach churning!). The worst part was that it appeared to happen for no discernible reason. Fear and panic overran global markets and overwhelmed markets themselves, leaving orders unfilled and wire transfers unsettled. The crash in stocks in the US tore into international stock markets, causing drops of 20-40% across the board. Perhaps our greatest lesson in self-reinforcing feedback loops and the potentially explosive role of emotions in markets investing, Black Monday led to “circuit breaker” rules still in place today.
- In January 1973, the economy and markets were humming. Nifty 50 stocks were all the rage and the DJIA had gained 15% the previous year. And yet, the economy was about to be completely flipped upside down over the following two years. US Dollars were no longer convertible to gold as the US pulled out of the Bretton Woods agreement and inflation was about to skyrocket. During this period, the President promised not to resign, then was impeached, and left office in mid 1974. At the same time, several oil producing countries in the middle east cut of US access to oil in response to America’s support for Israel during the Yom Kippur war, and oil prices jumped from $3 a barrel to $12, a gain of 400%. So we had an impeached president, an oil price war, runaway inflation, unstable currencies and a nice recession. None of which we had experienced in this way before.
By now you’re getting my point. Each and every one of these was new. Unprecedented. Unseen prior. A dramatic global event, political upheaval, brand new economic environments, you name it. We had never been there before, we had never navigated those markets before, we had never planned for these events before. We didn’t see any of this coming, and we were making up the solutions as we went along.
The one thing that was the same about all of these past periods is that they ended. None of these events caused the end of global capitalism, despite their widespread economic effects, millions of jobs lost, crushing declines in global output and social fear and turmoil. Eventually, the world righted itself, found footing and moved forward. The only thing I know for sure right now is that this pattern will hold true this round as well. I don’t know where or when stocks bottom, how widespread the virus will ultimately be or how bad the short and long-term economic impact is. But we have been in unprecedented times before and we will be again, once all of this is behind us. And we’ll figure out the next one too.
Bason Asset Management 