Dear Mike,
I’m writing to you while I’m in the middle of this corona mess. I (you) have been on lockdown since March 13th. I feel blessed to count on more than 1,500 investors’ trust and work online. The month of March 2020 has been pure madness on the stock market and we currently are enjoying a small rebound. Unfortunately, we can feel the market is fragile and any bad news shakes the stock market as if it was built on a deck of cards. Last week, oil futures traded at negative prices! Can you believe it? Producers were so full of oil, they were willing to pay buyers to get rid of their surplus! You are probably driving an electric car by now, but I can tell you I love my Jeep more than ever!
The reason I’m writing to you is for you to remember how people feel during such crazy times. Back in 2008, we were financial planners and we helped hundreds of clients to stay the course and make sure they did not suffer from permanent losses. Back then, we authored a blog called The Financial Blogger, and we wrote the following paragraphs during October 2008:
“No doubt about it, in 20 years, you will probably still be talking about 2008, about how you were there, every day, witnessing a truly unique scene, one where fundamentals of investing changed. Indeed, how is it possible to invest in markets where governments are getting involved with billions of dollars.”
“The stock market is a psychotic personality, and nobody knows when it will be high or down. However, the fear provoked by its fluctuations is 3 times stronger than the optimism created by good news on the stock market.”
I wish I had written more about that period. To capture the true feelings that were around and then remember them the next time the market crashes. Remember that time when most people called for the end of capitalism, the destruction of our banking system and the rising of the United States of Socialism (with a first $700B package plan to save the economy). Funny how hundreds of billions of dollars seem so small a decade later. I’ll bet you are now talking about hundreds of trillions in 2030. I remember vaguely the overall mindset back then, but I’m pretty sure most people were talking about hyperinflation since the FED printed money like there was no tomorrow and how oil was never going to get over $35/barrel. They were right on this one even if we had a nice rebound in the meantime!
Funny enough, from what I remember, the feeling about the stock market in April 2020 is pretty much in line with what I heard back in October 2008. Bad news, the stock market kept doing down until November 2008 and went nowhere until March 2009 when we hit the ultimate bottom. Good news, anybody who stayed invested got their money back by 2012 (if they were well diversified). Most people who invested between November 2008 and March 2009 made a killing over the next 10 years.
What’s truly incredible about 2020 is the enemy isn’t a regular bubble. Prices were not inflated by shady mortgage backed securities like during the financial crisis of 2008 or by clicks and page views from the tech bubble in 1999. This time, the enemy is an economic lockdown stopping great businesses from doing what they do best: make money. Who would have thought that tech stocks would be considered as defensive plays one day? That’s another first!
While you are reading this note, you know exactly what happened. Your brain may even tell you how obvious the end of that story was. Signs were everywhere, right? I’m here to remind you that when you are in the middle of an event, nothing is obvious. Between mid-February and March 23rd, we suffered the fastest market drop in more than 50 years. Then, the market bounced back almost as violently. You went from -33% to -10% within three weeks. The end of this bear market hasn’t likely happened yet. At this point, I think we are good for several months of volatility. The duration of that volatility depends on how fast North America’s economy can reopen and resume some semblance of normalcy.
If this happens sometime in May-June, the market will quickly recover as the damage to the economy will be controlled. It will remain a tragedy for many small business owners, but it should not hurt more than the 2008 recession where banks were not capitalized properly. I think this is what is going to happen, and I think the market is pricing stocks accordingly. The almost unlimited help committed by governments and central banks has helped in the easing of concerns.
Unfortunately, another scenario is possible; the one where the virus is not controlled and where the economy must remain in lockdown for several additional months. This would require additional help from governments and central banks and that would end-up in a huge pile of debt for everybody. Still, I’m not worried about hyperinflation or stagflation. The point being is quite simple: once the virus is over (it’s only a matter of time), great businesses will likely come back and thrive. They will capture the opportunity lying ahead and will capitalize on their strong business model and vision.
Now that you have read this note ten years later and you know that regardless of the scenarios I anticipated, the market did eventually recover. You know that strong dividend growers still exist and that your portfolio was well-diversified to go through this storm. Remember this: one will once again feel desperate and lost in all the confusion the next bear market brings. Each market crash is different and the same. The cause is different, it evolves differently, but in the end, it is inevitably followed by a strong recovery.
If ever I’m wrong about it, you can burn the letter and get back to hunting with your bow near your cabin in the Yukon as it is no doubt the only place human beings can live now.
Cheers,
Mike
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