Financial Headlines

By Ben Ferris, CFA

Financial headlines are dominated by well-known conditions and widely anticipated events such as actions by the Federal Reserve and trade disputes by world powers. Incremental developments, and market participants’ subsequent emotional responses, tend to drive markets in the short term. It’s always hard to know exactly why participants behave the way they do in the short term. I’m sure it is some cocktail of expectations, emotions, fundamentals, and pure randomness. On any given day, the sheer number of players, economic factors, and business developments defy any single person’s ability to fully comprehend what is going on and why. Yet, there is no shortage of seemingly intelligent financial strategists and market pundits claiming to know just why markets have behaved the way they have and just where they’re going. 

500 is down 29%, to about 2,240 at the time of this writing. Industrial companies tend to be one of the most cyclical industries within the S&P 500. XLI, an Industrial Sector ETF, is down roughly 13% since Lakos-Bujas made his bullish call on the “cyclical trade.” This is a short-term prediction, and short- term thinking is bound to produce critical errors. Strategists aren’t bad people for making predictions, it’s what they’re (handsomely) paid to do. They just aren’t paid to do it accurately, and it is important to remember that because no one can do it consistently. 

Interestingly, there was no mention by Lakos-Bujas about the potential for a worldwide pandemic as a risk to his short-term price target on the S&P 500. And that is the problem with making market predictions and trying to time the market; there are just too many variables that can impact the global economy. The emotions of the market can be just as unpredictable and usually are determined by fear/greed and short- term thinking. Fear has driven the price of many high quality companies down significantly. 

Emotions drive stocks in the near-term, but business fundamentals prevail in the long run. 

I’ll pick on JP Morgan US equity strategist Dubravko Lakos-Bujas, who told CNBC on December 12th of 2019 that he believes the S&P would end 2020 at 3,400. He firmly believed that the “business cycle shows more acceleration” and that “the rotation that began at the beginning of September (2019) continues to move forward towards the cyclical trade.” Just three and a half months later, the S&P.

If you owned 100% of a small business or rental property, would you rush to sell at a fire sale price if you heard coronavirus was making its way into the US? How about an interest rate change from the Fed, or a trade war with China? I’d venture to guess that you’d put some pretty good thought into how the business/property would be impacted over the next 10 to 20 years. So why do so many investors rush to the exits in the stock market when such news transpires? 

I’ve seen examples comparing coronavirus to the Spanish Flu of 1918 as both viruses are similar in contagiousness and initial fatality rates. The Spanish Flu was absolutely devastating. According the Center for Disease Control, it “was the most severe pandemic in recent history… It is estimated that 500 million people or one-third of the world’s population became infected with this virus. The number of deaths was estimated to be at least 50 million worldwide with about 675,000 occurring in the United States.” At the time, 675,000 people was about 0.65% of the US population. With a current population of 327 million, 0.65% of the United States is 2.1 million people. The loss of human life is not something to be taken lightly. However, as investors it is imperative to keep a level head, to maintain perspective, and to look at how history has unfolded following pandemics. All advances in modern medicine, global coordination and hygiene aside, let’s assume coronavirus gets as bad as the 1918 Spanish Flu. So how did the US economy and stock market perform during and following the 1918 Spanish Flu?

When taking a long-term perspective, there is no noticeable impact in either real GDP or the Dow Jones Industrial Average from 1915-1920. The American Tailwind, as Buffett calls it, has proven to be resilient for centuries. I won’t attempt to summarize his writing, but here is the link to the 2018 Berkshire Annual Report in which he talks about it. https:// www.berkshirehathaway.com/2018ar/2018ar.pdf. 

The nature of the stock market is transactional. We can buy or sell any number of securities instantaneously and at essentially zero cost. While it is incredibly easy to bounce from one stock to the next, one should not view stocks as a digital piece of paper that wriggles around in price every day, but as a very real ownership interest in a business. In times of panic, people see red on their screens and the natural emotional response is fear, worry, and anxiety. The corresponding physical response is sell, sell, sell. There is no doubt the coronavirus will have a widespread negative
economic impact on the global economy – in the short term, but we must ask ourselves whether the economic outlook for the next 10 to 20 years has dramatically changed over the last couple weeks. It is times of uncertainty when opportunity presents itself. As Warren Buffett’s adage goes, “be greedy when others are fearful.”