Same Yet Different
Tolstoy’s Anna Karenina begins: “All happy families are alike; each unhappy family is unhappy in its own way.” An astute observer
recently extended Tolstoy’s quip to markets, asserting all quiet markets are alike, while each crisis impacts markets in its own way. (1)
Some compare this crisis to the financial crisis of 2008-9, to 9/11 terror attacks, or to the 1987 crash. We experienced each of those crises plus other bear markets along the way, and while certain aspects rhyme, each crisis has been different in cause, in effect, and in what in hindsight proved to have been the turning point to recovery. This one, a health crisis, is also unique. Yet historically, all shared the most important characteristic: In each one, after the bleakly negative case was fully known and widely recognized, economic repair and recovery followed crisis. Every time.
Most unique to this crisis, as we have noted, is that we already know what will precipitate the beginning of the coming economic recovery – that moment when the pandemic has burned itself out enough, as pandemics always do, that we may start to unwind shelter in place and begin the return to normal life. And sometime before that moment, forward looking markets will anticipate that and begin themselves to recover.
Last week, we addressed investors’ pressing question: Have we seen the bottom yet? Our answer was and remains: We don’t know. We pointed out this crisis has three dimensions: health, economic, and financial, and that while two of those had been mightily addressed by fiscal policy and Federal Reserve actions, the most likely remedy for the health crisis is simply time. As of this writing, the “curve” of new case data has yet to clearly bend.
But in fairness, while that is a non-answer, it is essentially an un-answerable question. This week, we’ll pose instead a much more useful question: Are financial assets cheap yet?
Our natural inclination is to answer with a few pages of analysis. We’ll spare you that and jump to the answer: It varies by asset class. Treasury bonds were expensive before the crisis and have only gotten much more so today. US stocks as a group were quite expensive before and have now become neither cheap nor expensive, and while that may sound lukewarm, it’s not: US stocks are much more compelling now than they were just six weeks ago. International stocks were fairly valued to moderately expensive before but have generally become cheap now. And, importantly, there are lots of individual stocks that we believe are in fact cheap.
As this weekly market update also serves as our traditional quarterly market commentary, we wish to also share a word directed specifically to investors who are relatively newer to all this and who did not experience the last crisis with anything like the current level of interest. Perhaps you retired or sold your business or received an inheritance or simply saved your way into a position in which you are today much more interested in market movements than you were 11 years ago in the Financial Crisis. In other words, you are now experiencing a full-blown bear market for the first time with significant investments and this is different from the market corrections or the near or slight bear markets that have occurred in recent years. There are five things we wish to share with you:
- We understand this feels very different from every other market decline you have really experienced and that tempts you to believe that things you thought you knew about markets may not be true after all and that perhaps the best course is to take drastic “risk control” measures now with the thought of “getting back in” later, after this passes. Quite simply, common as they may be, such thoughts are dangerous to your financial well-being as those are the only notions that can lead to behaviors which can turn temporary declines in portfolio values into permanent losses.
- Prices of financial assets fluctuate much more than their intrinsic values and the value of your securities is ultimately a function of the income they each will produce over time. Importantly, in this bear market, your portfolio income has held remarkably constant. All investors would benefit by paying much more attention to the income their portfolios produce and much less to the values the fickle market assigns from day to day.
- Sometimes a serious bear market causes us to realize that our tolerance for market risk is not as high as we may have originally thought. That’s OK. Now is the time to note that but not the time to make associated adjustments. The time for adjustments is after markets have substantially recovered (as they have always done following every bear market in history). It will be hard then to remember how you feel now about your tolerance for risk, but it will be important for you to do so.
- Activity in your managed portfolios (buying and selling) has likely been higher lately because market volatility has been higher. Note that besides rebalancing, this activity is also to take advantage of opportunities to upgrade the quality of holdings and to realize tax benefits. Note also that your custodian, Schwab, does not charge now for stock or ETF trades, so this activity is not costly.
- Most importantly, in such an environment as this, it’s important to set aside emotion and stick to discipline. That is perhaps the most important thing we bring to our relationship. Please know this too shall pass. Yes, this crisis is different. They all are. Yet they are all the same in their most important feature, which is, they are all temporary. Thank you for the opportunity to serve you during this challenging time. Please don’t hesitate to contact us if you have any questions.
(1) AQR Insights, “Once Again, A Crisis Like No Other”