Baggot Markets Perspective – 27th March 2020

We’ve seen an unprecedented panic in global equities in a short space of time. This crisis has been very different from other crises in that it is a health crisis and not a financially driven one as we saw in 2008. The big difference between this one and 2008 is that the banking system is more stable now. The other difference is that the selloff was much quicker.

Although these indices are now well off their recent lows, let’s put it in perspective….The main Equity Index in Italy (The FTSE MIB) lost 43% from the peak on Feb 19 to the bottom on March 16. The Dow Jones Euro Stoxx Index got hit almost as badly. Austria had the largest losses, during the same period, the ATX lost 50% from peak to trough! In the US we saw the S&P 500 decline by 36% from the Feb 20 high to the March 23 low. I think the main reason Europe has been hit harder is because its economy has been largely shut down for a longer period of time than the US. We think that’s good for European Equities and relatively bad for US equities but that is really beside the point.

In the March 22 edition of the Sunday Times Money section, Gary Connolly had a few interesting points;

“Bear markets that are associated with recessions, of which most are, have lasted on average eighteen months with a peak to trough loss of 40% (according to JP Morgan Guide to the Markets, 2Q 2019, data refers to US equities). 

“According to JP Morgan there have only been 10 bear markets, not including this one, since 1929.”

“The stock market declines every year, in fact on average just over 15% every year. Every seven or eight years the market declines by twice that. If measuring calendar year returns since 1929, rather than just bear market periods, the market declined by c.30% in 13 of the last 90 years. All of these declines were unique in terms of the circumstances. But one thing that binds all of them; they were temporary. Yes, we can go through very fallow periods of returns (like 10 years ending 2009). But these are exceptionally rare.”

“The greatest risk to anyone investing in the last century was not whether they were in the market during these tough declines. Their greatest risk in my opinion was whether they were out of the market for the much more frequent advances.”

“For long-term investors, bear markets have always presented a buying opportunity.”

The average bear market has experienced a peak-to-trough loss of 40%, so we’ve pretty much discounted a full bear market in a little over a month!

In the Dec 31, 2009 edition of the Wall Street Journal, there was an article entitled “Best Stock Fund of the Decade: CGM Focus”, by Eleanor Laise.

The article profiled fund manager Ken Heebner’s (legendary Value Investor) $3.7 Billion CGM Focus Fund. The fund had risen 18% annually for the decade ending 2009. You’d have to agree that those were nice returns considering that the period included the Tech Wreck period of 2000 – 2002 and the Global Financial Crisis in 2008.

What I found shocking was that (according to Morningstar Inc.) the average shareholder in the fund lost 11% annually during the same period!

From the article;

“These investor returns, also known as dollar-weighted returns, incorporate the effect of cash flowing in and out of the fund as shareholders buy and sell. Investor returns can be lower than mutual-fund total returns because shareholders often buy a fund after it has had a strong run and sell as it hits bottom.”

“The fund surged 80% in 2007. Investors poured $2.6 billion into CGM Focus the following year, only to see the fund sink 48%. Investors then yanked more than $750 million from the fund in the first eleven months of 2009.”

“A huge amount of money came in right when the performance of the fund was at a peak,” says Mr. Heebner, the fund’s manager since its 1997 launch.”

Investing is a funny business, from a longer term perspective, risk is always greatest when risk perception is lowest and risk is always lowest when risk perception is highest.

Remember that markets are discounting mechanisms, they discount what they know, price-in those things and look forward, not backward. In one month markets have had to discount a lot of very extreme bad news. Let’s face it, here in Ireland and in much of Europe, much of the economy has come to a screeching halt in the interest of public safety. It’s bad but it’s in the price now.

Markets won’t wait until life gets back to normal to price-in better realities either. As soon as we see signs that the coronavirus curve is beginning to flatten in some of the harder hit countries in Europe, markets will begin pricing-in life getting back to normal and that means people getting back to work, sporting events happening again, restaurants and pubs opening up again, travel picking up, etc, etc. The market hasn’t even started to discount that reality.

On top of that in the last 2 weeks we have seen unprecedented Fiscal and Central Bank Stimulus. Central Banks and Governments have responded much more quickly than they did in 2008. In 2008 we got an estimated $2 Trillion in global stimulus. In the last 2 weeks alone we’ve gotten more than

$10 Trillion in total stimulus and there’s still more to come. 5X the size of the stimulus in 2008 already. It is truly unprecedented!

The point I am trying to make here is that this is an excellent time to put new money to work if you are a long term investor and if you invested in the last couple years before the selloff with a long term view in mind, this is not the time to get

spooked and panic sell. The big risk now is being in cash when the rebound comes.

The world will be different in the future. The investing template looks different as a result of this crisis.

The opportunity sets are different. Companies that have a lot of debt and little cash are likely to really struggle going forward. Those that have a lot of cash and little debt should come out of this sell off stronger.

In my next piece entitled “The Investing Template for the Future” will touch more specifically on where we see opportunity now and where we see big risk, which should be a little surprising to you.

To finish I wanted to leave you with some interesting thoughts that Paul Tudor Jones (PTJ) gave on CNBC. He talked about the potential for the US market to re-test recent lows before recovering this summer;

“Well, I think COVID-19 is — listen, it’s unlike anything we’ve obviously ever seen before. If we kind of think about where we are right now, we’re probably — if you look at the Hubei experience and we extrapolate from that what is getting ready to happen in the United States, to New York in particular, we’re probably — we’re probably going to hit our peak somewhere between April 4th and April 10th.”

“We’re going to see the worst of Covid-19, it’s going to throw its best punch over the course of the next few weeks and then we’re going to be on the back side of that,” Jones said.

He also tried to put the Fed’s latest actions in perspective; “At this rate, the Fed by May will have purchased as many assets as it did during the six years after the crisis. If this doesn’t give investors some peace of mind, nothing that the central bankers dream up will.”

“So, investors can take heart that we’ve counteracted this existential shock with the greatest fiscal monetary bazooka. It’s not even a bazooka. It’s more like a nuclear bomb.”

David Flynn
Chief Investment Strategist and Director