How Does Anybody Make Sense Of This Market?


Jul 10, 2020

Newsletter by Mary Buffett

We are wandering into uncharted territory, but there are some timeless guideposts that will help value investors get through this chaotic period and retain their sanity.

Normally when the economy stumbles into a recessionary period, there are many signposts that suggest a downturn is on the way. We saw the opening shots of this in the ruinous trade war with China that hit midwestern farmers hard. In 2019, investors faced an inverted yield curve, where short-term rates exceed the value of longer terms rate, a sure sign that the market is losing confidence in the economy.

When we look back at the seeds of what became The Great Recession of 2008 and 2009, there were a number of warning lights that flashed to investors, as the corrosion of mortgage backed securities led to a collapse in housing prices, skyrocketing foreclosure rates, and an economy that came within hours of a full seizure.

Unlike past economic shocks, the COVID-19 was a force of nature that hit hard. It’s surreal to comprehend, but 100 days ago, this pandemic was still a small localized problem within Wuhan, China before it quickly viraled out of control. As the impact of the virus moved into the American consciousness, the markets reacted with a vengeance in a series of swings that left investors exhausted.

Between October 1, 2019 and February 12, 2020, the Dow climbed from 26,078 to 29,511, just inches from crossing the threshold of 30,000. Then it crashed and rebounded somewhat. As the Dow tumbled out of control to a low of 18,591 on March 23, 2020, there was a sense of national panic as small investors watched in horror as their 401ks came crashing down to earth, reminiscent of what took place in 2008 and 2009. Lately, the Dow is somewhere in the 25,000 range.

The Dow has rebounded, perhaps as a response to the massive federal intervention, the Payment Protection Program (PPP) offered by the SBA (Small Business Administration), and the $600 weekly federal payout to state employment benefit payouts. While some of the PPP recipients have proved embarrassing, both programs temporarily stabilized a seriously wounded economy, if only for the short term.  However, the national supplement to state unemployment ends on July 31st and it remains to be seen if the program will be extended.  If it does, even with some minor tweaks, then we believe that it will serve as an economic lifeboat for the remainder of 2020.  If not, then we will be looking at an eviction and foreclosure crisis that might have a ripple effect through the economy and that could be disastrous.

Moreover, the political chaos created from a presidential election year will also have an impact toward a solution, if not a vaccine.  For some, the idea of wearing a protective mask has generated a political undercurrent; where wearing a mask somehow deters your liberty while others who are more extreme believe that COVID-19 is some hoax perpetrated by a wide variety of shadowy groups.  Both groups will slow any economic rebound.

Where do things go from here and what does this mean for a Value Investor?

While there have been some surprisingly good job numbers over the past two months, most of the gains represent “call-backs” for those who were temporarily unemployed.  Worse, because of the eagerness of some governors to reopen their states far too soon, we are seeing COVID-19 spikes in places like Florida, Arizona, and Texas. Los Angeles County, along with much of Southern California, is now experiencing an infection spike after earlier headlines lauded the state leadership for behaving in a way that would flatten the curve.

Unless a vaccine is developed in the next year to 18 months, it means that we will be dealing with outbreaks of COVID-19 for at least the next two years.  Now that cases in the United States have nearly reached the critical point of nearly 1% of the US population, political and health leaders now risk losing any control over the pandemic’s forward arc.

I predict that there will be a move to the “mushy middle,” where people will be wearing masks for the duration, medications will serve to mitigate COVID-19 symptoms until a vaccine is developed, and the economy will muddle through until the virus burns itself out or a vaccine emerges.  Instead of a “V recovery,” which remains wishful thinking for many, the economic scars of the pandemic may take several years to heal over.

So, what should you do with your portfolio? Don’t panic, for starters.  In each downturn of the last half century, the market has roared back to greater heights.  Value investors focus on a durable competitive advantage because they go for the “long game.”   The marketplace primacy will allow these brands to power though this financial down period, but they will roar stronger when the inevitable recovery occurs.   This is the time to hold, or if the right situation presents itself, buy.

There will be those who try to “time” the market for exit and reentry, but we all know that is more luck than skill. Companies that value investors target will focus on maintaining a durable competitive advantage not only to their customers, but to their investor base too. They will emerge leaner, meaner, and better able to leverage whatever recovery emerges. To an average investor, going through COVID-19 can be a very difficult event. However, value investors will see these economic moments as opportunities to pick up stocks that might be temporarily undervalued—which are what we are all about.

Finally, please take extra care to be safe.  Wash your hands often and wear your mask. Don’t get sucked into the political debates about the efficacy of wearing a mask; it’s all about beating the public emergency.  As this contagion shows some new life, we have already seen what happens when ICU rooms become full, when ventilators become scarce, and when fear grips a nation.

However, I can say, with great confidence that we will get through this difficult chapter. We have done it before, and we will certainly do it again.

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