“Davidson” submits:
Q1 2020 hedge fund letters, conferences and more
The most underrated tool for investors is hindsight. Hindsight as far back as one can go says buy stocks during crashes. We have a actual record dating from the establishment of the 1st stock market, 1602 in Amsterdam. There have been more than 50 major crashes since and many more smaller corrections lost in history. Not one of these market crashes were anticipated. Same for recoveries.
The reason investors were caught by surprise is that each crash had a unique cause outside previous experience. Most investors panicked believing they faced unknown and uncontrollable losses. Despite widespread fear that markets had been irretrievably damaged and would not recover for many years if ever, every market recovered. Some recoveries took longer than others, but recovery occurred in every instance. Investing history is littered with speculative periods. Heraclitus observed:
“No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.”
Heraclitus (~535-475 BC)
It is hindsight which indicates the current crash, the COVID-19 Crash, is no different than every crash in history. This crash was without warning and recovery has no obvious pathway. How fast economic activity recovers has no consensus. Despite this, it is the nature of human beings to find solutions, make adjustments and move forward.
The history of past recessions is ~18mos and recessions have always been preceded by periods of speculative excess with high levels of individual debt. Not this time. The current recession was a self-imposed shutdown, not one imposed on us by rising defaults in mortgages and credit cards. This time financial conditions were not speculative with delinquencies at or near 17yr lows and trending lower. Society does not have to restructure a mountain of excess debt which requires a period of time. This time a simple “Let’s get back to work!” is likely to restart economic activity much faster than past recessions.
The speed of recovery is dependent on how quickly individuals are permitted to return to work. While the media continues to stress COVID-19 cases continue to rise, the daily pace of new illness globally is clearly in decline since early April 2020. In the US, individuals are protesting government actions as overbearing. Politicians who want to be reelected usually follow the desires of constituents. Only time will answer how quickly economic activity recovers, but hindsight of centuries guarantees COVID-19 issues will succumb to a solution and that economic activity will return.
Every week, equity markets rise a little more with reports of declining patterns of illness and a rising number of treatment options. As the information becomes clearer that COVID-19 is far less risky to the general population, people will return to work and markets will respond accordingly.
