Dawn on the Horizon: What We Learned From 08-09's Bear Market and What We Expect From Here
4 weeks ago on March 9, 2020 the Dow Jones plunged nearly 8% as it barreled towards an official bear market. We know the headlines, the infection rates, and that, as of today, there is no treatment or vaccine. What did we learn during the financial crisis that might apply to this bear market?
Those investors who are keeping score at home will note that ironically, March 9, 2009 marks the bottom (lowest point) during the last bear market. Why March 9th? Nobody knows. The economy was still crashing, the housing market was still falling out, and the dust was nowhere near settled.
The Wall Street Journal at that time proposed that the Dow Jones, having recently dropped below 7000, had another 30% slide in front of it: “Dow 5000? There's a Case for It” read the front-page headline on 3/9/2009. Bond managers were calling for a “new normal” where stocks wouldn’t ever recover. Banks kept going out of business or being acquired by cash rich competitors. Indeed, for years after 2009 we saw some of the smartest economic minds calling for a second wave of recession. Despite this, for 11 years after that curious day, we have seen an incredible bull market defy the pundits and show returns exceeding hundreds of percent.
We believe this Virus sets a very different bear market stage than the 2008-2009 financial crisis; this is looking more like a natural disaster than a financial collapse. Indeed, although bear markets always take different shapes, the human reaction to it has been eerily similar. Here’s what we’ve seen and what we expect:
Stock prices move before the damage
Stocks are famously said to have predicted 9 out of the last 5 recessions. The reason? Stock prices are always forward looking in nature. The stock market had dropped over 30% by March 19th, at which time there were only 15,000 COVID-19 cases nationwide and California decided to issue the “Shelter in Place” order. Today, there are over 10,000 deaths worldwide and the market is actually higher today. What makes timing stock prices so difficult is that so much future information gets priced in before the headlines can confirm it.
The Charlatans come out from under their rocks to claim victory
When stock prices drop, CNBC scrambles to call every permabear in the rolodex to get a sound bite. These people have been wrong for years predicting doom and gloom, clearly costing their followers irreparable amounts of money as the stock indices pressed further upwards. However, when the broken clock happens to read the right time, they’ll shave for the first time in years, change into a suit and throw a grand party. After all- the Chicago Cubs parade in 2016 had over 5 million in attendance after going 100 years without winning a World Series.
You know their names- Dr Doom, Harry Dent, Negative Newsletter guy, obscure hedge fund manager, etc. While the iron is hot and the negative predictions are working, they know they must strike to get more subscribers.
Solicitations for “safe” investments abound
Annuities, CD’s, Precious Metals come out of left field. Celebrities take big dollars to promote firms who offer small “safe” returns by preying on investor fear. Their time to convert investors is now, when portfolios are down and people are searching for answers. For investors, moving to conservative investments at market bottoms can be a fatal error.
Ponzi Schemes come crashing down
As Warren Buffet quipped in 2009- “You only find out who is swimming naked when the tide goes out.” When asset prices drop quickly, it can shake out the schemers. With this new bear market, the internet and radio darling “The Income Store” looks to be well on its way to Ponzi scheme record books with a record $100 Million investigation underway. Anything that promises safe, high returns, will undoubtably be scrutinized. This is maybe not quite 2008 again, (which famously saw Bernie Madoff lose $65 Billion) but the seeds are being planted for the next investor massacre,” said Andrew Stoltmann, an investment fraud attorney based in Chicago.
Buyers & Sellers will emerge
Bear markets have an uncanny way of discovering who has a good rainy day fund. The Oil industry is certainly seeing some bankruptcies, but restaurant, airline and entertainment industries without strong cash reserves aren’t far behind. Don’t be surprised when the mega mergers come; companies will end up with less competitors, and consumers will ultimately end up with less options. However, this is the kill or be killed nature of capitalism.
Stocks will begin to rally before the headlines do
The same market forces that contributed to the huge market drop can work equally for a rebound. We saw the rally in 2009 start before anything got better. Remember, stocks move well in advance of the news. We don’t know how long containing this will take, what the catalyst will be, who will discover cures, or generally when social fears will subside. But I suspect any whiff of a slowing infection rate, progress on a vaccine or treatment, or a lifting of social distancing will be met with extreme celebration by stocks.
People will tell you it’s not over yet
You can expect to read headlines for years that tell you a second wave, or pandemic, is coming. These people will be bright public health, political and economic minds. They’re well-spoken and believable. They’ll make good points about influenza’s annual return in winter months, they’ll say the economy is forever impaired, and they’ll try like hell to scare you into believing the worst is yet to come.
During this time, you will likely see consumer products designed to fight the last recessionary war. I fully expect to see warehouse stores stocking “quarantine kits” with powdered rations fit for a nuclear fallout. Direct to consumer toilet paper, face masks, alcohol, disinfectant companies will join the parade.
This will only subside after many years, when every fearful investor has abandoned their plan and the stock market has more than doubled off the lows.