by Jason Bodner
March 3, 2020
WHAT. WAS. THAT?
The market fell more than 15% in less than seven trading days. It feels scary, catching investors like a deer in the headlights. Selling came from nowhere. Yes, I did warn you that a pullback was coming; but of course, no one could have predicted a global coronavirus pandemic trashing the markets.
All stocks and sectors were slammed. The market’s fear is that the virus will affect businesses. If entire towns and companies stop doing business, people will stay home, fearing infection. They will stop spending money. With Japan and Germany, amongst other countries, nearing recession territory, the fear is that a global slowdown will push the U.S. into a recession too. Panic selling is rocking world markets.
According to the latest data, there are 87,701 confirmed cases of coronavirus as of last weekend, with 2,995 confirmed deaths (a 3.4% death rate). Nearly half (42,687) have recovered and 42,019 cases are still active. Some 96% of the deaths and 91% of the cases are in China, with 4% of the cases in South Korea.
Sickness and death are very serious subjects. I don’t make light of any of this. It’s terrible and tragic. But I’m a numbers guy. Current reports translate into only 0.001% of the world’s population having contracted coronavirus. That means logically that 99.999% of the world does not have it (yet). And 0.00004% of the world has died from coronavirus, many of them elderly with a preexisting condition.
As of February 22, the current flu season has seen at least 32 million cases of flu in the United States alone, with 310,000 hospitalizations and 18,000 flu deaths, according to the CDC (and that’s slightly below par). Over 100 Americans die on average each day from car wrecks. That’s 36,500 people a year in the U.S. dying a violent death on the roads in a country with less than 5% of the global population.
Look, I don’t want to see this coronavirus spread. I don’t want my wife, kids, family, friends, or even my enemies to get it. So, I wash my hands often and cover my mouth when I sneeze or cough – things my mom taught me to do as early as I can remember. Buying surgical masks doesn’t do much good. It does more to protect corona from getting out of the wearer rather than preventing corona getting into the wearer. And paying panic prices for a mask to poorly protect you against a virus statistically far less likely to kill me than a car-crash seems like an overreaction. And so does selling a lot of good stocks.
Don’t forget, stocks aren’t just numbers on screens. They are shares of businesses providing services and products to individuals like us. We still need to feed and clothe ourselves. That’ll never stop. Neither will business. So, what makes a global stock (business) worth 20% less than last week? The answer is fear.
How Sell-offs Happen These Days
Stocks are getting punished for a few reasons, some of them reasonable, but then panic takes over.
- Algorithmic traders (algos) and computers run the market these days. To simplify, computers seek bad news, then they sell stocks. If sells get gobbled up, machines know not to short, so they cover, reverse, and buy. If stocks go lower when they sell, they sell more. This happens many times each second, and with everyone too scared to buy, markets plummet. Humans pause when afraid. We stop buying stocks. We wait and get paralyzed. When markets stand at all-time highs (as on February 19), news of a new and terrifying virus from China threatened global health and economies. The media overdramatize and scare people into watching. Don’t forget: News makes money off advertising. If people don’t watch, ads don’t get seen, and products don’t sell. Sadly, fear is the biggest seller of all, so the media loves a good panic. They fan flames and whip viewers into a frenzy. It’s good business.
- Stops get triggered: As stocks rise, investors put in protective trailing stops. I don’t like those. I’ve been stopped out, only to watch stocks race higher. But investors don’t want to lose money. When markets go down sharply, those stop orders get triggered, which causes even more selling.
- Mob rule takes over. Hedge funds have risk managers, who tell traders to lighten up on their long exposure. Hedge funds often crowd into the same trades. When everyone rushes to exit simultaneously, things get ugly fast. More selling happens…
- Main Street gets nervous. After a few days and a few thousand Dow points, people like you and me call our broker and say, “I can’t lose another 10%. Sell and I’ll revisit when this craziness calms down.” Mom and pop are usually ETF investors. Brokers then sell their ETFs, which are mostly baskets of stocks. When big banks like JP Morgan make markets for your brokers, they bid on the ETF. The broker sells it to the bank, which has to hedge by selling stocks. They don’t want long-risk in a diving market. Their job is to profit daily, not to take a long view. That causes even more
All of this cascades down until the eventual washout happens, when there is no one left to sell to. That’s usually when the V-shaped recovery begins. You can see examples of epic V-shaped ETF selling here:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is how stock sell-offs have happened several times during the last 11 years of this bull market.
What Am I Doing Now?
I am not selling. I have a long-term view. I don’t believe that a restaurant selling burritos is worth 20% less than last week. So, I buy a little. And when it goes lower, I buy a little more, if I believe in their business. If I see the lines out the door, I know they have a hit on their hands, and if there’s a temporary interruption because of irrational fear, it won’t last forever. They won’t go bust, so I buy it “on sale.”
I’ve been buying stocks slowly on the way down, picking my spots and putting long-term money to work. (That’s money for my retirement, for my kids, and for my family.)
Here’s the good news. When fear peaks, people from years ago contact me. Old friends I haven’t heard from in ages text me. They send short notes like these:
- “still bullish?”
- “are you buying here?”
- “How low can we go?”
That’s a signal to me that we could be close to the bottom, because that’s when people are reaching their breaking points. They see their 401k’s dropping and can’t stand the pain. It means we are close.
Besides, what other options do investors have with their money? Stocks are still the best place to be.
The 10-year Treasury note yield is now a miniscule 1.127%, the lowest on record, at least since 1962. Panicked investors buy bonds, pushing down yields. They’d rather earn barely 1%, just for the safety of knowing that the U.S. government is holding their money.
The S&P 500 dividend yield is 1.97%, nearly twice the 10-year yield. Dividends are taxed at a maximum 23.8% vs. bonds at 40.8%. That means stocks give you 125% more than bonds. That’s incredibly bullish. And when the 30-year yield is less than stocks yield, that’s crazy bullish. Today the 30-year yields 1.67%.
When Should I Get Involved?
“So, when do I buy?”
Great question. Going back to 1990, Mapsignals data showed 27 times that selling on a particular day was more than eight times the 50-day average. Three of those days happened last week! After that, the average 1, 3, 6, 9, and 12-month returns were significantly higher for stocks. Three months later, the S&P 500 was higher 20 of 24 times, and nine months later (Thanksgiving 2020 in this case), stocks were an average 20.3% higher, and stocks rose in all 24 of 24 cases. Here are the results:
As for when to buy, the average trough in the market occurred 21 calendar days later, or three weeks. So, according to this data, three weeks from Friday, about March 20, we can expect the market to trough-out.
Great companies will continue in their greatness. Even after the 1929 crash, the 2000 tech bubble, 9/11, and the 2008 financial crisis, great companies emerged and made some smart people wealthy.
These are the types of companies I am buying – great businesses with wide moats, strong sales and earnings growth (even if temporarily disrupted by pandemic fear), profitability, and big-money ownership.
Long-term investors should pounce when great companies go on sale. The problem is that fear paralyzes people and they fail to act. Fear may propel markets lower near-term, but buying great companies on sale is a gift, so here’s my closing quote, song lyrics by Haven Gillespie, written for a 1934 Macy’s broadcast.
“You better watch out
You better not cry
You better not pout
I’m telling you why
Santa Claus is coming to town!”