THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks.
That is how Warren Buffett—perhaps the greatest living investor—began his October 2008 New York Times op-ed. World stock markets were selling off violently, similar to what we have all experienced lately. The specifics, of course, differ from today. But his basic wisdom holds: In a panic, those who can keep their heads generally prevail. Investing is a statement of hope and optimism in the power of human creativity to bring a brighter longer-term future. Twelve years ago, his words resonated with me. Many lambasted him as out of touch at the time. The succeeding decade proved otherwise. This is, no doubt, a fearful time. However, it will pass. Once it does, history argues the American and world markets will flourish—echoing their rebound then.
Now, October 2008’s crash came nearly a year into a broader downturn. It was also a classic, 19th century-style bank panic. When credit markets froze, it became blatantly clear the economy was in recession and would suffer for a considerable time.
By contrast, today’s move is only weeks old. We have no clarity on the scope of the economic impact, and there is little historical precedent of even huge pandemics themselves causing lasting economic or market damage. However, it seems crystal clear that the longer interruptions to economic activity persist, the worse their impact will be. Perhaps it won’t be clear right away, as forecasts of trouble may have caused some to pull forward April or May consumption into March. But you should expect negative fallout to some uncertain extent.
How long this interruption lasts is key. Some latched onto President Trump’s words on March 16 to figure July or August was reasonable, a statement refuted by Trump and medical professionals later in the same conference. (They said that was an estimate of when the disease may peter out, not how long disruptions to business may last.)
Suffice it to say, that uncertainty highlighted a simple fact: No one knows when this downturn will end. Similarly, in 2008, Buffett said he had no idea when the downturn would end. But then as now, investors face the same question: With all this uncertainty, what should you do from here?
To my mind, the answer is clear. While the near-term future is hazy, bull markets have always followed bears historically. That suggests markets will eventually deal with this panic as they have panics in the past. They factor the crowd’s emotions into prices—eventually overreacting and depressing prices far beyond what economic reality merits. That sets up a snapback when reality isn’t as bad as feared—kicking off a new rally long before economic data and reality suggest it is justified. Look no further than Black Monday in 1987, the dot-com bear’s 2002 – 2003 bottom or the Global Financial Crisis’s end in March 2009 for examples.
A classic mistake investors make, cycle in and cycle out, is trying to dodge all downside and waiting to see “good news” to justify taking an optimistic stand and owning stocks. Maybe, today, that means looking for the virus to ebb—as it already is in China. Maybe it means looking for sports events and festivals to restart or unfettered travel to return. Maybe it will be data showing the economy has moved beyond the coronavirus. To me, that would be erroneous. Believe the old adage that it is always darkest before dawn.[i] Own stocks based on faith—faith in capitalism and adaptable, free markets. Faith in the creativity of problem-solving business people and more. These forces have overcome countless challenges in history—wars, recessions and more. Today is unique in some ways, but it doesn’t seem uniquely more threatening.
In the short run, that view may not look pretty. Pessimism will likely surge in the short run—I already see articles dripping with it now. Based on the S&P 500, Buffett’s decision to “Buy American” didn’t look great for five months after his column ran, either. But a year out, US stocks were up 14.9%.[ii] Five years later? 103.3%.[iii] The precise timing may have been imperfect, but the wisdom of dogged optimism proved timeless. This time doesn’t seem any different.
[i] Yes, I know this is factually wrong, but that’s not important to understanding the gist of the message.
[ii] Source: FactSet, as of 3/17/2020. S&P 500 total return, 10/16/2008 – 10/16/2009.
[iii] Ibid. S&P 500 total return, 10/16/2008 – 10/16/2013.
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