Monday, March 2, 2020
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Don’t underestimate the power of human resilience
The spread of COVID-19 has contributed to world markets plummeting at a historic pace. And the outlook is so murky that veteran investing pros are sounding the alarm with Allianz’s Mohamed El-Erian warning against “buying the dip” and Guggenheim’s Scott Minerd saying it’s “possibly the worst thing I’ve seen.“
While it may be weeks or months or even years before we fully understand the impact COVID-19 will have, we do know something about what happens after major global crises: the economy and financial markets come back.
“It is worth remembering that forecasters nearly always underestimate human resilience, and thus economic recovery from big shocks,” UBS’s Paul Donovan wrote on Friday. “The initial damage is correctly assessed, but the bounce back tends to come earlier and stronger than consensus expects.“
And why wouldn’t the world bounce back? People will always want their futures to be better than their present. This is why human ingenuity will perpetually advance the technology and develop the processes that make the goods and services we want and need better and more accessible. Standards of living go up for more people, and aggregate demand and profits will also rise. This is why the bias for stock prices is up.
“Look, in order to be a stock market investor you HAVE to have some level of optimism about the future,” Baird’s Michael Antonelli wrote in December. “Remember: more people wake up trying to make the World better than make it worse and that, my friends, is worth investing in.”
This secular optimism is at the core of the long-term investment strategies of history’s most successful investors.
Warren Buffett warns, “Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater.” But he also says, “We’re buying businesses to own for 20 or 30 years... and we think the 20- and 30-year outlook is not changed by the coronavirus.”
To be clear, things could get a whole lot worse in the economy and markets in the short- and intermediate- term. And so, now may be a good time for you and your financial advisor to consider tactical tweaks to your portfolio.
“Fear of the unknown is the one and only culprit in our view, which is particularly troublesome to an investment world which has been fascinated by anxiety and obsessed with negativity since the 2008-2009 financial crisis,” BMO’s Brian Belski wrote on Friday. “As such, we believe it is very premature to declare binary declarations such as buy, sell, recession or ‘green light go.’ In other words, bottoms rarely happen in a day - nor do recessions or structural dislocations.”
That said, it’s paid to be bullish long-term. Even the 2008-2009 financial crisis, which was the worst economic downturn since the Great Depression, was followed by a historic stock market rally and lengthy economic recovery. Who could’ve predicted that?
“Stick with your process and discipline,” Belski added. “If you liked a company X-days ago, chances are their product or service has not changed. As such, we are not changing our forecasts at this time.”
“Conviction takes courage during times like these,” he said.
What to watch today
9:45 a.m. ET: Markit US Manufacturing PMI, February final (50.8 expected, 50.8 prior)
10 a.m. ET: Construction Spending month-on-month, January (0.6% expected, -0.2% in December)
10 a.m. ET: ISM Manufacturing, February (50.5 expected, 50.9 in January); ISM Price Paid, February (51.2 expected, 53.3 in January)
UK manufacturing sector continues rebound but warns on coronavirus impact [Yahoo Finance UK]
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