Seaborn Hall, 3/28/20
How Do We Interpret This ‘Coronavirus Moment’? The Economy And The Markets
CS views this event as a ‘mid-cycle correction.’
The Real Estate cycle is a documented, 18.5 year cycle that depends on Bank lending and the global leveraging cycle. The Australian economist, Phillip J. Anderson, has shown that in developing nations the real estate cycle stays in effect at all times over the last 200 years except during major world wars.
The Stock Market lags the Real Estate Cycle slightly, so that if you refer to the chart to the right, the stock market should hit a high around 2026 and fall to its next low about 2029.
Additionally, ‘Innovation gains traction during tumultuous times’ (see the chart, below right).
We don’t see this as a ‘worst case’ moment – at least for the US – as the chart, below left, lays out. Along with continuing along the current cycle, and ‘blunting the virus curve’ through social distancing (see charts in Conclusion), we expect innovation (the chart on the right) and recovery to win over the chart to the left. The markets are oversold at present and panic and fear has induced a ‘flight to safety.’ Software trading algorithms, pensions, and insurance companies – and retail investors driven by the memory of the GFC – have all piled in. This is a true ‘blood in the streets’ moment. Warren Buffett and Berkshire Hathaway are probably buying quality.
The Real Estate clock in the chart above reflects the movements of global economies and markets through the 18.5 year Real Estate Cycle. Where is the clock at present?
We have not even clearly hit ‘rising interest rates’ and the easing of bank lending yet. This is a ‘Mid-cycle’ slowdown moment. Expect a brief pause – in 2001 to 2003 it was almost 2 years – and then resumption of the cycle back to where it was before – or higher. One caveat – the cycle never repeats exactly. As Mark Twain said, “History doesn’t repeat, but it rhymes.” In the Money section, week of March 29, we feature an article that suggests that this will be a U-shaped recession and recovery.
The Real Estate Cycle integrated with the Stock Market Cycle predicted the current downturn – and it predicts a subsequent upturn, as the chart at left, below, shows.
The one caveat to the above view is that this global pandemic is now somewhat similar to a ‘World War’ in that it is affecting almost 200 nations, shutting down economies, fundamentally changing finances, and killing thousands of people all over the world. That said, it is still not even close to the level of H1N1 in 2009-10 in terms of the number of infections or deaths. However, because of the contagious effect and the fear and panic created it is causing more severe economic impact.
At present, we need to monitor how this unfolds over the next few months to determine if this remains a ‘mid-cycle’ moment – or whether something fundamental has changed.
Interestingly, the late Christian prophet, John Paul Jackson predicted that there would be a pandemic that would sweep the globe in the future. This virus would be typified by a red rash that would break out on the skin. He predicted another virus would come on the scene before this one occurred that would create fear and panic – but, it would not be the virus he was predicting. Is the Covid-19 virus the ‘virus before?’
Coronavirus, Other Global Viruses And The Stock Markets
At any rate, we do not believe that the Coronavirus will sweep the globe and become the next 1918 Spanish influenza. We continue to predict that Covid-19 will not be as severe as the H1N1 virus of 2009 in its infection and total death impact. If true, the panic here certainly seems overblown and the markets much oversold. That said, because of panic and fear there are now real structural concerns relative to the global economy.
Though Covid-19 is a Coronavirus with more structural similarities to SARS and MERS, its spread thus far appears to have more similarities to H1N1 though the death forecast globally is not currently as high even though the current mortality rate exceeds that of H1N1. The repressed spread and infections in the US thus far may be due to President Trump’s early travel ban on China.
During the Spanish Flu in 1918, infected rates in Philadelphia vs St Louis (chart right) were different because Philadelphia authorities allowed a city wide parade for returning WWI soldiers. The goal of social distancing is to ‘blunt the curve.’
The extent to which the investor is comfortable investing – buying into this still falling market – will be a function of their risk profile, age, financial goals, and total net worth.
We have been buying all the way down, but our investment horizon is three to five years. It is difficult, if not impossible to call a market bottom. In addition, in markets of this type there is likely to be a V-shaped or U-shaped recovery, as predicted by Cathie Woods, ARK Invest, in the panel above. It is scary to buy a ‘falling knife.’ But it is equally impossible to grab on to a ‘launching rocket.’
Buying risk further downside and losses, or a sustained flat market with little recovery. But, not buying risks losing on a tremendous upside.
We have underestimated the panic and fear the Coronavirus would cause and the resulting effect on the markets. Regardless, the fear is greater than the reality at this point in time. Until this passes H1N1 levels, that fact remains.
Since social distancing is the primary defense we have against the virus at present, with the President’s travel ban from Europe instituted Friday night March 13th, we feel that the US still has a very good chance to keep total infected and death numbers below those of H1N1 in 2009-2010. The stock market was up overall in 2009 – 23% on average. We currently expect the climax of panic and fear in the US to subside within about 2-3 months, by mid to late May, though some effects of the virus will linger throughout the economy through the Fall election.
At that point, the big question will be, “What type of recovery might the US expect? V-shaped, U-shaped, or L-shaped? Without a doubt there will be at least a short, mild recession. Further results depend on the resolution of the spread of the virus – be it through social distancing, medicine, or vaccines.
According to Chief Global Strategist David Kelly of JP Morgan on the morning of March 12, 2020, this is no time to get out of the markets. We will probably see some brief period of recession, but be a long term investor.
As for CS, we would rather be a buyer than a seller at this point in time. However, volatility will remain for at least the next month and perhaps longer. Caveat Emptor. Best to cost-average into quality names, as we have previously advised.
For More On John Paul Jackson See This Link, Also, See The Spiritual Life Page