Things are never as good or as bad as they seem. My brother-in-law, Steve Scruggs, reminded me of that last Sunday afternoon during a conversation we were having about the coronavirus crisis and its impact on the global economy and the stock market. For this conversation, Steve and I were joined by my brothers, John and Phillips, and my father Frank at a called meeting in the barn on our farm. We had gathered to discuss the crisis, Bragg Financial and our clients. This was only the second “crisis meeting” we’ve had in the barn, the first occurring eleven years ago in late February of 2009 as the market neared its bottom during the financial crisis of 2008/2009.
I’ll never forget that first crisis meeting in the barn in 2009. Things were grim. Unemployment and foreclosures were soaring, corporate earnings and economic growth were falling dramatically, there was talk of the federal government nationalizing the banks, and the stock market was down more than 40% from its peak. The headlines were frightening, and we had been working overtime for the prior few months meeting with clients who were understandably worried. Making the situation especially difficult, the stock market had peaked a full sixteen months prior, in October 2007. It had been a long, difficult grind. In those days, whenever the stock market was open for trading, I recall having a perpetual knot in my stomach and a persistent muscle spasm behind my left eyebrow. Numerous people commented, “Hey, why is your eye twitching?” We were all stressed out.
Back then, the five of us gathered to ask ourselves some tough questions. How much worse will this get? Should we be taking a different approach with client portfolios in the midst of the crisis? Longer term, should we plan to change the way we manage money? Is there a better way? Surely there is a better way … this is too painful. We knew we needed to send out another letter to clients in short order. The letter needed to make clear our thoughts and it needed to tell our clients exactly what we were doing with portfolios and why we were doing it.
Well, we went around and around in the barn that day back in 2009. The more we talked, the more my eyebrow twitched. Steve couldn’t sit down; he kept walking circles around the barn. As always, my younger, smarter, brother Phillips had one idea after another. Older brother John brought calm. Dad offered his long-term perspective, but I could tell that even he was rattled, and nothing worries a son like seeing his father, the eternal optimist, worried.
When we finally left the barn that day, we were in agreement. We agreed that we didn’t know how much worse things would get or when the crisis would end. But we agreed that it would end. We agreed that when it ended, the economy would begin to expand and the stock market would go up. We agreed that we would tell our clients about the small changes we were making in managing portfolios to preserve liquidity and be slightly more defensive in the midst of the crisis. We also agreed that the changes to the portfolio process we were making would be minimal and temporary. Finally, we agreed that in the long term, we would not change the way we manage money. We acknowledged that while there are different ways to manage money, we firmly believed the approach we used had the highest probability of success in helping clients achieve their financial goals. You can read here the letter we sent to clients the next week on February 20, 2009.
At the time of our February 2009 meeting, we didn’t know that the market would fall another 18% before hitting bottom. Nor did we know that it would reach that bottom just three weeks later on March 9th. And finally, we had no way of knowing that from the bottom on March 9th, the market would gain 66% by the end of the year.
Last Sunday, at our 2020 version of the “crisis meeting” in the barn, the cast was the same, just older, grayer and hopefully a little wiser. The five of us spread out around the barn, maintaining our social distance, especially from the old guy. My eye twitched, Phillips generously shared his many thoughts, John was calm, Steve walked in circles and Dad was visibly rattled. The questions were similar and as you might imagine, our conclusions were the same. Specifically, we agreed that we don’t know how long this downturn will last but that it will end at some point and the economy and market will improve. We agreed that we will focus on maintaining adequate liquidity in client portfolios as we re-balance. And finally, we agreed that we will not change our long-term approach to managing money. I’ll share a few other things we discussed:
This crisis is different. Each crisis is different. Each brings uncharted waters, losses, human suffering and many questions about the future. In this case we have the virus pandemic, which we will get through. More significantly, we have the actions we are taking to control the spread of the virus. These actions are what make this crisis different. Never have we shut down major portions of the global economy, guaranteeing soaring job losses and enormous economic contraction in such an abrupt manner. There is much that is unknown about the long-term implications of these actions. While the massive and immediate contraction in economic output is obvious, our inability to estimate the duration of the shut-down leaves great uncertainty about the economy’s ability to bounce back.
The hope is that the $2 trillion of Federal economic stimulus can quickly make its way into the hands of companies and workers to float the economy for the next two months. How bad will the bottlenecks be in getting this money distributed? Execution is critical. Time is critical. What happens in the next three to four weeks will determine the severity of this crisis in terms of the financial and societal fallout. The global economy is like the heavyweight champion of the world, flattened on the mat by a sucker punch from a rookie, upstart boxer. The referee is on his knees beside our champ, slapping the mat with the count, “One … two … three …!” If the ref gets to the count of ten, our champ, the global economy, will suffer a mighty loss. But if, as is our hope and expectation, the champ stirs, rises to a knee, shakes his head and leaps powerfully to his feet, we can avoid a severe recession or worse.
The economic news in the weeks and months ahead will look horrible. The economy is in recession. As Matt DeVries describes in his Market & Economy article, in the weeks and months ahead, the reported declines in employment, economic output and corporate earnings will be some of the worst we have ever seen. The headlines will be filled with these reports as well as disturbing reports of the spread of the virus and the associated human suffering and death. Many of us have thus far learned of infections and deaths from afar. If, as projected, the virus continues to spread, many of us will be affected personally. We will know people who are infected, and we may know people who don’t survive. This will be difficult and will add to the emotional toll of this period of our lives. We know this is coming.
We’ll learn how resilient the US economy truly is. The Great Recession, which began in December 2007 and ended in June 2009, was the longest and most severe in terms of US GDP contraction since World War II. Unemployment doubled from 5% to 10%, home prices fell 30%, the stock market declined 57% and household net worth fell 20%. And yet, cumulative real GDP only declined 5.1% during this period. Once the economy began expanding again in June 2009, each of these negative trends reversed. Over the next decade, unemployment fell to a fifty-year low while household net worth, home prices and the stock market reached new highs. Our economy is amazingly resilient; today it faces a test that is seemingly unlike those of the past. How will it respond to this scenario where we have intentionally sidelined its dynamic energy? Time will tell. The pessimistic view is that the losses will be too severe and that the economy can’t bounce back in time to avoid a years-long slump. Optimists call for a better scenario. Based on the past resilience of our economy we remain optimistic that we will avoid a deep and lengthy recession.
Humans will do a better job with the next pandemic. Airline hijackings became rare after 9/11. But it required a tragedy for that to be the case. Experts have warned for years that humans were unprepared for a pandemic. The world now believes. As we did on 9/11, today we are paying a steep price for our unpreparedness. This won’t happen next time. Next time we’ll have stockpiles of supplies and equipment, we’ll likely each have a box of masks at home, we’ll understand social distancing, we’ll have rapid testing capabilities, we’ll understand how to isolate and protect the vulnerable and we’ll make use of the amazing technologies now being created at a feverish pace. Most important, we’ll know how to deal with a virus while not shutting down the economy.
Will the world be different after the virus? Many are predicting that the world will be completely changed by this crisis. You’ve heard the questions: “Who will fly on a plane, go on a cruise, go to a restaurant or bar or attend a basketball game?” My answer is that I will. And you probably will too. Actually, a cruise has never been on my bucket list but maybe that will change as I “mature.” We humans tend to be a risk-taking lot and the passage of time tends to heal the wounds of the past. The further we get from a period of great pain, fear and uncertainty, the more we discount its significance. We explain away what happened with the benefit of hindsight. We readily accept higher levels of risk and we project the more recent past far into the future. In some ways we should be thankful for this human characteristic; as we’ve written before, without our risk-taking tendencies, early man likely wouldn’t have emerged from the cave after his first brutal fight with the mighty mastodon. Needing to eat, he embraced risk and he emerged. And just look at the remarkable progress he has made since.
In some ways we will see a different world. Activities like remote working, online shopping, distance learning, video/telemedicine, the pace of our embracing new technologies, and many more trends will greatly accelerate. This will create new opportunities and will also be destructive. Capitalism is often referred to as creative destruction and COVID-19 is accelerating this phenomenon. Some have written that the virus crisis will harden borders, reduce world trade (globalism) and accelerate the nationalism trend that has emerged in the last decade. Others have pointed out that like never before, the countries of the world will be required to come together in cooperation to defeat a menace like this pandemic. It will be interesting. Life always is, isn’t it?
In closing, I’ll return to the words of Steve Scruggs with which I opened. Things are never as good or as bad as they seem. In mid-February, it appeared that the US economy was firing on all cylinders. Economists were expecting 275,000 new jobs for the month as China trade tensions eased, unemployment was at a record low and the stock market was at a record high. The virus has revealed our fragility. In just six weeks our reality has changed; things weren’t as good as they seemed. We face a time of great challenge in the months ahead. It will be sad and it will be scary. But we’ll get through it. At some point in the future we’ll be in a much better place. We’ll look back and marvel at this strange time. We’ll agree then that it wasn’t as bad as our worst fears today. For now, we’ll buckle in and grind it out, knowing that a brighter future awaits.
We join you in thinking about and praying for those who have been affected by the coronavirus including those who are ill, the families and friends of those who have died, the thousands of individuals around the world who are showing leadership during this time, and especially those on the front lines—doctors, nurses, other healthcare workers, first responders and anyone else putting their health at risk in order to help others.
We hope this has been helpful to you. Thank you for trusting Bragg Financial.
Related Special Market Commentary
Here are links to resources we have found especially useful during this time: