Somewhere around mid-afternoon Sunday, the text messages started bouncing around our Investment Committee. The general consensus? Monday was going to be… “interesting”. Well…it certainly didn’t disappoint!
Just a few minutes after markets opened, the stock exchanges were shut down when they triggered the first of three “circuit breakers”. That breaker causes a 15-minute halt to trading when the market is off 7% or more. These breakers were put in place after another bad Monday – “Black Monday” in 1987. Interestingly, this is just the second time in since then that the breakers have been triggered, and the first time in more than 20 years.
As you can imagine, we spent a lot of time today on the phone with our various partners looking at the basic fundamentals of the market, why this happened, and how best to respond. Let’s first get to the “why”.
What’s Going On?
COVID-19 continues to be the main theme here – but Saudi Arabia and Russia decided to get in on the game over the weekend. Scared about the declining use of oil caused by the current outbreak, Saudi Arabia tried to get OPEC + Russia to agree to a supply cut in an effort to prop up prices. It became clear, however, that Russia wasn’t going to play ball. They saw this as an opportunity to undercut U.S. energy supplies, and it sure seems they don’t miss a chance to play the rogue.
As Saudi Arabia saw this unfolding, they made their own choice. If the rest wouldn’t play ball, they’d just flood the market with cheap oil assuming they can wait the rest of the world out with their balance sheet and abundance of product.
The last time we saw a similar disruption, we also heard a talk from a world renowned “market expert” (we’ll leave his name out of this…) who proudly declared “we’d never see $30 oil again” — meaning oil would trade below $30 for the rest of his lifetime. That hasn’t been the case and – as the old saying goes – the best cure for low oil prices is…low oil prices. Lack of demand will lead to cuts in production.
In fact, those cuts began long before this news. The amount of U.S. oil rigs in the ground right now is 19.6% less than it was one year ago. The story is even more dramatic in natural gas where there are 43.6% less rigs working today than one year ago. While COVID-19 will have a short-term impact on global oil demand, the U.S. Energy department is still expecting a 2.3% increase in demand from 2019 – 2020 and a further 2.9% increase from 2020 – 2021.
While the oil drama pushed COVID-19 drama back a bit today, that story isn’t going away for a while either. I would point you back to our previous commentary on the disease which – while serious – we don’t believe is worth the Armageddon level attention it is receiving.
We gave a presentation to investors during the 2015 – 2016 market correction during which we spent a good amount of time addressing the impact of biology in the investment decision process – specifically the impact our amygdala (our brain’s fear center) has on decision making. At the time, we suggested that the impact of fear is much larger than any other emotion on decision making and is biologically hardwired into us. But fear doesn’t discriminate. It is not a logical process, but instead one designed to make us take action immediately (i.e. run away from the bear that is chasing you!).
That lack of logic is having an impact today. We are not about to tell you COVID-19 is not something of which you shouldn’t be aware and vigilant. We can all make life choices to put ourselves in the best position to avoid the disease (i.e. we wouldn’t recommend a vacation to Milan right now!). But, at the same time, some perspective is necessary. One of our favorite follows online is gentleman named Peter Diamandis. He pointed out the following yesterday (when – interestingly – addressing the impact of our amygdala on decision making):
Every day across the world:
- 49,041 people die from heart disease
- 26,283 people die from cancer
- 4,383 people die from diabetes
- 2,191 people commit suicide
- 1,287 people are murdered
- (And this one is our favorite…) 2,740 people are killed by mosquitos (i.e. malaria)
Yesterday, worldwide, 98 people died from COVID-19. It is tragic. And important. But it’s also 2,642 people less than mosquitos. For the life of us, we don’t remember the Great Mosquito Panic in the stock market.
Where Do We Go From Here?
This is going to be a long and drawn out saga. There isn’t a cure that is going to miraculously appear in the next year. And you can be certain that politicians will be pushing this story aggressively as we head into the election.
But in the end, the economy is fundamentally sound and the stock market – both in the U.S. and overseas – is on sale.
We can’t possibly predict the bottom. But we spend a lot of time working to understand where we can find value in the marketplace. As the market closes down more than 7.5% today and over 18% in the last 2.5 weeks, this is a place we can find value.
As a reminder, we took substantial risk off the table in the second half of last year. A little over a week ago, we put some of that money back into the market. We’re doing the same again today. While we can’t promise perfect timing, we are confident that, in the long run, we will be very pleased with this decision.
As always, please don’t hesitate to reach out if you have any questions or would like to discuss your individual portfolio strategy. You can expect more regular updates as this process unfolds.
Sincerely,
