Coronavirus Rattling Common Stock OwnersIn a mature, cyclical consumer-dominated economy like ours, recessions are inevitable. Uncle Sam, in total, has battled seventeen of these pullbacks and eleven since World War II. They are difficult to forecast and their catalysts are not always the same. Recessions to some degree are also helpful to a nation because they flush numerous economic excesses out of the system. The Great Recession lasted from December 2007 to June 2009 and is the longest on record. It was also the most devastating downturn to pummel the US economy since the Great Depression. An over-leveraged global banking system coupled with a bloated domestic housing market were the primary catalysts.
The sixteen-month-long December 1973 to February 1975 downturn was the second-longest and erupted as a result of the Arab Oil Embargo and runaway crude oil prices. The shortest post-WWII recession in the last thirty-five years lasted only seven months from August 1990 to February 1991. Iraq invaded Kuwait resulting in the Gulf War. Energy prices once again skyrocketed, and a goodly number of consumers limited trips to the shopping mall because of rising gasoline prices and availability. The average post-WW II downturn has lasted about eleven months. The good news is that after each recession Gross Domestic Product has gone on to reach new heights.
At present, it is impossible to calculate how severely our private economy's consumption and production apparatus has been or will be damaged. Fortunately, going into this unanticipated event the economy was in fighting trim. Typically, consumers have overspent, over-borrowed, over speculated, and under-saved as recessions get started. This is not the case this go around. History confirms businesses fail essentially for two company-specific and controllable causes. One is the lost access to capital. The second is a lack of management depth. In other words, they run out of brains or money, or both.
Systemic risk events such as wars, government revolutions, earthquakes, and pandemics hit without warning. They can also demolish business entities. How long it will take for the country's "animal spirits" and production capabilities to get up and running at peak performance levels again remains an open question. No one can say with conviction what the future profile of the US economy will look like. It could be the much-preferred V formation. It could also be a U or L curve. The economy is vulnerable to false starts and as such a W formation is another possible outcome.
Small businesses employing five hundred employees or less comprise about half the US workforce and approximately seventy percent of all business establishments. A plethora of these enterprises especially those in retailing, food service, transportation, leisure time, and others are having a difficult time trying to ascertain where they are in their life cycles not to mention their going concern value. With demand for products and services decelerating, numerous public corporations are wrestling with estimating future profitability flows and reduced market capitalizations.
Up until the end of February, the US economy for the first time since the Great Depression had gone a full ten years without suffering one recession. Much wealth was created throughout this elongated prosperity wave. The S&P 500 including the reinvestment of dividends posted a ten-year average annual return of over thirteen percent. At thirteen percent returns double in less than six years. Commercial real estate, fine art, vintage cars, and thoroughbred horse investing also produced handsome decade-long returns. None, however, matched the equity performance.
Risk vs. Reward
The stock market collectively knows more about the financial future than any individual or institutional investor. It is a leading economic indicator that discounts future events before they occur. It is not infallible, however. The Oracle of Omaha, Warren Buffett, proclaims "the stock market in the short term is a voting machine and in the long term a weighing machine". Some stocks are a lot cheaper today than they were a month ago. They could get cheaper. Nobody can predict how far stock prices are from the lows. The Coronavirus quagmire solution will dictate how long it takes to get Main Street back on track and jump-start the demand for common equities. Stock prices as measured by the S&P 500, are currently signaling that the short-term profit outlook is uninspiring.
The equity market goes up like an escalator and comes down like an elevator. Bull markets last far longer than bear markets. Investors do not have to get in at the exact bottom to garner rewarding long-term equity performance returns. Self-discipline is a prerequisite for achieving investment success over time. Investors that have a depth in finance and economics along with a feel for the market and the right temperament hold the necessary attributes for achieving profit-generating outcomes. Making investment decisions based on emotion and intuition can lead to costly unforced errors. "Buying straw hats in the winter and snow tires in the summer" remains a savvy piece of advice. With all the economic and investment uncertainties surrounding the pandemic and the unprecedented government-induced recession other than remaining liquid, there is not much to offer. Now is the time to be a financial detective in the search for valuable out-of-favor common stocks.