Markets Now: Recent Volatility & Coronavirus Fears

Markets Now: Recent Volatility & Coronavirus Fears

Hello and welcome to Fisher Investments
Markets Now webinar. My name is K.C. Ellis and I’m the
Executive Vice President of U.S. Private Client Services here at Fisher. I’m
joined today by Executive Vice President of Portfolio Management and Investment
Policy Committee member Bill Glasser. Good afternoon, everyone.
Today’s webinar is in direct response to the heightened market volatility over
the past week linked to concerns surrounding the impact of a coronavirus
that emerged in China in December in 2019. We will explore how Fisher
Investments is approaching this virus outbreak, how we assess its
potential long-term market impact, and what actions we may or may not take as a
result. Well thank you, K.C., and welcome folks. It’s great that we could be with
you here today, particularly in these periods of times of heightened
volatility and if we jump right into it if there’s just a few takeaways from
today’s presentation it’s clear that volatility has surfaced here and
presumably that’s due to the coronavirus fears and that what we’ve seen over the
last week or so are these big panicky sentiment-driven declines and in our
view they bear all the hallmarks of a classic correction and not the onset of
a bigger, broader bear market. But we’ve also noticed there’s some other
factors at play and we’ll talk about those momentarily but if you think about
last week’s returns and if you think about the declines you know day after
day after day and you go back historically and you look for
similar comparisons, what you tend to find is those clusters of returns tend
to present themselves in the depths of a bear market or bigger corrections and
what you tend to get, what ensues and what tends to follow, is a big upside
from there so that in and of itself in many ways is a bullish statement. That in
and of itself in many ways is a bullish feature. And the other thing that I’ll
have you see is if you think back to last week’s returns, those declines, they came
off an all-time high. And you know what Ken would say, as he mentioned to
us last week, is you know that’s doubly bullish. And you might say well why is
that the case and the reason for that is because that’s just classic market
correction characteristics. That’s not how bear markets unfold. Bear markets
don’t announce themselves like that. They don’t ring the bell, they don’t announce
that they’re here, they don’t announce that are about to break out and in fact
bear markets tend to roll over very, very slowly and we’ll walk through some
visuals that represent that. But I mentioned there’s also some other
factors at play and one thing we’ve noticed in this most recent market
activity, similar to what we’d seen in the fourth quarter of 2018, is that you
know we’re seeing indiscriminate selling, meaning the price difference across
different categories of the market has been pretty slim in all categories,
whether it’s big stocks, small stocks, growth stocks, value stocks — they’ve all
fallen in a similar magnitude and indiscriminately and in some ways that
tells us that much like in the fourth quarter of 2018, you’ve got a lot of this
panic-driven selling, you’ve got selling that’s driven by hedge funds,
quantitative funds, systematic traders. They’re all selling at these
predetermined price levels that really can exacerbate things, particularly
against a backdrop where liquidity is relatively thin. And so as we think
about the market environment we think about how that unfolds, again this bears
a lot of the hallmarks of a classic correction and what plays to the
downside plays to the upside and we think that the returns that we see
moving forward, the declines off the bottom can be just as significant or I’m
sorry the rebound off the bottom can be just as significant as the declines that
we’d recently seen. Now the next point is that if you think about virus outbreaks,
while tragic, they’ve never caused a global recession
or a global bear market. And could it be different this time? Well of course it
could but history and the probabilities would suggest otherwise. And some of you
might be thinking, well you know this coronavirus, it feels different, it’s
different this time, this is unprecedented. And maybe that’s true. You
know there’s some features to it that we haven’t really seen before and
others that we had and by no means would we claim to be medical experts, but what
we do know is how markets work. And that’s really what we’re laser focused
in on. And we know that markets will anticipate, they’ll pre-price, and they’re going to move in advance of what we believe to be
temporary economic effects. I mean if you think about that fundamental discounting
mechanism, I mean we’ve long talked about this concept of three and thirty where
markets typically discount events anywhere from three months out to thirty
months out. Anything beyond thirty months the markets are just too myopic. Those
are too far out in the future for the markets to worry about. And anything
within three months, well the markets have likely already discounted that,
they’ve already priced that, they’ve taken that into consideration. And so
it’s really that three to thirty month time frame that markets discount that
information and if you think about the virus and the effects of it, I mean that
darn near squarely falls right into that time frame and so as this plays out
we’re either going to get a cure to the virus, it’s gonna play out by itself,
maybe we just learn to live with it but markets are gonna discount that and
they’re gonna anticipate that. They’re going to anticipate and discount the
fact that factories that might be idle today will soon come online. Pent up
demand and purchases that were delayed will come back.
Employees will start to resume back to work where they’ve been temporarily put
off. All those things are reasons why the market’s going to discount the temporary
economic effects and they’re the same reasons why markets tend to move long
before historical recessions tend to end. So let’s look at some common
characteristics of a correction and a correction is typically defined as a
market environment where stocks fall between ten and twenty percent and
that’s what we’ve had here more recently. Peak to drop, peak to trough the market
fell about twelve percent and corrections come from nowhere. They’re
short, they’re sharp, they’re psychologically-driven events but they
recede just as fast as they tend to come about and if you think about the
coronavirus, as you think about any pandemic for that matter, I mean that is
the quintessential correction narrative and it’s so easy for people to grasp on
just to this small kernel of information or news and extrapolate it into these
things that just sound terrifying and whether it’s the second-order
effects or the third or order effects as it relates to supply chains and so on
and so forth, that bears all the hallmarks of a correction. That’s what
we’re seeing today and in many ways it’s reminiscent of the trade war that we’d
seen with China. I mean you can almost substitute the word trade war for virus
and you’ve almost got that perfect identical correction narrative.
But we also know that you know far too many times people underestimate the
responsiveness and the adaptability of our economy and we think this time is
going to be no different. But if you go back to this bull market, this is a chart
of the MSCI world going back to 2009, the beginning of this bull market, and you
just look at all the different corrections that investors had to
contend with over these time periods and you know if at any one in these point in
times that you’d sold out, you’d gone to cash, you waited for things to become
more clear, well the opportunity cost would be huge and you know what they say
in investing is the investing environment is never pristine. There’s
always going to be something for investors to worry about. These all
proved historically in this bull market to be buying opportunities and we think
this time is going to be no different. But let’s compare about how corrections
tend to behave with how bear markets unfold and you could see that here. These
are four different charts of four different bear markets but they all tell
the same story. So you get the bear market and the top left of the 60s, the
top right of the 70s, of the 80s on the bottom left and the 2000s on the bottom
right. And you get these slow rolling tops, these big broad rolling tops and
you know we’ve long said bull markets they die with a whimper not with
a bang, right? They don’t announce themselves
like I mentioned there earlier — you get these slow rolling tops where it’s kind
of luring in that last greater fool before you get the big declines, which
you typically get in the very very later stages of that bear market. Now if we turn here to some advice that Mr. Buffett once once said, you know I
certainly and we certainly at Fisher Investments empathize with any
of those that have been negatively impacted by the coronavirus and you know
just one death associated with this or any virus for that matter is one too
many. But setting that aside and thinking
strictly from a stock market performance and from an investment advice
perspective, you know Mr. Buffett once said that you want to be fearful when
others are greedy and greedy when others are fearful. And you know if investors
had heeded this advice over the years it certainly wouldn’t lead them astray and
it’s one thing to keep in mind as you go through these periods of heightened
volatility. Now this next chart looks at historical virus outbreaks and the
subsequent market returns over the next 6, 12, and 18 months and we’ve shared
this with clients in various venues before in the past but this looks at
some more recent virus outbreaks and some of those that have been of size and
magnitude and what you could see the forward-looking returns in all instances
are uniformly positive. You can see the averages down there at the bottom,
all of them nicely positive so if you take things like Ebola, for instance, in
2014 where that killed you know thousands of people with a mortality
rate much greater than what we’ve seen so far here today, yet twelve months
later stocks are up almost fifteen percent. Or just take swine flu for
instance in 2009, H1N1. For that, it’s estimated to have infected you know more
than a billion people with hundreds of thousands of people had died from that.
Yet on a 12-month forward basis stocks were up 33 percent and I think in some
ways if you think about all these virus outbreaks all of them had a negative
economic impact. The question becomes how big is that, right? And none of them have
been big enough to create a global recession or a global bear market. We
think you’re gonna see similar elements with the coronavirus as the markets
discount that ahead of time and move on to higher highs.
And if you think about arguably the greatest pandemic of all time, the
Spanish flu, which transpired in 1918 and 1919, I mean that infected at the time
what was thought to be a third of the global population and it also was estimated to
kill about 6% of the global population and all this transpired in the midst of
World War I, where just by comparison you had about 16 million people were killed
in that particular war but it’s just a way to put this into perspective because
during that time frame, in 1918 and 1919, both years were up nicely. Up more than
20%. And that just gives you a sense of that discounting mechanism, right? At its worst the impact from the coronavirus is going to be much smaller than what we’d seen here. And I know some of you might be saying well you know the
world is much a different place today than it was back then and while
that’s true, not only are we much more of a globalized economy and China’s role
in the economy is much bigger today than it once was, but we also have much
greater advancements in medicine and technology and ways of dealing with
these things than we once did and like then, we believe now that the economic
impacts are going to be temporary and the markets will discount that ahead of
time. The vast majority of the confirmed cases are within China, you’ve got about 90%of those. You’re seeing a little bit more breakout in South Korea. A lot of that is
associated with a religious sect out there that spans you know hundreds of
thousands of members where they’re worshipping in close quarters, they’re
not allowed to wear masks, they have to check in and so forth
and so you’re seeing a big concentration of the outbreak there and in some of the
surrounding areas and hospitals. But for the most part these confirmed cases
are still highly concentrated in China and that we’ve seen cases really start
to subside, right, and in fact if you look at China, you look at the coastal provinces,
I mean some 80% of business activity and some of the coastal provinces are
starting to come back online. In fact you know one of the largest manufacturers,
Hon Hai, just announced that about 50% of its business is now back online and
they’d expect to be fully operational by the end of March. And Hon Hai is one of
the largest manufacturers in Asia. They’ve got you know roughly a million
employees that work there at the firm. But here if you look at the number of
active cases you know we don’t think looking at the headlining cases is
always that illustrative but the active cases, which looks at the total number of
cases outstanding but backs out those that have either been
cured and recovered from the virus or those that have died, and you can see
this is peaked and this has been trending down here. So this gives you a
sense of the potential transmission mechanism or how these folks might be
able to infect others and you can see that’s trended down here more recently
and that’s a positive development. What about the confirmed number of
deaths? Well, you can see here again don’t pay so much attention to the numbers
themselves but on the left-hand side of the screen you can see they’re highly
highly concentrated within China. Today it’s estimated that you’ve got you know
close to or more than three thousand total confirmed deaths. All this data was
as of yesterday. And certainly the significance or the loss of life is,
we don’t mean to minimize that whatsoever, but it’s important to take
that into context and have some perspective. I mean as I mentioned
earlier just one single loss of life is one too many but when you compare what’s
happening with the coronavirus relative to other common causes of death and
whether it’s age-related causes on the far right hand side of the screen or
frightening related causes on the right side or non frightening causes right in
the middle there I mean you could see the common flu on average kills about
sixty thousand people per year. But things like drowning and obesity about
300,000 and on the far left hand side you’ve got things like heart disease and
cancer. Now if you think about the corona virus, you know it is known and thought
to have spread more quickly and infect people of older a
age and particularly those with pre-existing conditions and that’s where
you see the high concentration of the death rate there and again none of this
is to diminish the significance of the loss of life but we believe it’s
important to kind of scale that and put it in a broader perspective. Now what
about the economic and market impact? I kind of spoke to this a bit but there’s
ways we can go about quantifying it and none of it is necessarily precise but
with these types of exercises we don’t really need to be precise. Precision
isn’t key and I’ll explain why but we believe that the global economy is going
to take a temporary hit. The impact should be short-lived. It’s going to be
too small to cause a global recession. Some economic activity will be lost but
most temporarily delayed and markets are going to pre-price the
inevitable economic recovery and the rebound that we expect should be
similarly as sharp as some of the declines that we’ve recently experienced.
But here’s how you might scale a wallop, right — a wallop, a bear market — this is
what’s really required to cause a global recession. And you ask yourselves the
first thing we do with these exercises is how big is the global economy? Well
today it’s about 87 trillion dollars and we’re expected to put on about 4
trillion dollars in global economic growth. So that’s what’s required, that 4
trillion dollars, you need to knock 4 trillion dollars off the global economy
to get a global recession and what we’ve done to kind of estimate the economic
impacts is we’ve gone out there and we surveyed all the different investment
banks, all the different analysts, all their estimates and we said you know
what’s kind of the average estimates, which you can see on the left in blue
and what’s worst-case scenario, which you can see in yellow. So let’s call it worst-case scenario is a trillion dollar or I’m sorry a trillion dollars. Even if you
doubled that number it’s not enough to create a global recession and this is
why I was saying the numbers the precision in these numbers isn’t all
that terribly important. I mean roughly speaking you knock a trillion off the
global economy that’s going to decelerate economic growth, no doubt
about it, but it’s not going to create a global recession and what we know
is that any form of economic activity or economic growth is good for stocks, right?
This slide depicts that. We shared this with many of our clients
before. On the horizontal access you’ve got the various ranges of economic
growth. On the far left you’ve got negative economic growth, to the far
right you’ve got gangbuster economic growth of more than 5%. Now the blue bars
represent average stock market returns in those environments. Not surprising to
folks when you get negative economic growth and a recession, stocks are down.
But notice in all three other instances, whether economic growth is accelerating,
decelerating, whether it’s its absolute basis big or relatively meager, stocks
can do just fine and so even if we decelerate from you know call it three
plus percent to the high twos or mid twos that’s an environment where stocks can still thrive. So on the last slide
here I just want to reiterate our forecast for 2020 and this is
verbatim what we said at the beginning of the year and we still stand by it and
that we believe 2020 is going to be a good year for stocks albeit one that’s
more mild than 2019 and one thing we had mentioned if you go back and look at our
fourth-quarter review summary I mean one thing we had said there was that we’d
expect to pick up in volatility and we’d seen just that, right — we expect
volatility to kind of rear its ugly head early this year. We didn’t expect it to be
associated with the coronavirus, right but we did expect more increased
volatility relative to last year. We’ve started to see that. Last year towards
the end of the year sentiment started to improve but one of the features of a
correction, especially one that’s associated with a big virus outbreak, is
it knocks that sentiment down back to skeptical levels. I mean previously there
was hints of optimism, not so much today. We also know this is a fourth year of a
president’s term. That tends to be pretty good relative to all four years —
not as great as the third year, but pretty good nonetheless and that
political uncertainty should peak earlier in the year and fade as we get
closer and closer to the election and our expectation is still that big
high-quality, growth-oriented stocks they did well last year, we would expect them
to continue to do well. And we could talk about interest rates in our Q&A. We’re
not expecting big, big moves. We’ve clearly been wrong with that so far. We’ve seen
the ten-year drop to 1% here today and slightly below. We can talk more about that
in Q&A if you’d like but our sense also is not that there’s no foreseeable wallop on the horizon, meaning no foreseeable big bear market despite what we’ve seen
here more recently. This bears all the classic hallmarks of a bigger correction
and not a bear market. Okay, everyone that’s all the time we have for today we
want to thank you for joining us for this Markets Now webinar.

12 thoughts on “Markets Now: Recent Volatility & Coronavirus Fears

  1. It would be nice if the general public was aware of this logical and timely advice and perspective. We need to have a recovery before November!

  2. He just didn't give much thought to the ten yr bond plunging to near zero. That has to be a concern for zero growth in the economy.

  3. Very insightful. Puts the potential economic impact of Covid-19 in perspective and helps investors to see through the fear fuelled by the media headlines

  4. The issue is that the crazy train has no brakes. And the media fuels the hysteria with wild prognostications pulled right out of their asses. .

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