The large cap portfolio closed out the period ended March 31st with a value of $254.93 USD. When compared against the value at December 31st, 2019 of $326.45, this represents a loss of 21.9%.
For the first quarter of 2020, the DJIA reported a decline of 23.2%. The S&P 500 reported a decline of 20% and the NASDAQ reported a decline of 12.2% for the first quarter of 2020.
The portfolio loss was broadly based. No sector or security remained unscathed from the carnage wrought on the market by the actions taken at government levels to mitigate the human toll of the SARS-COV2 pandemic. Businesses that reported positive comparable sales, such as Costco, still fell based upon institutional selling for liquidity purposes.
Concerted and coordinated efforts to pump liquidity into the global economies, in order to stave off a full blown panic, were made by most western governments; these efforts appeared to be only moderately successful. In terms of damage wrought upon the global equity markets, the corporate debt markets and the assumed reduction in values of public and private businesses, the destruction was incredible. Estimates exceed well over $100 trillion USD of reduction in aggregate global wealth (public and private) in the quarter ended March 31st. That is roughly 17% of the global capital and wealth of the markets, that went up in smoke.
The issue at hand is that unlike the 2008 and 2001 global recessions, which were financial meltdowns first and that spilled over into the overall consumer economy; this recession is based on a total, utter, relentless collapse in consumer demand. The health crisis at hand is bad enough for policy makers to handle, exacerbating that issue is a complete shuttering of the consumption component of the global western economies.
Consumer activity, primarily in the form of consumption and production of goods and services, account for roughly 67% of global GDP. This sector has been ravaged through quarantine, through layoff and likely soon, through firings and business bankruptcies. There is no firm set of policies at the national levels as to when these sectors will be opened for business again. National governments are operating with a piecemeal, helter-skelter approach to the problems driven entirely by health officials that have zero regard for the financial crisis they are creating. Policy solutions employed successfully in 2001 and 2008 may not be entirely successful in this environment as there are two driving causes to this recession that are quite different than the last recessions.
A. How long can governments replace lost income for individuals and businesses during a government imposed shutdown of the economy? Likely, the answer is just a few weeks, not a few months.
B. How long can governments function without tax remittance to fund their spending outlays? Again, the answer is just a few short weeks, not months.
In order for equity markets to recover in the shorter term, there must be an acceptance of the health issue, rather than a resolution. Resolution may take considerable time, and global economies do not have the luxury of time on their side. Concerning the current SARS-COV2 pandemic, the population needs to come to grips with the reality that a vaccine is not around the corner. SARS-COV has no vaccine and scientists have been working on a vaccine on that virus for almost 18 years. There is no vaccine for MERS. There is no vaccine for malaria and malaria kills between 1 million to 3 million persons annually. HIV still lacks a vaccine, 30 years into that viral spread. Viruses are extremely difficult to combat through the development of effective vaccines. SARS-COV2, which appears to scientists to be a tricky combination of a virus capable of spreading more quickly than influenza with a risk profile only slightly less than the previous generation of SARS, seems to be a challenge.
Acceptance of the fact that no vaccine is coming, then leads to the realization that in order for economic life to resume, everyone that is a candidate for infection needs to be infected, at some point and either exhibit few symptoms, be treated and recover, or pass on due an inability to survive the pneumonia. Flattening the curve might resolve one problem, but creates others.
Governments, businesses and consumers, in order to survive this pandemic without experiencing a depression, need to come to terms with some grim realities of this viral pandemic. The current patchwork of policies at national levels is untenable and continuation of global shutdowns is unimaginable.
In the interim, I fully anticipate the coming quarter to be as bad for equities, or worse, as the first quarter of 2020. Health officials are not economists, nor are they focused upon the economic toll being exacted upon the economies of developed nations. Until rational minds seize back control of the situation, the efforts to save, largely, senior citizens will, in all likelihood, continue to beggar the world.
Stocks are collections of businesses, and are valued based upon current and future business prospects during periods of economic expansion. During periods of economic contraction, prices are slashed and can be based on little more than the potential for survival. The Q1 earnings reports will be grim, but the Q2 earnings reports may be like nothing modern day investors have ever experienced, or can possibly envision. It could get sufficiently bad that global stock markets might get shut down, for a period of time sufficient to deal with the health crisis and then to deal with the economic fallout. Despite that outlook, I maintain fully invested position, as I always do, for three reasons.
1. My doubts don’t always come to pass. I anticipate a very bad case scenario in my investment planning in order to assess if the investments held can survive during that period of stress so as to thrive in recovery.
2. World class businesses are world class for a reason. They can withstand stresses that break lesser companies during downturns and can expand more rapidly once weaker competitors are shaken out. I don’t second guess excellent companies.
3. A recession of some magnitude, while painful on the psyche and more so on the pocketbook, is something that I have been awaiting for some time. Once this current recession is over, provided that it does not turn out to be a depression, the policy and economic actions that will be developed may allow for a longer period of economic growth down the road.
The recession is here. It could be severe. Accept it.