By Gregory Lai, CFA
Memo to investors spooked by the coronavirus—take your masks off and breathe.
As I write these words, the Dow has been tanking in response to fears relating to the coronavirus, concerns about the ever-increasing likelihood of Bernie Sanders snagging the Democratic presidential nomination, and the possibility that the massive, record-setting upturn that has lasted a dozen years has finally reached its end, again.
That’s not how I see things, and I hope that you don’t see things that way, either. Here’s why.
The media runs on fear. The more fear it stokes, the more eyeballs. As they say in local TV news, “If it bleeds, it leads.” You could paraphrase that for international news reporting by saying that, “If it inspires fear, it’s always near.”
Right now, of course, fear of the spread of the coronavirus has the entire world on edge. Everything from school trips to the summer Olympics is in danger of cancellation. People aren’t sure they should fly, or where they should fly, what kind of mask they should wear, and so on. Costco run anybody? I don’t want to diminish the reality of the coronavirus for its sufferers and their loved ones, or anyone who is sick at this time of the year. My point is that we’ve seen time and again that the worst fears of a media-driven world population seldom turn into reality.
Remembering
Remember bird flu? SARS? Ebola? ISIS? And for that matter, Donald Trump? Kidding on the last one.
Yet, each of these entities were supposed to represent the end of the world as we knew it. The three diseases—SARS, avian flu, and Ebola—were believed, for a time, to be unstoppable.
ISIS, born in the power vacuum of a shattered Iraq, took over increasingly broad swaths of territory throughout the Middle East, engendering fears of a worldwide caliphate so organized that even as it was killing thousands and imposing its narrow, intolerant religious viewpoint on populations, it was issuing fishing licenses in small villages.
While there are still scattered pockets of resistance and solo fighters whose political and religious viewpoints become weaponized by the Internet, ISIS is a shadow of its former self. It has lost more than 95% of the territory it once held. Its leaders are dead. It represents one more failed ideology in the dustbin of history, rightly so when killing is your primary agenda.
Many people, especially prime time news commentators, thought that the election of President Trump also meant the end of the world as we knew it. News reports immediately following his election and even through the first six months of his administration, pegged him for setting off World War III…or worse.
Instead, on the foreign policy front, or call it what you will, we have seen a new opening to North Korea, America’s most dangerous rival; a new approach to trade with China, something even the Chinese never saw coming; a new trade agreement among the United States, Mexico, and Canada, replacing the controversial NAFTA agreement; and new hopes, however forlorn, for peace in the Middle East.
Domestically, even those who thought Trump would torch the economy rejoice every time they open their brokerage statements or pension statements. That’s because the market, even despite the recent selloff and incessant rhetoric, has registered massive gains over the course of his first three years in office. The economy is humming, Black and Latino unemployment are at their lowest levels in fifty years, inflation remains low, and the fundamentals underlying all this positive economic activity remains sound.
Enter Coronavirus
And then, into that mix…enters the coronavirus.
The images, of course, are terrifying. Sixty million Chinese under lockdown. Government officials coming to the door of private citizens throughout China, taking their temperature and checking for symptoms. Individuals with non-coronavirus-related illnesses, no matter how severe, turned away at urgent care centers. Record number of new cases seemingly occurring daily, and deaths surging as well. The disease then spreading to two of China’s main trading partners—South Korea and Iran, and then to, of all places, northern Italy, Africa, and other points around the globe.
Shouldn’t the market be right to be terrified? Or more like concerned?
Shouldn’t we all be stocking up on the right kind of face masks, fearful that the pandemic will then reach our shores, our airports, our communities, our schools, and our hospitals?
No wonder the market hit the skids.
But maybe the wisest person to quote on the subject of the coronavirus is President Franklin D. Roosevelt, who come at his first inaugural address all the way back in 1933, told Americans, "The only thing we have to fear… is fear itself."
Every pharmaceutical company you’ve heard of, from Johnson & Johnson to dozens of small pharma companies you’ve never heard of, are racing to produce a vaccine. Before you know it, the coronavirus, having enjoyed its day in the sun, will find itself treated, diminished, and then all but wiped out from the lungs of a grateful mankind.
That’s what I see. The coronavirus crisis, like all other crises, has a beginning, a middle, and an end. And the end is in sight, despite what you may see when you surf the web, watch the evening news, or catch on your chat feeds. (There’s always someone!)
Opportunity
With every crisis, there is opportunity, and indeed, in Chinese, one ideograph can be understood as standing for “crisis” and “opportunity.”
In other words, in every situation that captures the world’s attention, as has the coronavirus, there will always be perceived winners and losers. The question is, which side you want to be on?
Let’s first take a look at the losers.
These are the individuals who panicked and sold into a falling market. Somehow, in their stampede for the exits, they forgot the immortal investing advice of Mr. Dow himself, uttered more than a century ago: Buy low, sell high. That’s how you get rich. Doing the opposite is how you lock in losses and keep yourself from the wealth you could have enjoyed. SOund familiar? Remember the “Great Financial Crisis” or “The Crash of 1987” (Ok, I am old…). Even the “2000 Tech Wreck” proved to be a relatively short-lived panic in financial asset level terms.
At some point, the market will roar back. It always does. Those individuals who sell, either out of a sense of terror or a sense of invulnerability—a belief that they could time the market—are the ones who will pay the biggest price. They will have lost and lost big. They will have sold the market at, say, 26,000 or 27,000 only to have to buy it back at 30,000 or more.
How quickly will the market come back?
In these volatile times, it could take days, weeks, or months. While the timing is uncertain, the reality that it will go higher is unquestionable, for the simple reason that this is still America and it’s still stocks. (No rolling period of 20 years or longer since 1928 has the market been negative!) The perception of the value of the market has changed, but the reality of the value of the companies that make up the market has not changed. Nor the concepts of finance that require a return on money that you have deferred gratification on, but we’ll leave that for a later time. So, the people who will lose the most are the people who sold the fastest.
From our perspective, the other biggest loser in the entire coronavirus crisis is China itself.
Western firms have always made a devil’s bargain by doing business with the People’s Republic of China, a great country governed by a tyrannical political regime. China is unfathomably corrupt from top to bottom. The offspring of Mao’s Long March comrades, the 'Princelings', along with the military, the 'People’s Liberation Army', control much of the business life of that nation. The bank system is based on lies, propping up a failing real estate regime with cheap loans to finance entire towns and cities into which no one will ever move. The Chinese balance sheet is laughably inaccurate, and the Chinese economy as a whole is cruising for a bruising.
Western firms have overlooked all that, along with the forced transfer of technology, the outright theft of technology, the disregard for the rule of law, and the closed markets they have had to endure. American businesses have always short-handed China, in a rather vulgar matter, as representing “two billion armpits.”
In other words, there’s a massive, uncapped market. Americans businesses have always believed in China for Western products from deodorant to Dior. And yes, while there is a thriving middle of class of more than 300 million in China, despite the efforts of the current administration to rectify trade imbalances, that market has remained largely, and frustratingly, untapped. The Chinese like their trade imbalances and will go to any lengths to keep them that way.
China, in the form of its leader-for-life, Xi Jinping, has made clear its intentions to dominate the world economically, politically, and culturally by 2049, the hundredth anniversary of Mao’s Long March. The Belt and Road Initiative, bringing infrastructure like railroads and ports to nations around the world, has been characterized as the equivalent of payday lending—the more these other countries borrow from China, the more beholden they become.
China’s desire to rule the world by every conceivable method is unquestioned. Will they get there? Doubtful. The coronavirus, the secrecy surrounding it, and the top-down “solutions” imposed by the Chinese communist regime have all conspired Western companies doing business in China question whether the devil’s bargain they have made with that nation is really worth it.
Western firms thought they would have access to cheap labor, but in reality, the cost of labor in China has only risen, compared with other nations like Vietnam, Pakistan, Poland, or closer to home, Canada, Mexico, or even the good ole U.S. of A. In other words, the rationale for doing business in China has diminished as the costs of doing business there has increased. Going forward, we expect that more and more companies, burned by their exposure to China’s response to the coronavirus, are going to question whether they should even remain in the country.
Manufacturing, investment, and consumption in China have all collapsed as the virus has spread practically unchecked. That fabled market of “two billion armpits” has never truly materialized. At some point, and sooner than later, we believe, Western businesses will rethink their China strategy and reduce or even eliminate their operations in that nation, so that they do not face the same level of exposure when the next crisis hits.
Therefore, the losers are investors who dashed out at the first sign of a correction, as well as the nation of China itself. Who will win? No one benefits, in crass terms, from a virus that kills thousands. Yet, economic circumstances do create opportunities for success—the other side of that Chinese ideograph that means crisis.
Who is likely to benefit?
Investors who were wise enough, and patient enough, to recognize the downturn for what it is: A buying opportunity. America is on sale at the stock market, 10 percent or even 15 percent off. But act fast, because these low prices will not be available for long. Investors, therefore, who are able to take advantage of this downturn, are the ones most likely to register big wins.
The same is true of those investors who stay the course. They will also find themselves in a better financial position as the market rebounds. The smart money, in fact, are those who don’t even open their monthly brokerage statements. The stock market is a long-term play, except for speculators, and we don’t really deal with speculators at our firm.
Yes, airlines, cruise lines, and other industries directly and immediately affected by the reduction of travel, manufacturing, and so on that the coronavirus has brought about, will pay a short-term price. But we believe that the long-term outlook is as bright as ever. The fundamentals have not changed. We don’t see a self-described democratic socialist finding his way to the White House anytime soon, nor a New York billionaire. Does it even matter?
We see the current downturn as expected, virus or not, and from a long-term investor’s standpoint, all but meaningless. If you’ve got cash, there are some very interesting things to buy, some great bargains to be had. If you’re fully invested, sit tight. And if you don’t have cash, worry more about getting some by either working more and/or saving more. But just wash your hands! The good times have not gone away. If anything, they are going to roar back with even greater force.