dimanche 29 mars 2020

Market timing

Everybody will say that market timing isn't something to seek for an intelligent investor. Because we simply never know what the future will be.

But let's be realist, the coronavirus won't disappear overnight.

I've read that the reduction of measures (isolation, closing of schools, restaurants, parks, libraries, shops, etc) won't happen before the last new case and an additionnal 4 or 8 weeks of security period. Does anybody thinks that the last new case will soon be discovered (in may for instance)?

Let's be very very positive and let's assume that the last new case will be discovered on may 31th (2 months from now). We'll have to wait probably 2 more months (until the end of july) to see some measures be reduced slightly. And probably a few more months to see the measures be completely cancelled (october?).

Every expert says that we won't get a vaccine before at least one year. Perhaps 9 months if we're very very lucky. Until then, the scientists will perhaps find a drug that will reduce the effects of coronavirus. That's our only hope in regard of the economy. The borders will be shut until then. People won't use their car, won't go to shops. They'll only stay at home, eat and watch Netflix.

So, it's surely not urgent to buy shares on the market. Let's wait for a big panic headline about the USA. Something like 5000 deaths on one day in the states. Or the news that Trump got coronavirus. I'm pretty sure that something close to the end of the world, or at least, the end of capitalism will be in the mind of masses, sooner or later.

Meanwhile, many of us will lose our jobs. Many will fall into depression. Many will experience paranoia because that virus make us feel that every people we cross is a threat. That's a very strange time. Probably the strangest time ever on earth.

5 commentaires:

  1. One death is always a significant, tragic loss. But as far as event shocks go, this one is pretty minor so far. The panic is off the charts. That is really unfortunate. I was thinking, if this exact same circumstance happened pre-internet, i think the reaction would be less severe.

    1. I think there is too little panic selling in the markets. Good quality companies have barely sold off and are trading at higher prices than during the non-event December 2018 sell-off. Even bad companies have recently rallied by ~20% of 52-week lows on government stimulus news.

      From health perspective, this will not be over until we can vaccinate or let at least 70% of population get sick. Vaccination will take maybe up to a year. Until then, we will all have to remain under quarantine with several successive waves of reappearing epidemics. On the other hand, total global infection could be over in a few weeks if we liberate the public.

      If we assume 1% mortality rate, we get 7.9 billion * 70% infected * 1% mortality = 55 million dead people over less than a year. That is not the end of the world, but is still a significant loss, especially for developed countries. For comparison, World War 2 killed about 80 million people over 6 years or roughly 3% of the world population (out of which only about 25 million were soldiers and rest were mostly starved by commies).

      Therefore, current pandemic could cause more immediate but less long-term human and economic cost than the deadliest military conflict in history. I would think that such a crisis should impact economy more than barely 8.40% YTD fall in SP500 or 20% YTD fall in TSX. Government spending in most developed countries constitute about 1/2 of GDP. If we shut the private economy down for 12-18 months until we vaccinate everyone, I would imaging we should expect at least 1/2 drop in economic output, which should translate to much deeper earning cuts (SP500 net margin is just 11%) and thus drop in share price.

      Sorry for the longer post. I have already cut it by about a third.

    2. To play a devil's advocate, I will also note that if we assume 73 year life expectancy for the world and flat population pyramid, this would mean on any give year, we would expect 1.4% of people to die (1/73). This is about 1/2 of the 0.7% corona virus mortality from the above example. So the virus is only slightly speeding up the inevitable natural order of things by expediting the death of the old and sick people. In doing so, the virus is simply deburdening the social and health systems around the world while sparing most of the young and productive cohorts. The economic cost of the global shut-in, on the other hand, not only prevent this much needed cleansing but will also cause lasting multi-year damage and destroy many families, businesses, and future of many young people.

      Which perspective do you agree with?

  2. "Or the news that Trump got coronavirus."

    A hypothetical that occurred to me the other day...

    Imagine that late on Friday (after markets close) news comes out that both Trump and Pence have tested positive. Over the weekend there are rumors that neither is doing well, and by Sunday afternoon both are in induced comas in intensive care and are not expected to survive.

    Speaker Nancy Pelosi is sworn in late Sunday night as acting President.
    She does a national address in which she says she will immediately start coordinating a coherent national strategy to combat the virus using all available resources and guided by the best scientific advice.

    Do markets open up or down on Monday morning??

    What if only Trump is sick and it is Pence giving the national address??

    1. I think any of those news would be a big negative for the stock market. Given the advanced age of all of the politicians in question (73, 60, 80), a similar scenario might happen anyways even without the viral infection.

      The current US gerantocracy might experience similar problems as the USSR politburo, where the politicians were so old by the time they reached the top office that they did not have the sharpest mind and were not able to make the best decisions.

      I reckon plurality of people believe Trump will be re-elected and will continue with financial deregulation, lower-for-longer interest rates, and helicopter money and protectionist policies for domestic industry. Any deviation from this will destroy investor confidence and put downward pressure on stocks - especially if some of the more extreme democratic candidates might gain in pre-election polls.