I recently returned from New York for the NYC Traders Expo and Covid-19 (Coronavirus) was on the mind of all there. As I looked around, I saw people wearing masks, people hoarding hand sanitizer and saw one person wrapped in toilet paper protecting themselves from the virus……. well most of that is true except the toilet paper. I still am not sure what the run on toilet paper is all about but just like that situation I think people are overreacting in the markets.
Before Covid-19 started to become a major factor, I started to remove many of my long positions and replaced with short positions, not because of the Covid-19 threat but because there was already cause for concern. I saw a correction from the markets being artificially propped up by the federal reserve and the increase of money supply to the repo markets. I also had the following concerns:
- Inverted yield curve
- Negative rates in Europe and Japan
- Trade wars and tariffs
- GDP drop in US
- Increase of national debt
- Increase of consumer debt
- Lack of money supply
- Increase in oil supply
- Brexit news
Markets and people are irrational in both directions, think about the toilet paper shortage. I had a hunch Covid-19 could be the catalyst to finally push our markets back to where they should be and stop the seemingly unending positive drift we were seeing. Markets need black swan events to keep them honest.
What are black swan events?
A black swan is an unpredictable event beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact and the widespread insistence they were obvious in hindsight. Covid-19 appears to be a black swan. Maybe a one in ten years black swan, maybe worse, who knows. Time will tell, but we as investors need this as it could prevent a future financial crisis.
Either way this is healthy for the markets. If people believed stocks would go up in perpetuity, there would be no such thing as investing. So, although you may have crashed down with the wave of a record market, there are some positives that can come from this. I have listed a few below:
#1 – Opportunities to Get Long Positions at Rock Bottom Prices
With the markets poised to go down, and I predict them to go below 30 percent, this is a once in every 10-20 years buying opportunity. Take advantage of this, and ladder in so you don’t miss it- that is buy on the way to the bottom. It is difficult to buy at the bottom because nobody knows where the bottom is. Therefore, you ladder in. If you don’t have cash, consider borrowing as interest rates are at an all time low.
#2 – People are FINALLY Washing their Hands!
How many times have you gone into a public restroom and see that person go in go to the bathroom and then leave without washing their hands? Or, see someone run their hands under cold water for three seconds? People are cognizant and fearful of this new virus and are actually doing what they should always do! I was taught to run your hands under hot water for as long as it takes you to sing two happy birthdays to yourself.
#3 – The Banks Cannot Control the Markets Anymore
The Federal Reserve has been artificially propping up this market for some time, and it has created a bit of an unhealthy situation. The record highs and the record bull market run we had was unlike anything in the history of the markets. Having Covid-19 come along as the catalyst tipped the scales enough to where the banks have very little ammo left to prop up the markets. This “could” prevent a recession or even a depression. The markets have now officially turned their back on the banks, and they are somewhat exposed.
#4 – This is a Wake-Up Call for the American Healthcare System
We have heard it for years- now it is front and center. With this crisis we do not have enough hospital beds to account for this crisis. For example, we have roughly 92,000 ICU beds in the US. In the mildest scenario, they predict 100,000 people needing ICU beds. In other cases, there could be up to one million ICU beds needed. Do the math if that happens- nine out of every 10 people would be turned away. Not a situation we want, so on with the social distancing.
#5 – The Federal Reserve Has Emptied All its Ammunition
With the recent rate cut and the Quantitative Easing policy of printing money, there is nothing left the federal reserve can do. Last November and December when we had this positive drift of record highs rates should have been hired. They were not, and as a result the fed has lost control of what they can now do going forward. This is good news because they cannot screw it up anymore, but bad news because this freight train has nothing now to slow it down or even stop it.
So, in times like this what are we to do?
I will just say, while I like to trade, sometimes there are more important things. Like students being sent home, weddings and events being canceled, airports closed and places of gathering (like churches, synagogues and concerts) are emptied. Broadway has gone dark, and restaurants and businesses are limited. All the news is dispiriting, but we Americans were born of a revolution rugged and resourceful and resolute. Our determination and our perseverance are hallmarks from whence we came- it’s in our DNA. So, we must batten down the hatches during this period until life returns to normal. We learn and must sacrifice as our families have over generations, who once came here to enjoy the fruits of the greatest nation on earth. We will now practice social distancing; ultimately no large crowds, no touching, no hugging. This will take discipline and self-control, but we simply have to buckle up and get through it. Then, maybe in six months, hopefully look back at this as just a blip on the screen of life.
Stay busy, keep calm and don’t panic. If we panic, we have lost. I look around and I have watched people panicking in supermarkets, emptying shelves. The panic in the stock market with huge selloffs. Panic? It’s a waste of energy and it’s exhausting for everyone. We should focus instead on what we have to offer during this time. Do an act of kindness and offer generosity to our senior citizens that you know who can’t get to a grocery store or who could use a home cooked meal, which you’re probably making more of any way these days.
The markets will crash, like we saw in stock market crash in 1987, the dot.com bust of 1999-2000 or the Great Recession of 2007. BUT, the markets WILL come back, they always do.
Don’t panic and be kind to each other. This is about human nature, our will survive and our nature to help each other as a human race. Better times await!
Disclaimer: The author is not a financial advisor and the following should not be taken as financial advice. This is by no means a complete discussion of the pros and cons of trading and/or investing. Please consult your own qualified advisors to determine what is appropriate and best suited to your specific investment objectives and risk tolerance.