A key difference between the current economic and markets crisis and its forerunners, and why many people are finding this one so unsettling, is the association between apparently important things like money and the stock market and really important ones like the lives of the people we love.
Financial pain is perhaps the least important of the losses we may face this year but the suddenness of events in the past four weeks shares some of the characteristics of a bereavement. The slide in financial markets this year reflects not just a monetary loss but the death of a set of ideas we had about the world just a couple of months ago.
This week one of my investment colleagues framed the ongoing market turmoil in unexpected language, words typically used to describe the five stages of grief. I’m not quite sure where we stand today on the journey from denial to anger, bargaining, depression and acceptance, but it’s a useful lens through which to view our response to what’s going on.
Looking back a few weeks, the denial is now clear. At the start of the year, there was a broad consensus that we could look forward to a further extension of the longest economic expansion on record. The Federal Reserve’s U-turn in the middle of last year and the apparent desire by both China and the US to patch up their trade spat seemed to push recession further into 2021 or beyond. The overvaluation of the US stock market and excessive borrowing in parts of the financial system did not cause the crash but they have made it worse. As usual, concern about these was a minority sport while the music continued.
There has been plenty of denial since we learned about Coronavirus, too. At first, we pretended the disease could be contained in China, ignoring the inherent fragility of global supply chains. Next, we hoped that the outbreak would be short and sharp, a hit to first quarter earnings that would bounce back in the second. Perhaps our latest act of denial is to think that the absence of sick pay or free-at-the-point-of-need healthcare in the US will not frustrate attempts to control the outbreak in the world’s most important economy. We shall see, but if the market suffers another significant leg down, this will be the cause, I suspect.
The passage through the middle three phases of anger, bargaining and depression will vary from person to person and market to market, and it won’t be a direct journey through the stages.
There will be plenty of retreats and false dawns as markets go through the cleansing that will ultimately set us up for the healing and rebuilding to come.
In fact, we have all probably experienced all three of these to some degree already. We’re angry at the Chinese authorities for ignoring the early signs of the outbreak, angry at the panic buyers, the profiteers, the people ignoring the expert advice.
We may still be passing through the bargaining phase. A key part of this is the ‘if only’ conversations we have with ourselves, beating ourselves up for the sheer, blinding obviousness, with the benefit of hindsight, of what has happened. Another variant of bargaining is the fruitless negotiation with our higher investment self - the hope that if we promise to be better diversified, balanced, cautious or whatever in future it will somehow undo the past four weeks’ losses.
Maybe, we’ve just headed straight into depression. These feelings may soon be exacerbated by fears about our jobs. They are perhaps the most dangerous from an investment perspective because they encourage the natural desire to make the pain go away by turning our back on the investments which have caused all the hurt. This is the stage in which investors make the cardinal error of crystallising their losses by selling what they still have. It’s understandable but usually a dreadful mistake.
The final stage of acceptance is key to moving on with our investment journey. Investing is about seeing the world as it is, not how we would like it to be. So, what are some of the things which we must accept now that pretty much everything has changed?
Most importantly, we must accept that the world will most likely experience a sharp recession this year.
This will be most pronounced in China, although that country’s recovery will also be the sharpest and will come first. While the return to growth should mean the hit is largely temporary, the scale of the shock is the main concern and this is why even the co-ordinated monetary and fiscal response so far may not be enough. The important issues are cashflow and survival.
Second, we have to accept that the income argument for investing in shares may fade away for a while. Companies that are in receipt of government support to keep them afloat and prevent them laying off large numbers of workers may not be able to justify pay-outs to shareholders in the short-term.
Third, we have to accept that some industries will be permanently scarred by the next few months. The brunt of the pain will be felt by travel, tourism and leisure, which collectively account for a tenth of global GDP and employ a tenth of all workers. Others may bounce relatively quickly - industrials and even parts of the retail sector. Some businesses may look back on 2020 as their breakthrough moment - who had heard of Zoom until everyone started working from home?
Finally, we must accept that the world’s attitude to the state and to public spending has changed irrevocably. This is a watershed moment for the balance between monetary and fiscal policy. Opening the fire hose of government spending will come at the cost of re-awakening the dragon of inflation. Some things never die.
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The US also has to battle with an idiot President who is still in denial and is spruiking fringe 'cures' at the same time that ED's in major cities have hit capacity. But hey his approval rating is up so all is good...
Great article Tom. Governments giving away 10% of GDP (40% of Budget) must surely be inflationary as you imply. I suspect the time for Modern Monetary Theory experimentation has finally arrived. Bond markets steepened the yield curve (2-10s). Are they flagging inflation or an anomaly due to default risk?