Update from the Captain’s Bridge
by Marshall W. Gifford
It’s been six weeks since I wrote, “The Case for Optimism.” Enough has happened since then that I wanted to provide an update from the captain’s bridge. I noted on March 21st that I felt like a character in a sci-fi movie, sequestered in safety at my cabin in northern Wisconsin. All but essential businesses had been closed and the future looked very unclear. Now I feel more like a character in a movie where the prisoners have become restless and are planning a breakout.
Six weeks ago, a Monday morning on I-94 in St. Paul felt like a Sunday morning at 6AM. Now it feels more like a busy Saturday afternoon. In many states, elective surgeries are resuming, and we are seeing general dental and specialty practices cautiously reopening. People are starting to live again but have learned to social distance and wear masks. Businesses have added hand sanitizing stations and wipes, along with adding plexiglass barriers to separate their employees from the customers. The vast majority of people are working together to mitigate the spread as we all start to venture out more. The feeling that things are getting busier is backed by data. Apple looks at "routing requests" on map applications to determine how much movement is occurring in the population. In mid-April, both walking and driving requests were down roughly 60% from January 13th. As of Saturday, May 2nd, walking and driving requests were only down 29% and 16%, respectively. The amount of motor gasoline supplied has grown three weeks in a row and is up a total of 16%.1 General Motors is restarting production on May 18th and Gap is planning to open 800 stores by June 1st, to name some large businesses finding their way back.
As of the close of the markets on March 20th, the S&P 500 closed at 2289.62, but as of this writing at 11:22AM on Tuesday, May 12th it sits at 2927.19 or 27.8% higher.2 I had noted that after the 38% drop in the market in the shortest number of trading days in history, that one option not under consideration was to “abandon ship” and sell the great companies you own. This creates a situation where you need to be right twice. Did you get out at the right time and when do you get back in? It also creates regret if you are wrong and the market moves higher, and now you find yourself wishing for it to drop. I will state this as clearly as I can: Timing the market is not investing. It is gambling and can be dangerous to your long-term wealth. If you bet right on getting out, the upside is limited to whatever drop you get from the point you sell to the bottom. The downside of being out of the market is unlimited, as there is no cap on how high the market could go over time.
I feel the need to address the temptation of market timing now that we have had a sizable rebound from March, despite the number of cases and deaths from the virus increasing. I am getting asked variations of the questions, “How can the markets rise with all the bad news? Isn’t it bound to drop again?” In response, I want to provide some perspective. First, markets look forward and only a relatively small portion of a stock’s value is expected earnings in the current quarter. The second quarter of 2020 earnings drop will likely be the largest, or one of the largest, single quarter drops in recorded history. This is one of the contributing factors to the initial selloff in March but is no longer new information. As of now, markets are expecting a recovery starting later this year and accelerating into 2021 and beyond. If this does not materialize, the markets will re-price the values of the companies based on new expectations. Waiting for clarity or the all clear sign is not a strategy for investment success. Once we have clarity or the virus is contained, controlled with antiviral medications, or we have a vaccine, the markets will already have priced that in and most likely moved higher. It is times of peak uncertainty that typically correspond with peak opportunity for the long term, goal focused investor. Six weeks ago, things appeared more uncertain than they do today with regards to the virus, and the markets have reacted to this news.
I noted on March 21st that I was confident that with the best minds around the world working on this, that we would have antivirals and/or a vaccine faster than most expect. As of today, drugs such as Remdesivir, by Gilead Sciences are showing excellent results and there is progress on combining other existing drugs with Remdesivir to increase efficacy.3 Countries are competing to develop the first viable vaccine. We have Johnson & Johnson with a vaccine candidate. Pharmaceutical giant Pfizer has begun testing a new vaccine in partnership with German biotech company BioNTech. Both companies are beginning production of the vaccines in anticipation of successful trials to have them ready for distribution. A sample of other companies announcing vaccine plans are Novavax in conjunction with the University of Pittsburgh, University of Oxford, GSK, and Sanofi. The scientists at Oxford are hoping to have the first few million doses of their vaccine available in September.4 As I noted in March, and will reiterate now, betting against America has always been a bad idea. When you add in the collaborative efforts of the best scientists around the world, the chances of success are even greater.
The point of this letter is not to discount the human toll of the virus or in any way attempt to predict in the short run what will happen. The intent is to limit the long-term financial toll it has on my clients with respect to things we can control. The one thing we can control is our behavior and how we choose to react to this. The loss of business revenue that many of you are facing is enormous. We have always advised having a good emergency reserve. I will be the first to admit, however, that I didn’t see it being used for a government mandated shutdown of businesses or your way of life. You should also congratulate yourself for having the discipline to live within your means going into this crisis and being able to weather the storm because of choices you made. I have confidence that you will emerge on the other side of this in your same home, with your kids in the same schools, and with your business intact, open, and operating profitably. Recessions are painful, but good businesses regroup and come back leaner and more efficient. We’ve seen this process repeated throughout history. I wanted to close with some quotes that I think really ring true and some relevant investment advice from some of the top investors in the world.5
- Every five to seven years, people forget that recessions occur every five to seven years.
- Imagine how much stuff you’d have to make up if you were forced to talk 24/7. Remember this when watching financial and network news on TV.
- Read more books and fewer articles.
- Read more history and fewer forecasts.
- During the last 100 years, there have been more 10% stock market pullbacks than Christmases. Everyone knows Christmas will come; think of volatility the same way.
“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
“You make most of your money in a bear market, you just don’t realize it at the time.”
“The four most expensive words in the English language are ‘this time it’s different.’”
Sir John Templeton
As I noted cure after cure, disease by disease in my “The Case for Optimism” piece, I have no reason to believe this time will be different. Those that choose to ignore history can do so at their own risk. I wish all of you good health as you continue to fight the fight on the front lines, return to your jobs, or re-open your businesses. In closing, I would again quote Nick Murray, “Optimism is the only realism. It’s the only worldview which squares with the facts and with the historical record.” Thanks for trusting me during these turbulent times. As always, I am happy to talk anytime you need me.
Marshall W. Gifford, CLU, ChFC
Founder & Senior Partner*| Founder, North Star Medical Division
Gifford Financial, The MD & DDS Specialists
A Division of North Star Resource Group
2701 University Avenue SE Suite 100
Minneapolis, MN 55414
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index. 5-2021
1Source: First Trust Advisors; https://www.ftportfolios.com/retail/blogs/economics/index.aspx
2Source: Market Watch; https://www.marketwatch.com/investing/index/spx
3Source: National Institute of Allergy and Infectious Disease. NIH Clinical Trial Shows Remdesivir Accelerates Recovery from Advanced Covid-19; https://www.niaid.nih.gov/news-events/nih-clinical-trial-shows-remdesivi... covid-19
4Sources: Sheikh, Knvul. Pfizer Begins Human Trials. The New York Times: May 5, 2020; https://www.nytimes.com/2020/05/05/health/pfizer-vaccine-coronavirus.html
GlobalData Healthcare. Covid-19 Vaccine Development is Picking Up Pace, Supported by Government and Private Funds. Clinical Trials Arena: May 12, 2020; https://www.clinicaltrialsarena.com/comment/covid-19-vaccine-development/
5Source: Housel, Morgan. One-Sentence Financial Rules. The Motley Fool: March 26, 2014; https://www.fool.com/investing/general/2014/03/26/one-sentence-financial-rules.aspx