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  • Brett Spurr

What Ifs

Another fun day, wasn’t it? Stocks are down about 30% from all time peak reached just one month ago tomorrow. Frankly, by bear market standards, that’s not even bad. Really! The speed at which we got here is frightening, but the depth of the decline is just run of the mill so far. The big bear markets are somewhat rare, but both of the last two saw greater than 50% declines. The Great Depression saw an 86% decline! An 86% decline is so absurd that it is almost easier to think about it as a 63% decline followed immediately by another 63% decline of what’s left. (Go ahead, get the calculator and check).

So what’s the worst that could happen? A depression, obviously. And what would the economy look like if people are furloughed and we’re confined to our homes most of the time? It would be depression-like. (Are you depressed yet?) Even Washing now understands this and we’re looking at $1-2 trillion in various forms of stimulus, support and bailouts to help the economy through. Even with such help, unemployment is going up dramatically and the economy will suffer in some sort of coma for a year until a vaccine returns life to normal. This is a situation that could see stocks fall even further. Not to depression era levels given our modern economy (the Depression was a very unique set of circumstances and Washington did nothing until FDR came to office three years later). But why wouldn’t the 50-60% declines of more recent bear markets be unreasonable? That would be very reasonable indeed, and so we conclude we’re probably not near a bottom- thus my summation of selling rallies and buying plunges to new lows.

What is the most optimistic scenario? Aside from a vaccine falling from the sky, I believe the absolute best scenario is that we shut down for a 30-day national holiday. That sounds disastrous, doesn’t it? It’s the very thing every governments everywhere have been trying to avoid! Bear with me for a moment: First, the next month is completely lost to business anyway. The pain is already in the pipeline as nearly everything has closed and we know its not coming back soon.

Second, the advantage of this scenario is the it completely wins the war. The virus would exhaust itself without spread. Those currently incubating would get it and pass the quarantine period. Those in their households would be able to avoid spreading it to even more people. In 30 days, the virus is basically gone. Spring will be in full bloom, the world would fling its doors open and go back to normal life, not partial life. Third, the stimulus being passed and support measures in the pipeline would be just about hitting the system- just in time to kick start everything. Fourth, for all the talk of forbearance, not paying mortgages and wages- all of that could be handled as we see light at the end of the tunnel. It’s when the tunnel lasts well into next year that defaults happen. This would be a “V” recovery and not the “checkmark” recently described.

If we were to declare a month long “shelter-in-place,” I would buy stocks immediately. But will it happen? Well, that I don’t know. It should be noted that in the last 24 hours, prominent voices have been saying “the government needs to do more”. The only thing left more to do, is a long mandatory “holiday”. What seemed a terrible idea 10 days ago, now gets actual consideration. The longer we wait, the more likely it becomes, so I am inclined to think it is coming.

Here’s the catch: if we were to buy stocks and a 30-day holiday doesn’t happen, that opens the possibility to the worst case scenario- a global nightmare that rolls on well into next year with all the attendant financial and physical dangers. Stocks would go down more. If this isn’t a perfect encapsulation of investment risk, I don’t know what is: Don’t buy and miss potential upside; or buy too soon and feel pain. Catch-22.

Remember, there are all sorts of half-measures that could happen instead. For example, what if just a 2-week shutdown was implemented? Helpful, but maybe not enough- then what? The situation remains fluid and uncertain. Investing appropriately requires some fortitude and acceptance that things could turn against even a smart decision. Rest assured that we’ll put the odds with us as best we can. It may not be a fun ride, but it won’t matter in the long run.

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