Bankinter | Thursday March 12th was the worst day in the history of the stock markets. Panic took hold and neither the central banks (the ECB was a huge disappointment) nor the governments were up to the task. The problem was the speed of the fall. Slow governments and unconvincing central banks. Despite the fact that on Friday the situation was reversed, undoubtedly there will still be bad days. 3 basic ideas suffice:
1-It is unlikely that the accumulated stock market falls in 2020 will be greater than the real damage that this COVID-19 crisis will end up causing to GDP and corporate earnings. This means that current prices are starting to become sufficiently attractive, or are about to become so, if we raise the stakes. When to act? Let’s remember that it’s impossible to buy at minimums (and sell at maximums). Nobody can do that in real life.
2-Let’s avoid frustration without looking to blame. We must not get frustrated because we did not get out in time to avoid this hit. That was not possible because it (COVID-19) is an exogenous factor to the economy, unleashing this hyper-violent reaction as never before. We suspect this is due to the activation of the stop-losses of passive management (the importance of which will be worth reflecting on later). The failure of the central banks (mainly the ECB) and the slow and lukewarm reaction of governments have allowed the markets’ own inertia to increase.
3- The real damage (for GDP and corporate profits) is not unlimited, but limited. Perhaps one bad quarter (Q1) and a next fairly good quarter if there is a “reduction – increase” effect on final demand. But now (almost) everyone is driven by emotion rather than reason. That means that there are almost 9 months left of 2020 to get things back on track. This is not only sufficient time, but even seems “infinite” considering the speed of events. Think about how we want to be positioned in December 2020 or even 2021… because that’s what really matters. On Sunday, the Fed lowered rates yesterday (-100bp, to 0.00/0.25%) and injected $700 billion in asset purchases. On Monday, the BoJ doubled its ETF purchase programme (to $113 billion), targeting mostly stocks. We have to wait a little longer and hold our nerve until the capitulation comes, which is near. When you invest the reward is always medium to long term, while the “noise” is always short term. Let’s ignore this noise just a little longer, even if it seems unbearable now.