Insights The Benefit of Patience & Time

The Benefit of Patience & Time

John P. Swift, CFA, CPA
Chief Investment Officer
312-259-9595 or

“The two greatest warriors are Patience and Time.”
Leo Tolstoy

Every market analyst will remind you that patience, time and history are on your side when it comes to investing. You know what? They’re right. The charts don’t lie.

Of course, the cushion of time gets a lot more uncomfortable the older one gets, which is why this bear market hurts a lot more right now for someone who is 65 years old as opposed to 35 years old.

Some market analysts, though, think the stock market will make up for its losses in little time at all, which implies similar closure for investors of all ages. We’d love to hope they are right, but we have our doubts.

This week’s 20% rally gave everyone a little taste of how fast this market can rip on a change in sentiment. There is a lot of ground that needs to be made up and a lot of repair work that needs to be done in the U.S. economy, as well as the global economy.

As you know, we aren’t sold on the notion of a V-shaped recovery for the stock market or the economy as we discussed in last week’s note (“Covid-19
Containment-A Necessary Hit to Our Economy & Investment Implications”,
3/23/20) Yes, there will be big moves like the one seen this week in the stock
market, but it is easier, of course, to score big percentage moves off a depressed base that belie the reality of the situation.

Has the Stock Market Bottomed?

“Has the stock market bottomed?” That is the question and every investor’s mind. Some argue forcefully that it has while others argue forcefully that it hasn’t.

You know what the only answer should be? “I really don’t know.”

The Times They are a-Changin’

The bottom that the many are basing their prognostications on is the S&P 500 at 2191.86. That level was reached on Monday, March 23, and it marked a 35.4% decline from the all-time high registered on Wednesday, February 19.

The world — and certainly the U.S. — was a much different place on February 19. While we can cite a multitude of reasons to confirm that realization, we’ll stick to four for now:

  1. The Federal Reserve’s balance sheet has swelled to $5.25 trillion from $4.13 trillion on February 19; and the Fed will soon have a $4.5 trillion lending capacity.
  2. The Senate passed a $2.2 trillion fiscal stimulus package with bi-partisan, and unanimous, support, neither of which were in the Senate’s legislative lexicon on February 19.
  3. Initial claims hit 3.283 million for the week ending March 21 versus 219,000 for the week ending February 22.
  4. The confirmed coronavirus caseload in the U.S. stands at 86,012 today versus 13 on February 19, according to Johns Hopkins University.

Sure, there are historical connections made to past bear market drawdowns, which generally fall in the range of 30-50% declines depending on the severity of the recession that coincided with the bear market.

Hence, the camp that argues that this recession will be short and shallow thanks to the massive stimulus effort rides on the notion that the bottom is in with that 35% decline. Meanwhile, the camp that argues this recession will be long and deep expects newer lows to be reached, and it is common during bear markets to have a couple of Bear Market rallies before a durable bottom is reached. For example, during the Great Recession of 2008-2009, we had several double-digit rallies.

S&P 500 Price Return-August 2008-April 2009

Bear markets rarely end without retesting the first low hit in the bear market. In 2008, the passage of the financial-system bailout package and other measures helped the market soar off its low. Attention then turned to the real economy and corporate earnings. The initial estimates were off—way off—and it wasn’t until analysts got a grip on the profit path that the S&P 500 found a bottom on March 9, 2009 We’re not saying we’re going to retest the lows from March 23rd (remember, we don’t know), but it must be contemplated knowing:

  1. U.S. GDP should see its biggest decline on record in the second quarter.
  2. The sudden stop of economic activity has done incalculable damage to
    consumer, business, and investor confidence.
  3. Corporate earnings are going to get clobbered.
  4. There has yet to be a flattening in the coronavirus caseload trajectory and no one can say for certain when that might be.

The wild card is the coronavirus itself. It is far from contained, and Covid-19, the respiratory disease caused by the virus, continues to spread. There are now more than 550,000 cases world-wide, touching nearly every country. The U.S. is now No. 1 in confirmed cases, passing China, where it all started. Even where the disease’s spread has been slowed and quarantines lifted, life hasn’t returned to full speed as people remain reluctant to interact and conduct commerce as usual. The financial
stimulus and rescue measures signed into law Friday will bring people financial relief, but it isn’t clear that they will be enough for the economy to bridge the gap of a near-shutdown or prevent another stock market swoon—one that almost surely is coming.

In other words, this isn’t over yet.

Reason for Hope

There are reasons to be hopeful, however. With their robust action to shore up financial markets and give American businesses a lifeline, the Federal Reserve and Congress have likely kept the U.S. economy from sinking into a prolonged recession or even another Depression. The Fed, for its part, acted with unprecedented speed once it realized the scope of the problem. Beyond cutting short-term interest rates to near zero and launching bond-buying programs known as quantitative easing, its quick decision to backstop money-market funds, pump cash into the short-term funding markets, and make dollars available to foreign central banks has helped unclog the pipes of the financial system so that cash can get where it is needed.

This isn’t 2008, when both the Fed and lawmakers dithered as the financial system crumbled and the economy slumped. In 2008, it took a market crash to get the legislative branch to take the financial crisis seriously. This time, while it took longer than some might have liked, the Senate took about a week to pass a $2 trillion rescue package. Even when roadblocks sprang up, it was clear by midweek that a b ll would pass, and that it would be big. The final document included payments to individuals and families; $500 billion for corporate aid; and an extension of unemployment benefits that could cost $260 billion.

While the fiscal rescue package, in combination with the Fed’s monetary stimulus, was enough to rally the market, it remains to be seen whether it is enough to plug the gaping hole in the economy that is just around the corner. More than three million Americans filed for first-time claims for unemployment insurance in the week ended March 21, and economists say the numbers will get far worse in coming weeks.

Stocks could still head south toward their recent lows, or even tumble further.

For now, the hope that economic damage can be contained—regardless of
whether the virus can—is what’s causing the market consternation. This past Thursday, even as the U.S. saw its largest daily increase in Covid-19 cases, the Dow gained 6.4%. No one should expect that to continue. The economic numbers are expected to be horrific, but the number of people who get infected is likely to get worse than many expected—and rattle the markets. Retesting recent stock market lows will depend on the progression of the disease and its cost to society and our economy.

What This Means for Investors
The world and the U.S. are in a tough situation right now. It’s unprecedented in this modern age, which is why nobody should be declaring confidently right now that the bottom is in, or isn’t in, for the stock market.

Those are simply best guesses when there are no credible earnings estimates at the moment, the labor market is seeing a period of unrest like no other, supply chains are being broken, companies are suspending stock buyback programs and dividends, and coronavirus cases continue to grow exponentially.

Time will heal these wounds, just as it always has, but it may take longer this time.The cure to stop the spread of the coronavirus has been to shut down the economy, which is taking a huge toll on local and state budgets. In turn, the cure for the economy is to flood it with fiscal stimulus, only that may not be a long-term cure. It might help get the economy out of ICU, but it is also going to create some chronic issues.

Ironically, the fiscal cure for today is going to be what ends up ailing the economy later as higher taxes and reduced spending will be needed to cut the deficit, impeding economic growth at the local, state, and federal level.

This is a challenging time, then, not just because of the coronavirus, but because the necessary policy solutions today will turn into tomorrow’s problems.

Where the bottom is for the market and the economy is anyone’s guess, yet the climb back to the peak for the market and the economy isn’t expected to be an easy one. Investors, therefore, should act in accordance with their risk tolerance, because it is still risky business for the market and the economy.

I wish you all continued health and strength for you and your families, and I look forward to the day when we can meet again face-to-face. Until then, I’m available on Zoom video, the phone, or email.

Warm regards,

APPENDIX: A Summary of the CARES Legislation

After much heated debate and late-night negotiations, Congress finally passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Here are the key items included in the final text of the bill:

  • Direct payments to Americans: $1,200 per taxpayer with incomes up to $75,000, with a phaseout beginning at that level and ending at $99,000 in income. Families will also receive $500 per child. Payments will be issued by the Treasury Department through direct deposit and physical checks in the coming weeks.
  • A $500 billion corporate relief fund: $425 billion is set aside for the Federal Reserve to leverage into loans to distressed companies, and $75 billion is available for specifically hard-hit industries, like travel and leisure companies. The fund was one of the most contentious negotiating points. Democrats reportedly won the inclusion of more transparency and oversight measures, including the immediate release of the names of companies that have received aid and an inspector general and Congressionally chosen board. Also included is language that effectively restricts the Trump family’s business—and the businesses of his family members and other senior members of government—from receiving aid from this fund.

Help for companies crucial to national security: The corporate aid includes $17 billion set aside for companies that are seen as vital to the U.S.’s national security. While no company is specifically named, this could include companies like Boeing, whose stock has vaulted higher as the stimulus agreement has come together.

  • A big extension of unemployment benefits: Jobless claims will be available longer and benefits will be improved for four months. Unemployment benefits will also be available to furloughed workers, freelancers, and so-called gig-economy workers like Uber drivers.
  • Loans to small businesses: The loans, which total more than $367 billion, would be made by community banks and federally guaranteed. They would carry a nominal interest rate, but any portion used to keep employees on staff or pay critical costs like rent or utilities would be forgiven. Small businesses also get new tax incentives to keep people on payroll.

Aid to the health-care system: $100 billion to help hospitals, doctors, and nurses fight against the coronavirus outbreak and almost $20 billion to stockpile medical equipment.

  • Funding for state and local governments: $150 billion to help cities and states deal with both the direct costs of fighting the outbreak and the budget holes created by lost economic activity leading to lower tax revenues.