On Friday, Feb. 21, the S&P 500 closed at 3,337.75. Six weeks later, on Friday, Apr. 4, the S&P 500 closed at 2,488.65. That’s a drop of 25.4% in just 30 trading sessions.
While it’s easy to assume that this marked decline is the sole result of the coronavirus crisis, I think we should at least question that assumption: Is the coronavirus really to blame for the stock market’s drop?
Is the Coronavirus to Blame?
Just to be clear: I’m not an expert. On anything. Except maybe Seinfeld. Even there, I have significant gaps in knowledge. And I’m really not an expert when it comes to the economy and the stock market.
But in my inexpert opinion, the coronavirus is not to blame for the drop in the market.
Let’s imagine that you attempt a nonstop swim from New York to London. That’s a long swim.
What are the odds that you’re going to die in the water? Pretty fucking high.
If you’re reading this and thinking, “Nah, bro, I could do it,” just know that you’re 100% wrong — unless you happen to be a fish. A fish with internet access, a computer, and the ability to read.
And I bet a lot of fish couldn’t make that trip either. Finding Nemo, you know?
One way or another, you’re going to die. Maybe you die from lack of food or water. Maybe you drown. Maybe a shark eats you.
However it happens, you’re going to die.
Now let’s say that you’re out in the ocean — and, congratulations, you’ve gotten much farther than anyone would’ve expected — and then you get run over by a boat and die.
That would suck.
But it also wouldn’t matter — because you were always going to die in these waters.
Is the driver of the boat to blame? Yes.
And no.
Really, you’re the one to blame — because you’re trying to swim from New York to London.
That’s kind of how I feel about the coronavirus and the stock market.
Yes, the coronavirus is what killed the market — but long investors were always destined to die.
They were attempting an impossible swim in dangerous waters.
The Coronavirus Crisis Is Not the Cause
One book I read years ago that I found useful for thinking about cause and effect was D.Q. McInerny’s Being Logical. In it, he breaks down different types of causes — principal, instrumental, material, formal, final, remote, proximate, etc.
Honestly, I can’t remember what all of the terminology means.
But if we’re thinking about the coronavirus and the stock market, I think it’s fair to say that the virus was the precipitating cause. It was the catalyst.
It was not, however, THE cause. It was merely the thing that caught on fire in a forest ready to burn.
And make no mistake about it: This jungle was ready to go up in smoke.
Yesterday, I wrote about how the U.S. might get screwed by the $1.2 trillion leveraged loan market.
You can spray each other with gasoline for only so long before someone decides to light a cigarette.
The signals have been here for a while.
The inverted yield curve continues to throw a no-hitter.
With hindsight, the #yieldcurve has accurately predicted another #recession! pic.twitter.com/P6FGSHomI8
— jeroen blokland (@jsblokland) March 29, 2020
On Ep. 14 of the Brandon Adams podcast, he talks with Aaron Brown, the former Chief Risk Manager at AQR Capital Management, who highlights a few of the reasons we should have expected the market to go down.
Here’s what Brown has to say about the pre-coronavirus market:
It was very hard to justify price-to-earnings ratios, credit spreads. It was unbelievable that we could have a bull market for 12 years. …
I do believe that much of what we’re seeing would’ve happened without the virus. I think the virus triggered things and increased the panic. It means the stock market crashed sooner than it would have. But the credit problems are not from the economic shutdown — slowdown, whatever — caused by the virus. The credit problems are that more money was lent than was ever gonna be repaid. Stocks are still at very high price-to-earnings ratio territory. …
I don’t think that we can really blame the virus for everything. … It’s always convenient to blame something way beyond your control for things that happen.
I would say — I’m going to go out on a limb here — I’m not sure that 2020 financial market returns for the whole year are going to be significantly different than what they would have been without the virus.
And Brown’s take is not just retrospective analysis.
In the fall of 2019, I vacated almost all of my long positions — some of which I’d had since 2012 — and I went into cash in anticipation of a market drop, not because I’m an investing savant but because on almost every podcast I listen to that has anything to do with the news, economy, or stock market I started to hear things that troubled me.
It’s not as if these were random items that only the most knowledgeable and forward-thinking of investment gurus were aware of: These were data points being discussed on mainstream money podcasts.
If my memory serves me, Joel Greenblatt (the founder of Gotham Capital) says in You Can Be a Stock Market Genius that he has gotten some of his most valuable investing intelligence simply be looking at the newspaper.
That’s also how Tess from Working Girl gets her investing ideas, and we all know that Tess is a fucking boss.
One of my favorite sources of information is the Thoughts on the Market podcast by Morgan Stanley: Each episode is only 3-7 minutes, and over the past year it has shaped my perspective on the market more than probably any other podcast.
On the Feb. 21 episode — just two days after the S&P 500 hit its all-time high closing price and just three days before the market really started to tank — Chief Cross-Asset Strategist Andrew Sheets said this about the market:
While stock market performance indicates that all is well, the story looks different below the surface. With a variety of markets, the right way to invest, both since the start of the year and really over much of the last 12 months, has been to invest as if you thought the business cycle was ending and a recession was likely.
After all, ahead of recessions, bond yields usually fall, yield curves usually flatten, defensive stocks usually outperform cyclicals, large cap stocks outperform small caps, investment-grade credit outperforms lower-rated corporate bonds, and gold outperforms industrial metals. All those things have been happening.
At the end of 2019, almost no one could have anticipated that the coronavirus would be the precipitating cause of a 2020 recession.
But we can’t blame the coronavirus for the drop in the market.
We can blame only ourselves for thinking it was safe to be in the water.
I’m not a financial advisor, and I don’t suggest that you make any decisions based on anything I say or write … but I’m not blaming the coronavirus for what has happened in the market.