Science, Not Speculation
Doug Walters
Recent questions we received about the risk of depression are natural at times like these, and a sign of the emotional strain of the crisis. But investing should never be about emotion. When given the option, we will always choose science over speculation.
Contributed by Doug Walters , Max Berkovich , ,
With stocks up 15% over the past two weeks, depression seems like an odd topic. But more than once recently, I have been asked if a depression on the horizon. While my first instinct is “absolutely not!” it occurs to me that I am not sure of the technical definition of a depression. A recession is typically defined as two quarters of negative GDP, and these happen relatively frequently. But a depression… those are rare, and we have not had one in the U.S. in nearly a century. It turns out there is no single definition of a depression, but the most frequent I came across had two criteria, 1) a prolonged recession of at least three years, and 2) annual drops in GDP of at least 10%.
So, are we entering a depression? Not an economic one. The U.S. stock market, which reflects the opinions of millions of investors and intellectuals, is up around 27% since March 23rd. If depression is around the corner, no one has figured it out yet. But there are other reasons why a depression is highly unlikely. Lessons were learned from the Great Depression. We have a much stronger central banking system with tools at its disposal that were unavailable back in the 1930s. We saw the central bank in action during the Financial Crisis of 2008, and we see it out in full force now, helping to keep the economy afloat while this temporary health crisis passes.
With all that said, the question of depression or not is one for cocktail party small talk and not one that should impact investment decisions. More money has been lost trying to predict significant downturns than in downturns themselves. U.S. equity markets generally go up, and trying to time entry in and out is a scientifically proven detriment to long-term returns. We will always choose science over speculation when it comes to managing our client’s investments.
Headlines This Week
Finding Hope
- A report noting early success in treating Coronavirus with Gilead’s drug Remdesivir, gave investors renewed hope Friday.
- Gilead’s management said that clinical trial data would be available soon, and they are looking forward to data from the ongoing studies to become available.
Getting Back to Normal
The White House unveiled a three-phase approach to reopen the U.S. economy:
- Phase one – restaurants, gyms, movie theaters, and large sporting venues reopen if they adhere to strict social distancing requirements. Vulnerable individuals continue to shelter-in-place.
- Phase two – schools and activities like daycare centers and camps can reopen, and non-essential travel can resume. Bars can operate with diminished occupancy.
- Phase three – vulnerable individuals can resume public interactions while practicing physical distancing. States must meet certain conditions such as a downward trajectory of positive tests within a 14-day period.
Looking East
- The contraction of 8% year-over-year in China’s Gross Domestic Product (GDP) was widely expected, with economists looking towards a recovery.
- A pleasant surprise was in China’s industrial production data, where March results were much better than expectations.
- Going forward, China sees an improvement in economic activity as the country continues to lift activity restrictions slowly.
The Week Ahead
One-fifth of the S&P 500 will report earnings next week. Our attention will be on M&T Bancorp (MTB), Lam Research (LRCX), NextEra Energy (NEE), Intel Corp. (INTC), Verizon Corp. (VZ) and Ventas REIT (VTR).
- While we do not expect much on the earnings front, our eyes will focus on balance sheet strength from the above-listed holdings.
- M&T Bancorp’s results are coming after initial reports from competitors, so there shouldn’t be surprises, but any comments on what they see in Upstate New York, will be of interest to us.
- Both Intel, the microchip maker, and Lam Research, the semiconductor equipment maker, will offer a peek into what to expect from the technology hardware sector.
Economic news next week will include the University of Michigan Consumer Sentiment Index, Durable Good Orders, and the all-important weekly jobless claims on Thursday.
- The weekly claims are probably the most closely watched economic release with over 5 Million people reporting being laid off this past week. Hope for those numbers to start looking up can help sentiment.
This weekend will bring an International Monetary Fund (IMF) and World Bank Group meeting.
- This meeting will focus on how the developed world will help the developing world deal with the COVID-19 crisis.
- IMF has $1 Trillion in lending capacity and has doubled its fast-deploying crisis financing.
- Over 100 of the poorest countries have requested aid, and so far, 50 have already received support.
China’s Central Bank (PBoC) has a rate decision on Monday.
- China reported a Gross Domestic Product (GDP) shrank by 6.8% in the first quarter. The decline is the first in nearly half a century.
- Comments from the PBOC on its efforts to restart its vast $14 Trillion economy will be critical.
- As the first in and first out from the Covid-19 lock-down, the rest of the world will look for insight on the path forward.
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