Stay the Course and Buy American

The number of Americans infected by the coronavirus has surged dramatically since the first case in the U.S. was confirmed earlier this January. In the month of March alone, recorded cases in the U.S. increased more than six-thousandfold. As our government is frantically trying to control the spread of the virus, the repercussions for our general economy have been dire. In the near term, millions will lose their jobs, corporate earnings for most American businesses will be dismal, and news headlines will continue to be unnerving. Nevertheless, while the infection rate of the coronavirus is certainly steep, there is a disease that spreads even faster—fear.

In light of recent events, the beginning of 2020 marked historical record-breaking declines in the stock market. The Dow Jones Industrial Average recorded its worst first quarter in history, dropping by over 23%, while the S&P 500 fell by about 20%. Perhaps even more interestingly, markets also recorded record-breaking gains during this accelerated meltdown. In a peculiar turn of events, the Dow surged by over 11% on March 24th, marking the largest single day percentage gain since 1933. During these times of unprecedented uncertainty, it’s incredibly difficult to draw conclusions from the short-term price swings, which is why I have been buying American stocks.

To be clear, I am not optimistic about the impact of the coronavirus. The outlook for the disease looks grim—especially in the United States, where access to testing is scarce and nation-wide quarantine is incredibly difficult to enforce. The hoards of college students going back to their homes after partying all throughout spring break only reinforce my concerns. Our healthcare system will be overwhelmed, the competency of our leadership will be tested, and our economy will contract at record rates. The broader public is right to be worried about the health and safety of Americans. In addition, companies that engage in excessive leverage or lack strong competitive positions could be in deep trouble. However, fears about the financial stability of many of our nation’s well grounded businesses are unwarranted.

The market may be far from its bottom. However, investors who are hoping to precisely time their next move should know that accurately and consistently predicting the short-term movements of the stock market is a lost cause. It is impossible to know for certain whether stocks will be higher or lower next week or next month. But in the long run, news about American businesses will be good. And chances are, the market will be higher before either the virus subsides or the economy rebounds.

An example of precedent occurred during the Great Depression. When the S&P hit rock bottom in June of 1932—falling below 5 points—the American economy continued to decline for almost an entire year. It wasn’t until President Roosevelt’s introduction of the New Deal in March of 1933 that things began to bounce back. Furthermore, real GDP fell by almost 13% in 1932 and 1.2% in 1933, while unemployment above 20% persisted until 1935. Yet, by January of 1933—before Roosevelt even took office—the S&P had already risen by about 50%. To provide another more recent example: in 2008, when the decline of the subprime mortgage market led to an international banking crisis, stocks again began to rise well before we saw the worst of the crisis. On March 6, 2009, the S&P fell to its lowest point since 1996 to 666 points—a decline of about 58%. Still, peak unemployment of 10% didn’t occur until October, record foreclosures didn’t happen until July, and despite an increased demand for loans, America’s largest banks continued to cut lending up until the third quarter of 2009. Nevertheless, by the end of April, the S&P had already risen by about 30%. Just as Warren Buffett once said, “if you wait for the robins, spring will be over.”

In just the last century, America has experienced the Great Depression, World War II, the Cuban Missile Crisis, a handful of epidemics, the 9/11 terrorist attacks, a couple of oil crises, an abundance of political scandals, and close to twenty recessions. Yet, perhaps the single best investment decision you could have made a hundred years ago was to buy a basket of American equities and pretend that the stock market didn’t exist. Since its inception in 1926, the S&P has increased by more than 200 times, excluding dividends. Today’s headlines may not be very comforting; however, over the long-run, news about the stock market will be exceptionally good. 

In hindsight, it may seem incredibly unlikely to lose money buying stocks during this century of incredible growth. However, agonizing losses amongst speculators have not been few and far between. According to a study from Morningstar, GCM Focus was the best performing mutual fund from 2000-2010, compounding at a rate of 18.2% annually. Yet, the average GCM Focus shareholder lost about 11% a year during that same decade. How? They bought when markets were rising and sold when the bad news barometer began flashing red. Buying low and selling high simply doesn’t work. To some, the stock market may sometimes seem like a scary roller coaster ride. If any investors feel that way, they are much better off closing their eyes and holding on tight rather than jumping off when things start speeding up.

People who have been hoarding cash in recent years may feel like they have dodged a bullet. But the reality is, anyone who chooses to suck their thumbs and sit on cash is holding an asset that doesn’t distribute any income, and is certain to diminish in value over time due to inflation. If you had one US dollar in 1920, its purchasing power today would only be worth about 8 cents. In other words, your George Washington would have lost 92% of its value over a century. The good news for cash owners, however, is that when bad things happen to the United States, it provides an opportunity to buy an assortment of American companies at a discount. 

Buying an index fund and holding it indefinitely has worked, and it will probably continue to work for a considerable amount of time. Today, it may seem like there’s no end in sight. However, the world will return to normal eventually. Stocks might continue to go down further tomorrow, and if they do, I will be buying more. Nobody knows exactly what the very bottom is or when it will occur. What we do know, however, is that America is the goose that lays the golden egg; and no one in their right mind should be selling it simply because it is quoted at a lower price today.

 

The above article references an opinion and is for information purposes only.  

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