Fisher: Coronavirus Fears Are High — What to Do With Stocks
Ken Fisher is the founder and executive chairman of Fisher Investments.
While much of China is up and increasingly running again after the coronavirus outbreak, the West’s economy has come to a screeching halt. Now pundits say cratering export demand will hamstring the country’s recovery and markets. But despite the fact no one knows how long the West’s economies will remain shuttered, now is no time for fear. Instead, separate your stock market view from the global economy and the still-unfolding human tragedy. As you do, remember American investment legend Warren Buffett’s best advice: “You should be fearful when others are greedy and greedy when others are fearful.”
To understand the fear, consider Covid-19’s uniqueness. It isn’t so unique based on any of the epidemiological statistics. It is so unique based on how the world responded to it. Unprecedented reactions from businesses, governments, schools and other institutions disrupted economic growth globally. As of early April, about half the world’s population—some 4 billion people—were under stay-at-home orders, as “non-essential” businesses closed. In the week ended March 7, U.S. initial unemployment insurance claims were a historically low 211,000. The following week they rose to 282,000. On March 21, they spiked 12-fold to 3.3 million—smashing prior records. The next week, they doubled. In Europe, over 898,000 Spaniards lost their jobs since restrictions were enacted. A fifth of French private-sector employees weren’t working in March. These are just a few examples from many of the fallout from the worldwide Covid-19 response.
China’s economy is on the road to recovery. But many say this international threat puts China at risk. They note that shipping rates and volumes to North America and Europe slid in March—and that was before Western business restrictions were fully in effect. To an extent, they have a point. A third of China’s exports go to North America or the European Union. Widespread shutdowns in those areas mean U.S. retailers won’t order as many goods from Chinese manufacturers. European automakers will cut equipment orders. Chinese firms may have to lay off employees, cut their hours or salaries—or both. Some already are.
That said, compared to 10 or 15 years ago, exports have far less impact — thanks to the government’s sensible policy shift. In 2006, China’s exports peaked at 36% of GDP. Today, they are under 20%, as China shifted from a manufacturing- and export-driven economy toward a services- and consumption-oriented one. That shift should limit export shocks’ impact somewhat.
Now, that is all the economic effect. But here is where separating this from your stock market view is crucial. Many will see export shocks as justifying a cautious stance toward Chinese stocks. They will wait for signs of improvement before investing. They’ll want clarity on Covid-19’s path, signs shutdowns are ending abroad or even improving export demand. But markets never give “all clear” signals.
They pre-price brighter days no one sees. The stock market is a very expensive place for those waiting for all clear signals because of that. Those waiting for “light at the end of the tunnel” usually crash into the tunnel’s sides — when instead they should turn their car’s bright beams on and drive forward faster. That stocks pre-price the future always is the beauty of Buffett’s quote. You can’t wait to be confident the market’s low is in — you’ll be much too late to catch the steep rebound. Besides, short-term predictions are folly even under normal circumstances. Today, the vast quantity of unknowns makes trying to time a low laughable.
While the low’s timing is unknowable, I see two basic paths forward. If Covid-19 fades in the West at a pace similar to China’s, then America and Europe could be back to work in weeks. Already, Austria and Denmark are planning to ease restrictions soon. The pent-up demand should invigorate China’s exports. If that happens, stocks will hit new highs far faster than almost anyone envisions.
If the virus lingers or resurges, disruptions could persist. If so, we’ll get a more severe and prolonged contraction and stocks will rebound later. Regardless, Buffett’s advice applies. Bear market bottoms form a “V” shape or “W” shape. Either way, following panic selling, stocks are shockingly higher in six, 12 and 18 months. Forget pinpointing the bottom. Embrace the brighter aftermath now.
Today, headlines focus on death tolls and contagion rates — both tragic. But for stocks, the key is when the institutionally generated restrictive reactions end. Health-wise, history will judge their effectiveness. But I fear with asymptomatic carriers spreading the virus through necessary continuing functions, like food stores and healthcare services, the fear driven economic clampdown may linger longer. American researchers blame such “stealth” transmissions for most of the spread.
Yet some unnoticed positives are happening. For example, the documented Peltzman Effect is everywhere in full force—the idea that taking precautions against one risk helps insulate you from similar dangers. Worldwide, influenza kills 290,000 to 650,000 annually, according to the World Health Organization. Pneumonia takes even more lives. Those illnesses spread similarly to the way Covid-19 does. Hence, efforts to avoid the coronavirus are quietly but heavily reducing flu and other pneumonia deaths everywhere. Recent data show that starting in February. Reduced traffic likely also saves some lives through fewer Western world auto accidents.
Yet global stocks reacted to the business restrictions strangling the global economy, very unlike previous recessions. That’s why they fell so steeply, flipping from a mid-February record high into a bear at all-time record speed. They correctly anticipated the clampdown. Stock markets always run in advance, pre-pricing the future somewhere three to 30 months ahead. This time, the sudden, unprecedented interruption to business forced them to the very short end of that range. Nothing otherwise was economically wrong.
The global coronavirus endgame is a future vaccine. It will take time, but it will come. Its evolution will be scrutinized and chronicled widely. But markets, as always, will pre-price its arrival. They’ll skyrocket — even though economies will still be deteriorating. That will confuse most observers and investors. Stocks are always hugely higher before we’re even close to any all clear signal. Fathoming that gives you a leg up on most.
Specifics vary, but Buffett’s quote always applies. The coming weeks will test the West. But invisible as it seems now, a bright future is near. The business and social restrictions will reverse like a depressed spring that is released. Stocks will do what they always have: anticipate this better future. This panic began without warning. It likely ends similarly, with stocks surging as quickly as they fell. So, yes, it’s a fearful time. That means it’s time to be greedy.
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Ken Fisher is the founder and executive chairman of Fisher Investments, a money management firm serving large institutions and high net worth individuals globally.
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