Outlandish scenarios, risque behaviour, and general foolishness keeps eyes glued to the screen. The financial markets of 2020 were no different.
COVID-19 would be a Black Swan
event in the mind of Nassim Taleb
. A once in a lifetime event that will be in our minds for the next 100 years. These events scar and educate us, building resilience to future madness.
Pessimists and chicken littles view these events as the end of civilization. Optimists view them as learning, profitable and opportunistic experiments of life.
We are optimists and will use this InterPrime newsletter to recap 2020 learnings and point out themes for 2021.
Lesson #1: COVID = Always Have Insurance
The stock market started 2020 hotter than a New York kitchen in August.
President Trump took China to the wrestling mat in 2019 on trade deficits and many viewed the outcome as a draw. No bad news equals good news in the markets. So, the 2019 rally continued at the start of 2020. Then…
Looking back at how COVID took the markets down in Feb/March always replays in my mind. Most won’t remember but it played out like a slow moving car wreck.
China started to report cases and many (including myself) assumed they could contain it. Localized situation. Goes to show you why you never assume.
Initially, the spread was slow enough to not trigger alarm bells. I went through with a two week visit to Spain at the end of February 2020. During that trip Italy became the canary in the coal mine. Infections rose exponentially and travel restrictions started.
As we made it to the Madrid airport the concerns of Europe lockdown and no flights to the US became real. We made it off the tarmac in what felt like a commando style exit out of a war zone.
Governments were starting to shut down across Europe and my Wall Street contacts started saying high probability the US will do similar.
I was sitting in a SF Starbucks looking at markets on my laptop in my best attempt to be a hipster(or are hipsters only in Brooklyn?). As I sat there I had a moment of clarity. This COVID thing has the whole world locking down so it is not unrealistic to think the US could do similar. But would they?
I had the gut instinct to start hedging my investments. Did I?
Two days later the US started lockdowns and travel restrictions. Calamity ensued and I sat in the corner with the dunce cap.
This story is to help suggest that you should always have insurance. The purpose of insurance is to guard against unforeseen events. The small money paid (or time) to have that coverage is worth it.
Insuring your life (life insurance), your portfolio (risk management/hedging) and your business (budgeting and planning) are always important. Take time to consider if you have the proper risk and insurance nets in place.
2020 showed why you always need to be on top of risk. Don’t get caught slippin’ in 2021.
Lesson #2: Federal Reserve = Liquidity Over Everything
Get me out!
That was the theme during the over 30% S&P 500 decline in March. Every sector of the market was taking losses. Then the Fed swooped in like the caped crusader.
When markets and assets are under heavy selling there need to be buyers to sop up the supply. If the buyers do not want to buy, or if they do not have the cash/liquidity to buy. Prices fall until a buyer sees value.
The speed at which asset prices were falling during March kept the buyers WITH cash on the sidelines. They saw blood in the streets, so decided to wait for a real fire sale!
The buyers who normally have cash DID NOT. And were taking heavy losses. Margin calls and lack of available credit were taking them down. They looked to sell to any buyer who would buy their assets to raise capital to protect their company. S.O.S!
During this time the government was shutting down individual business sectors. This left the companies to burn through cash to stay alive. Cruise ships, airlines, and hotels were some of the worst affected.
To say it was bleak is an understatement.
Like the cavalry comes to the rescue in an old western film - the FED came out guns blazing. Saying we will “do whatever it takes”
to save the economy.
Their method of resuscitation had two parts:
- CPR was administered by taking interest rates to zero.
- Defibrillators came out with bond buying programs moving beyond treasuries and mortgages. They added corporates, state and local debt and other variations.
They did this to make sure investors had confidence in corporate bonds. Without investor capital being lent to corporations they would have to tighten their belts. This would lead to rising unemployment, economic slowdown, and a crawling recovery. And in the worst cases - bankruptcy for those affected companies.
If you want to get into the nitty gritty details of what the FED is buying you can read our breakdown here
As I write - the FED’s actions appear to be exactly the confidence boost everyone needed. The S&P 500 has rallied since the declaration.