When we wrote to you at the end of the first quarter of 2020, the world was lurching into the greatest economic collapse in modern history.
In the UK we entered lockdown. London, for a thousand years the source of “the dreams of men, the seed of commonwealths, the germs of empires” [1], emptied and became still.
In The Waste Land (1922), T. S. Eliot depicts a heaving London that we might broadly recognise 100 years later:
Unreal City…
A crowd flowed over London Bridge, so many,
I had not thought death had undone so many.
Sighs, short and infrequent, were exhaled,
And each man fixed his eyes before his feet.
Flowed up the hill and down King William Street,
To where Saint Mary Woolnoth kept the hours
With a dead sound on the final stroke of nine.
When I cycled through London on a Saturday afternoon in mid-April 2020, I saw Eliot’s “Unreal City” but in negative, the streets scraped clean of humanity.
“Unprecedented”
The human cost and social upheaval triggered by the pandemic will, we suspect, become clear and unfold over decades. But will the pandemic usher in “a future economy and education system based on tele-everything”, in the frankly rather chilling words of Eric Schmidt, Executive Chairman of Alphabet Inc., the parent company of Google [2]?
Whether this vision represents utopia or dystopia for you, our guess is that the most significant changes will be continuations of existing trends.
Apocalypse Now
Turning back to the more immediate impact of the coronavirus, it is worth distinguishing between:
The economy; and
The financial markets.
The virus – or rather, the economic shutdown necessary to deal with it – hit the global economy like an asteroid. This was a collapse so widespread, so fast and so indiscriminate, it exhausted adjectives.
Unemployment in the US rose so rapidly it has rendered decades of data largely meaningless; historic, global events (various wars, 9/11, the Dotcom boom and bust, the Great Financial Crisis) now unremarkable eddies set against the tidal wave of joblessness in 2020:
So much for the economy. What about financial markets? As so often, they started to price in the damage before it became clear. Major markets peaked on 20th February 2020. As the disaster unfolded before our eyes, asset prices fell more sharply over 30 days than any comparable crisis:
Note that markets plummeted, fearing the worst, before the economic collapse. And the selling became more desperate and indiscriminate even after governments and central banks announced colossal programmes of support for the economy. The desire for safety above all else was so great that no amount of support was enough to stop the rush for the exit becoming a stampede.
On 23rd March 2020 the US stock market closed 35% below its peak on 19th February.
“It Makes No Sense!”
In a memorable interview [3] on CNBC, Bill Ackman, manager of the hedge fund Pershing Square, warned that without a total shutdown and huge government support, “America will end as we know it… Hell is coming.” Yet in the very same interview he said that he had already been buying stocks heavily and would continue to do so.
Since 23rd March 2020, we have seen one of the fastest ever recoveries, with many markets around the world having recouped most of the losses from the pandemic. This is despite a constant stream of bad news.
“It makes no sense!” I hear all the time from intelligent, educated people. How can markets be so disconnected from reality?
The Ackman interview perfectly captures the difference between the economy and the financial markets. In case it has not been made clear enough before: they are not the same thing.
Effect and Cause
How does any of this make sense? Financial markets frequently defy explanation. I am not going to tell you why they started rising so rapidly when the crisis was only just beginning. I will share with you a couple of features of financial markets which might provide some illumination.
Firstly, there is always a long list of reasons to be fearful, yet very rarely do we get news stories celebrating all the reasons we have to be optimistic. It is human nature to fret about and magnify risks. This brilliant chart by Michael Batnick [4] demonstrates the point:
As you can see, this is not the first time that markets have shrugged off terrible real world news. Just as the markets fell before the worst of the crisis, so they often start rising long before we see signs of recovery.
Secondly, many people make the mistake of treating financial markets as a static, closed system that can be modelled and explained. People used to being able to analyse, model and interpret systems in their own fields (marketing, software, e-commerce…) find that financial markets frequently defy attempts to be “explained” when they bring the same approach to bear.
Financial markets are not static. They are dynamic and frequently self-referential. Consider them more akin to open biological or ecological systems with feedback loops.
The very act of analysing the market changes the market. Even the most perfect analysis, once acted upon, will lead you to take a position which will alter the price of assets which in turn will affect millions of other decisions made by every other market participant.
This, too, shall pass… and maybe it already has
I will close by reflecting on what we had to say as the crisis was unfolding. As you know, we are not fans of short-term market commentary, which is not only often pointless but sometimes downright harmful. But after some huge market falls, on 8th March, I was asked, “at what point do you say to clients, ‘ok, it’s time to change your investment strategy…’ Does that day ever come? Realistically what needs to happen to trigger that response?”
My response then, with markets in meltdown, is no different today, when they have largely recovered losses:
“The strategy should have accounted for emotional and paper wealth effects of normal market behaviour - 20% or 30% market moves at some point in the journey. Strategy changes when client circumstances change, not when the market changes.” [5]
During that period, we saw astonishing daily swings of 8%, 10%, even 12%, equivalent to literally trillions of dollars of market capitalisation evaporating. I remember noting a 5.5% fall in the UK market one day in March and how that felt fairly mundane – yet it was the 14th worst daily fall in history. Nothing to see, move along!
The speed of the crisis both in markets and in real life was amazing. Hard to imagine this but the first recorded death in the UK from covid-19 was only on 6th March. (At time of writing the official, and tragic, death toll is over 45,000.)
I wrote a further public comment on 12th March. Returning to it on a number of occasions since then, I have asked myself whether in hindsight I would have said something different? On each occasion, the answer has been “No”. This crisis, like all the others before it, will one day be history.
- FS
[1] Heart of Darkness, Joseph Conrad (1899) [2] https://www.wsj.com/articles/a-real-digital-infrastructure-at-last-11585313825 [3] Well worth the 25 minutes or so to listen to the whole thing, which is already taking on the sheen of a piece of history: https://www.cnbc.com/2020/03/18/watch-the-full-interview-with-bill-ackman-on-the-coranvirus-threat-to-economy-shut-it-down-now.html [4] www.theirrelevantinvestor.com [5] https://www.linkedin.com/posts/fsheikh_investment-strategy-market-activity-6643034514979373056-Fh8T