Over the past two weeks, several people have contacted me excited to jump into the market and buy at lower prices. On the surface this makes sense – stocks are substantially cheaper than they were a few weeks ago. Eventually, the corona virus will go away, or at least cease to be a major outbreak, and things will go back to normal.
Restaurants across the country will be closed for months. Malls, spas, any non-essential business will have to shut their doors for a considerable period of time. Many of them will go out of business, but even those that survive will have to lay off employees. This unemployment has a lasting effect – those people no longer have a steady income, which means fewer customers for surviving businesses. Which means more layoffs. Which means fewer customers.
Many recessions and depressions have begun because of temporary problems. The downstream effects of shutting down such a large part of the economy for months is unprecedented and will last long after the infections stop.
Stocks aren’t dropping just because of fear. They’re dropping on the reality that lasting harm is being done to market.
Now while every crisis is different, it seems like our solutions are always the same. You can count on the government throwing money at the problem until it goes away. I don’t mean the health problem. The government’s main concern is propping up asset prices. As long as most voters’ retirement savings are tied to the stock market and their home value, keeping the value of both inflated is the top priority.
The government does this by stepping in and directly buying assets, usually bonds, until prices go back up. In 2008 they threw trillions of dollars at the problem until it went away, and the stock market more than quadrupled from its lows over the next 10 years.
Don’t buy stocks because you think everything is going to return to normal in a few weeks. It won’t. Stocks still have room to fall because the underlying value of most companies will continue to fall over the next few months. Stocks cost less than they did a few weeks ago because they are worth less.
However, at some point there will be a V shaped recovery in the market, because the political pressure to print money to fix the problem is a certainty, and the government absolutely won’t stop until it’s reinflated asset prices.