Economic Insights - March 2020

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What is the outlook for the economy?  We’ll give you the insights and analysis you need to make better decisions, so you can make better profits.

Markets are panicking.  Daily routines are being disrupted.  Geopolitical tensions are rising.  People are paralyzed by fear.

Let’s be specific.

Since February 20, “panic index selling” has driven markets down across the board.  Strong companies, as well as weak ones, have seen their stock prices cut 30+ percent.  Globally markets are down $25 trillion.  This won’t make sense in retrospect, but just like market bubbles, market panics are a permanent feature of human psychology.  We can’t get rid of panics as long as we have people acting emotionally.  But we can turn those panics into opportunities

From an investor’s standpoint, it can’t be said any better than Warren Buffett’s famous quote, “Be fearful when others are greedy and be greedy when others are fearful.”  And, if there was ever was a time when others were fearful, it’s now!

Fear is rampant, causing investors to exit index funds.  The VIX fear index recently hit a record high, above the levels of the 2008-to-2009 financial crisis.  Meanwhile, investment in money market funds is at a record $3.8 Trillion dollars; that’s 20 percent higher than just one year ago. 

Too many people fear that things aren’t going to get better.  Or, more likely, they assume that it will take forever for things to improve.

Just how ridiculous is that understanding?  Consider the annualized returns after other panics.

For reference, let’s focus on two waves of panic of comparable magnitude to the COVID19 panic: the 31.5 percent decline associated with the 1987 Stock Market Crash and the 39.5 percent decline associated with the collapse of Lehman Brothers in 2008.  One year after the 1987 Crash the S&P500 was up 27.9 percent and it rose an average of 18.9 percent a year for the next 10 years. 

Those who responded rationally to the market won big.  Those who panicked and stayed on the sideline lost.

Perhaps the biggest factor driving market panic is volatility.  Extreme volatility has proven to be a precursor to superior returns.

In March, the VIX index hit levels...

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