March 16, 2020
Markets continue to be under pressure. Unknowns remain about the magnitude and duration of the coronavirus, including the extent of the human tragedy, as well as the economic impact.

Uncertainty breeds volatility. In just a few weeks, the market has gone from a record high to a decline of 29% for the S&P 500. This is the fastest market decline from a record high in modern history. The average daily price swing for the market has been over 5% for the past 10-days. This is the highest volatility seen since the fourth quarter of 2008, during the depth of the Great Recession, and before that, the 1987 crash.

With both volatility and fear high, we thought it would be instructive to look back at the fall of 2008. On October 16, 2008, during the height of market turmoil, Warren Buffett penned an Op-Ed for the New York Times titled: “Buy American. I Am.”

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So … I’ve been buying American stocks…

…Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Buffett, Warren.E. (2008, October 16). Buy American. I Am. New York Times. Retrieved from https://www.nytimes.com/2008/10/17/opinion/17buffett.html

Although he was not making a short-term market call, from the time he penned that letter, until roughly a month later, November 20, the S&P 500 dropped another 21%.  Markets would fall a total of 29% from the time of the Op-Ed to the final market low on March 9, 2009, roughly five months later.

The market drop was painful. Fear remained high. Despite the continued market drop and investor fear, once stocks found their final low, they skyrocketed by 65% by the end of 2009. Moreover, one year later from the time of Buffett’s Op-Ed, stocks were UP 15%. That is, even with a sharp temporary overshoot to the downside, a year later, investors who maintained current positions or added to equities at the time of the Op-Ed gained double-digits. Stocks continued to rise over the coming years, culminating in the second strongest bull market in history, with a price gain of about 400%.

Of course, there are many differences from today and 2008. However, a key question remains for investors: are earnings for companies going to be permanently impaired from the current crisis? We are certainly going to see a sharp hit to profits this year. And while we’re not certain on timing, we believe it is more likely that once we get to the other side of this downturn, the S&P 500’s earnings will also rebound sharply.

Bottom Line

The short-term outlook remains highly uncertain. We know markets are already pricing in an average recession at current levels. We know markets are extremely stretched to the downside. We know that markets can overshoot further based on fear and forced selling.

That said, we will get through this. And we believe that once the market has a better handle on the full depths of the coronavirus, we are likely to see a snapback rally that is just as powerful as the decline that we have seen. We do not know when that starts or from what level. Our conviction is that longer-term investors, who have the time horizon and can stomach the downside potential, will be rewarded for holding equities during this challenging time.

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