What we’re living through right now is truly unprecedented. And the trading opportunity that will follow is going to be a once-in-a decade opportunity. More on that below, but first let’s dig into what’s happing in the markets – and more importantly, why.
A novel virus has commandeered our modern ability to travel fast and far. And it has spread quicker across the globe than ever before, creating a global health crisis. To solve that, we and most other countries around the world are putting our economies temporarily on ice.
That makes this the first global economic crisis that wasn’t caused by a financial problem. For example, the Great Financial Crisis of 2007-2009 was caused by problems in the overleveraging of debt in real estate sector, which through securitization spread to the finance industry and then the world.
Meanwhile, the Dot Com Crash that started in 2000, was due to a frenzy of overleveraged speculation on tech stocks that weren’t making any money.
Going way back, the 1929 crash was again the result of – you guessed it – overleveraged investors who couldn’t survive a modest pullback. At the time just about anyone could get a margin loan of ten-to-one, meaning you could by $100 worth of stock with just $10 deposited in your account.
Those crashes were all of a financial nature.
Normally, I’m very wary of people who say that “this time is different.” It’s almost always a cry for people trying to prop up the bubble of the day.
But this crash really is different. The CAUSE for this crash isn’t financial. Instead, the cause is a global health issue.
This time, the financial/economic uncertainty is an EFFECT. The financial/economic issues are the result of the underlying fundamental problem: there’s a pandemic sweeping the globe.
And this is exactly why all the financial stimulus efforts that the Fed (and other central banks), the White House, and Congress have thrown at the problem haven’t had any meaningful effect at stopping the markets’ free fall.
The Fed has launched their full arsenal of monetary stimulus tools – multiple surprise drops in interest rates, bond purchase programs (aka Qualitative Easing or QE), loan backstops – the works! And the market just yawns.
The White House and Congress offer helicopter money – sending everyone $1,000 checks (maybe even two) and bailout packages for affected businesses. And the market says, “Meh.”
Monetary and Fiscal stimulus packages don’t work because they’re addressing the effect – not the cause.
Think about being caught outside in a monstrous rainstorm. You’d like to get dry. So you grab a towel and towel off. Problem is the rain just drenches you again instantaneously. People can hand you towel after towel. And you’re still going to be wet.
What you need is an umbrella. Something that keep the rain from hitting you in the first place.
And that’s what the market is looking for. Something that keeps the insidious virus from effecting global health and welfare and by extension, global economics.
Until we find a scientific, medical, or social solution that slows the growth of cases, stock prices will continue to drop and the market will not find a bottom.
But while we band together to fight the biggest external threat to hit us in a generation, we realize that, for a little while, some parts of our lifestyles and our global economy will have to change.
What is clear is that we will get through this. But it is also clear that it will not be easy, nor will it come without all of us working toward this goal.
I hope that in these trying times you have someone you can reach out to, someone to keep you company, even if over the phone or Internet, while we weather this crisis. If not, I urge you to make that virtual contact. Do it now (after finishing this article, of course!). Staying connected is an important part of well-being.
I also want to extend my gratitude to those putting themselves in harm’s way to fight this pandemic head on: police officers, fire fighters, EMTs, nurses, and physicians. And those real unsung heroes – the people working hard at grocery stores and pharmacies to allow us to keep our pantries and medicine cabinets stocked. And to all you who are keeping our distribution channels open during this trying time.
While they fight the good fight, and we do our part by practicing social distancing, cancelling unnecessary travel, and washing our hands as much as we can, let’s look toward the future.
Right now, that future may look bleak or scary. After all, this crisis seems different from all the ones that have come before. And uncharted waters can be scary.
But on both the medical and the economic side, we will beat this crisis.
On the medical side, potential treatments are being tested and vaccines are being developed. Meanwhile, testing, tracking, and isolating people will eventually let us put a stop to the virus.
As for the economy, there is one past event that is at least somewhat similar.
And it shows how, with the American spirit, we can and will pull ourselves out of this…
Americans Have Seen This Kind of Crash Before…
At 7:48am on December 7, 1941, the Imperial Japanese Navy launched a surprise attack on the U.S. Naval Base at Pearl Harbor.
We all know how the rest of this story went. America was dragged into World War 2, there was much pain, sacrifice, and suffering, and ultimately the Allies defeated the Axis powers.
But today, I want to focus more on the economic lessons from that time.
See, the attack on Pearl Harbor bears some similarities to the pandemic we face today. On that day in December 1941, Americans went from having no major existential threats to a state of war practically in an instant.
Ordinary people were scared and confused, and their lives were changed by a variety of state and federal measures. American society was upended almost overnight.
The stock market wasn’t spared. It fell drastically after Pearl Harbor as uncertainty reigned. Then as now, the future looked bleak.
And like now, that market crash wasn’t due to financial factors. It was people fearing for their life and safety, the fact that America was suddenly attacked and at war, that was the cause. The economic effects were secondary to that.
That’s what the current market drop is like, too. It’s the medical issues we face, our fears about them and our actions to stem them, that are primary. The economics are secondary to that.
But just five months later, in May of 1942, the markets had bottomed, and started working their way back up again. The month before that, in April, the Doolittle Raids showed that the Japanese were vulnerable and that removed much of the fear in the U.S.
The decisive U.S. victory in the Battle of Midway in June showed that America had turned the tide of the war in the Pacific.
By early 1943, markets had recovered all their losses from 1941.
Through America’s great resolve, both markets and the nation recovered in little over a year. America’s manufacturing sector had quickly turned around and focused on helping the war effort. Soon we were building enough tanks, planes, warships, and guns to supply not only us, but our allies as well.
Meanwhile, the Texas oilfields fueled our wartime economy and the war effort, giving us and our allies secure access to plentiful energy that the Axis powers lacked.
Together, America overcame the crisis, recovered, and became stronger than ever.
And I have no doubt that we’ll do so again.
When we’re in the middle of a storm, things are tough and scary, and it’s hard to see how we’ll ever recover.
But we did just that after 1941, however impossible it might have seemed at first.
And I know we will do the same after this crisis. I have no doubt it will require some personal sacrifices and some changes to our lifestyles in the short-term. Your governor, as well as federal authorities, have issued guidelines on what to do and how to help. I urge you to seek those out.
But we will come out of this, and we will be stronger for it.
Now, as an investor, I believe the markets will go lower than they already have. But they too will recover.
And much like in 1941, when the underlying problem wasn’t financial but military, the solution today won’t be financial.
But – whether through science, medical technology, social actions, or some combination of each – the solution will come. And when that happens, we will hit what I call the “trade of the decade.” It will be time to load the boat with quality companies that can be had at incredible prices. In fact, it’s even possible to start buying small qualities of top shelf companies like MSFT, AMZN, and AAPL as well as dividend stocks that will have great yields.
And stay tuned right here to Straight-Up Profits for more insight and analysis as we weather this storm together.
Good Trading and God Bless You,