Topic: How To Invest

What is Pat’s commentary for the week of March 17, 2020

The human and economic damage from Covid-19 so far is minor, compared to what may happen in the coming weeks and months. The stock-market drop to date partly reflects investor guesswork on that future damage may be. Investors are taking their cue from published predictions about the great damage still to come. These predictions come from health experts who are working with data from a variety of official and anecdotal sources, private and public, from around the world.

This flood of information, moving swiftly from one source to another, no doubt reflects a lot of differences of opinion, misunderstandings and errors.

Even the most highly qualified predictions may be optimistic, pessimistic, or somewhere in between. My guess is that the most highly publicized Covid-19 disaster predictions are, like most disaster predictions, overly pessimistic. You can blame this on human nature.

In times like this, the media tend to zero in on memorable or even extreme predictions, rather than the middle-of-the-road variety. This tendency is more pronounced today than in the past, simply because of rising competition in the media, due to online competition.

In talking about Covid-19, health experts may feel a moral obligation not to guess on the low side. If they did that, vulnerable people might act on that under-estimated risk, and die as a result. Better to gravitate toward the worst-case scenario.

This won’t hurt anybody’s health. But it could hurt your finances if you use it to make investment decisions.

I mentioned last week that a friend’s broker showed him a tabulation that suggested that the stock market always goes up after a disease-related market downturn. However, market movements and disease outbreaks are both subject to a large random influence. When two random events coincide, it’s a coincidence, not a sign of cause and effect.

Then too, the market goes up around two thirds of the time over long periods. Market rises coincide with lots of things.

This past week, I saw a research study that described three kinds of market downturns – V-shaped, U-shaped and L-shaped. In the V’s, the market goes down quickly and rises back up just as fast; in the U’s, the market goes down, stays down a for a while, then goes back up; in the L’s, the market drops sharply, then goes sideways for a lengthy period.

Supposedly this classification helps you sort through possibilities. It doesn’t add any value that I can detect. In fact, it’s an example of what we call “mental chewing gum.” It has about as much value as an investment technique as chewing gum has as a form of physical exercise.

You can learn something about the market outlook by studying past market movements, but it takes more than spotting coincidences. You have to look into what caused the market to do what it did in the past. You may come across a similar cause/effect relationship in the future.

You may recall the late-1990s predictions of the effects of the millennial bug, known for short as Y2K. Financial and computer experts warned that Y2K would bring financial and social chaos at the start of the new millennium. Some predicted a Y2K depression. (This was because 1990s computers used the last two digits of years, rather than all four, for record-keeping. Y2K experts predicted that computers all around the world would freeze up when the year “00” (that is, 2000) replaced “99” (that is, 1999).

Some of these computer consultants gained instant but passing fame and fortune, and also set off something of a Y2K panic. However, the dire predictions fizzled. Y2K was a genuine risk, but there was a simple fix for it. The Y2K panic drew enough attention to it that most computer users around the world got the problem fixed before January 1, 2000.

I detect an analogy between Y2K and Covid-19. If people dismissed Covid-19—as “just a new type of flu,” or “something the media is blowing up out of proportion” or, worse of all, “a hoax”—then some of the most drastic Covid-19 predictions might come true.

Instead, the reverse seems to be happening. People are picking up on the simple fix. Many are going for personal hygiene and social distancing in a big way, and they seem determined to stick with it.

In fact, many people around North America seem to be preparing for lengthy periods of self-imposed quarantine, much as Canadians prepare for a winter storm, or Floridians for a hurricane. They are doing more than just stocking up on toilet paper. Many are stockpiling on all sorts of everyday household items, plus canned goods, cereals and other food items that can keep for months.

Covid-19 has already done much more damage than Y2K.  But if people around the world go all in on bracing for the future harm the disease could cause, they might cut way down on its actual physical and economic costs.

With that in mind, I’m beginning to think that the bulk of the damage to the stock market may be behind us.


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