Edison Byzyka, chief investment officer for Credent Wealth Management

Byzyka

The volatility across global equity markets that commenced in late February 2020 has been one of historic proportions. The S&P 500 plunged over 20% in the fastest pace on record over fears associated with COVID-19, the novel coronavirus, and sent the index into bear market territory. The index has now exceeded a -30% drop from its peak.

There’s no hiding the fact that such downside, in such a short timeframe, can be shocking. The fear factor is likely to be exacerbated over the coming weeks as talks of a recession may likely amplify. After all, COVID-19 pinpointed tremendous supply chain issues following China’s efforts to quarantine the virus, and we’re now seeing demand side issues as consumers avoid malls, car dealerships, and leisurely travel.

Such a double whammy on supply and demand can often result in economic weakness. If I had to stare into my crystal ball, I would likely venture that a recession is inevitable at this point; just don’t ask me when. Attempting to correctly time macroeconomic events is the most futile process that exists, just ask the 400 PhD economists at the Federal Reserve (yes, 400).

The fact remains that recessions are part of the business cycle, and they’re often necessary prior to the beginning of a new, and often stronger, economic growth cycle. It’s really that simple, despite our human nature to produce unwarranted mass panic at the idea. Our human nature further takes hold when we dig deep into our recency bias where we often associate upcoming recessions with the immense fright of the previous one, which unfortunately proved to be the worst since the Great Depression.

As we gauge the current environment, however, and as the previous recession’s wounds are once again coming alive, I want to provide a sense of objectivity amid the chaos. Firstly, let’s recognize that the equity market and the economy are different animals that tend to react differently on the same set of news.

It’s possible that equity markets have already priced-in the weaker economic data points of the future. This may imply a scenario where equity markets remain neutral, or may gain value, during an actual recession. If that sounds crazy, it’s not, because it’s happened numerous times in the past. The tremendous panic of the recent selloff may cease once quarantine guidelines are lifted.

Secondly, it’s hard to justify the fact that a bear market itself can cause a deep recession. That’s simply not true. What we’re witnessing with COVID-19 is a level of uncertainty that cannot be currently quantified by market participants, despite media efforts. The best sense of weakness will become evident in the upcoming earnings season when we receive forward earnings guidance from major U.S. companies.

Thirdly, let’s not forget the fact that prior to the COVID-19 equity market panic, the backdrop of the U.S. consumer remained in extremely healthy territory, unlike most recessions of the past. The number of people voluntary quitting their jobs nearly peaked, retail-based sentiment had not faltered, and net new monthly private payrolls surged. Additionally, household debt, as a percentage of disposable income, remained at record lows, wage growth established a promising trend, and home buying sentiment conditions had improved, not to mention that investors remained constructive on the equity market. Such data is critical when gauging the potential severity of the next business cycle shift.

In my view, this means that the potential for a forthcoming recession had no roots embedded in fundamental economic issues like the 2008 crisis. There is also lack of concrete evidence rooted in equity market bubbles, such as the outstretched technology sector valuation issues of the dot-com bubble. As a result, the current record pace into bear market territory may have provided a gift for those investors with a five year, or longer, investment horizon. Readjusting the risk level of existing equity exposure, or even liquidating bonds to buy stocks, may all be things that an investor should seriously consider. Always remember that there is never a clear roadmap tied to equity market volatility and nothing will signify the definitive bottom of the market. As the business cycle eventually shifts, as has been the norm over the past 100 years, the goal is to acquire equity exposure on sale, it’s not to time the market.

Recommended for you

(0) comments

Welcome to the discussion.

Keep it Clean. Please avoid obscene, vulgar, lewd, racist or sexually-oriented language.
PLEASE TURN OFF YOUR CAPS LOCK.
Don't Threaten. Threats of harming another person will not be tolerated.
Be Truthful. Don't knowingly lie about anyone or anything.
Be Nice. No racism, sexism or any sort of -ism that is degrading to another person.
Be Proactive. Use the 'Report' link on each comment to let us know of abusive posts.
Share with Us. We'd love to hear eyewitness accounts, the history behind an article.