COVID-19: The Stock Market And Economic Disruption

Ben Strubel’s letter to investors for the month of February 2020, titled, “The Stock Market and The New Corona Virus (COVID-19).”

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 2019 hedge fund letters, conferences and more

Dear Investors,

Hedge Funds: Small Firms Profit As Big Names Close In 2020

At the beginning of July, Lansdowne Partners, one of Europe's oldest and best-known hedge fund managers, announced that it was closing its flagship hedge fund after a run of poor performance. The closure is the latest in a string of high-profile hedge funds that have decided to shut up shop in recent years. Billionaire investor Read More


We’ve gone many months without any substantial panic in the market, but that streak has finally come to an end with the current 10%+ correction due to the fear over the spread of the new corona virus (COVID-19).

COVID-19's Impact On The Economy And Your Investment Portfolio

I’m not a global health or pandemic expert, so I can’t offer predictions about what will happen with regards to the specifics of the outbreak. I can help put a few things in perspective as it relates to the economy and your investment portfolio.

Investors are still shell-shocked by the 2008-2009 downturn (and before that the tech bubble).  That means there is a tendency always to look for “the next big thing” that is going to knock your retirement off track for the next decade. I think it’s important to keep two things in mind.

First, while there will be economic effects from the virus, this is not a crisis like the 2008-2009 global financial meltdown. The effects of this virus will be more temporary than permanent. It’s going to be much more similar to a natural disaster. Disruptive and knocking things off track for a quarter or two, not years.

Think about it this way. In 2008-2009, people took out loans to fund consumption. They used credit such mortgages and home equity loans to fund consumption such as building homes or buying big ticket items such items as a big screen TV. When the party ends because the rate of debt growth is no longer enough to sustain the boom, then the people who were going to buy shiny new big screen TVs with their home equity lines of credit are no longer able to do so. Instead, they have to get busy paying off their debt. Prior to 2008, private sector debt (specifically consumer debt) was what fueled the economy. When the debt growth stopped economic growth reversed. Banks were saddled with bad loans and the financial system almost (or did) grind to a halt.

Disruptions Caused By Corona Virus

Now, think about what’s going on with COVID-19. Factories, schools, churches, even whole towns close for a while. The person who planned on going out and buying that shiny new big screen TV can’t because they are under quarantine. The person isn’t in debt. They still have that money in their bank account. Once the quarantine is lifted and things return to normal that person is going to go back out and finally get that TV. Things will return to normal.

Sure, depending on how big the outbreak gets, that person might be very fearful and it might time for them to feel comfortable buying a big TV, but they don’t have big debts preventing them from buying more things. The future isn’t being hobbled by the virus, there are just disruptions in the present.

Second, remember that sensationalism sells. The media is in business to sell newspapers, magazines, clicks, and air time. Often, the media create the story and before they go looking for facts. During the financial crisis, a professor told me he got a call from a local news organization looking for an expert to go on record for their story that a local bank was going to fail (it wasn’t and didn’t). The story had been decided well before any experts were contacted. When I read the news, I always keep that story in mind. Was the story line written first and then the facts gathered with experts asked to agree? Or did the writer gather the facts, talk to experts, and then craft the story?

A headline like “New Global Pandemic” is going to get a lot more clicks and advertising money than a headline “COVID-19 Causes Supply Chain and Economic Disruption Likely to Last Several Months Before Things Return to Normal.”


Disclaimer

Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.

The performance data presented prior to 2011:

  •  Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
  • Performance is calculated using a holding period return formula.
  • Reflect the deduction of a management fee of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

Performance data presented for 2011 and after:

  • Represents the performance of the model portfolio that client accounts are linked too.
  • Reflect the deduction of management fees of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.

The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.