The Morgan firm represented and believed in America; and one inherited article of faith appears in every action of Pierpont Morgan. He recalls to-day, as his business motto, the advice his father gave him on a sea voyage made from England …
“Remember one thing always,” said Junius Morgan. “Any man who is a bear on the future of the United States will go broke. There will be many times, when things look dark and cloudy in America, when every one will think there has been over-development. But remember, yourself, that the growth of that vast country will take care of it all. Always be a ‘bull’ on America.”
Masters of Capital in America - McClure’s Magazine (November 1910)
An Historic Crash
The U.S. stock market has fallen about 30% from its February high which presently puts us in the midst of an historic stock market crash. The following slide from my old employer puts this in perspective as it highlights the greatest U.S. stock market declines over the last 90 years or so (click to enlarge):
Source: J.P.Morgan Asset Management
You can see here that a 30% drop in just a few weeks puts us on par with the 1987 stock market crash. Like the 87’ crash, the economic environment that proceeded this crash only included “extreme valuation” in stock prices, although I would add that 2020 only had extreme valuation in some categories of stocks. Like 1987, commodity prices are down, the Fed is anything but aggressive right now, and the economy is not in a recession.
What we are witnessing is a plain old market panic. It is easier to have such a panic when it is driven by something that is hard to see or quantify—like a virus spreading. This is one reason why the stock market is swinging wildly.
Let me give you an example of how wild these swings are. On Thursday, March 12th, the U.S. market fell roughly 9% or 10%. The next morning (Friday) I purchased shares of American Express (AMEX) for some clients at roughly where they closed the day before. Shares of AMEX finished the day up over 19%. They were down 14% today.
Market participants are grappling to quantify the impact or potential impact of a great many unknowns.
When this whole drama began I formulated a plan to have the stock portion of my client’s portfolios (different strategies are only allowed to hold so much in stocks) fully invested at a 30% decline. In other words, I thought a 30% decline was a worst case scenario. We are there now. At this point, whether we have a recession or not—keeping in mind that a “recession” is just a technical economic term for a decline in economic activity for a certain period of time—does not really matter at this point for stocks because the stock market has already priced it in.
It is hard for me to imagine a virus that has apparently only killed a few thousand people over many weeks now leading to a 50% decline in stocks that lasts for say, 6 to 12 months—something which has only happened 3 times since the Great Depression.
Stick to Principles
In my own 401(k) plan I am 100% invested in U.S. stocks and buying as much as I can right now within the framework of my own budget, financial objectives, etc.
The only stocks you don’t want to own right now are overly indebted companies—especially oil producers since the price of oil just crashed (get ready for cheap gas prices). Otherwise, you want to be buying quality companies like everyone else is buying toilet paper and I mean it. The last thing you want to do here is sell stocks. You have to ride it out. You could sell out today, a certain news story can come at night, and then the market could open up 10% higher and you may never be able to get back in where you exited. Wealth evaporated by fear.
If you own shares of quality companies, your ownership percentage of the company will most likely not change and will more likely grow as most companies are presently using their extra cash to repurchase more of their shares at a significant discount. The price of your shares is fluctuating a lot—they are always fluctuating to some extent—but your ownership level is not changing. If you are going to be a shareholder, then start thinking like one.
Most people do not do what I recommend though. This is why it is worth having an investment advisor who can value stocks and will buy at times like this. I actually said to myself several months ago something like this: “I am going to buy and sell when my valuation model tells me to even if it costs me every client I have.” Put simply, I am going to stick to principles no matter what. Investing is like life. If you do not act according to principles you will be tossed to and fro.
Once this panic atmosphere settles down, the economy digests the situation (Government support may be a key variable here), and the the market begins to look forward to normalized economic and trade scenarios, we might just see the stock market explode higher. The bear market that accompanied the 87’ market crash was only 3 months long and then stocks soared higher. The current environment has the makings for such a rebound.
The Very Best Time To Buy
The confusion and fog of market turmoil is the very best time to be buying. I keep hearing professional investors talking about waiting a little while and then they will start to buy. This is music to my ears. The very, I mean the very, very best time to be buying stocks or just confidently holding on to stocks is when the consensus does not want to buy (yet). It takes new buyers to move prices higher.
People can visualize why they want to own toilet paper right now so they buy. You want to own stocks when people cannot visualize why they should own them.
This works in the opposite direction. Several months ago I noticed a lot of people talking to me about stocks. When people who don’t normally talk about stocks start talking to me about them, that is usually a sign to get a bit more conservative. I wish I would have got even more conservative but what is done is done.
“There is no such thing as a stock market crash in America that has not turned around and eventually went higher.”
I like to listen to audiobooks on American history. People always paint the current environment as the worst ever, but if you have historical perspective you realize that it is not that bad. One of the reasons why we have such things as “stock market crashes” in America is because we have freedom. Freedom in a fallen sinful world often means a greater degree of volatility.
I am presently listening to the audiobook, What Hath God Wrought - The Transformation of America, 1815 - 1848 by Daniel Walker Howe. Through this I realized why so many Christian denominations and other religious cults were birthed in America. It happened because people had the land and freedom to spread out and do so.
We need to embrace freedom, act on principle, quit trusting in the government, be thankful for stock market declines (there is no such thing as a stock market crash in America that has not turned around and eventually went higher - the concept of an eternal crash is a false socialist lie that people like Bernie Sanders exploit), and yes, we need to listen to Pierpont Morgan and be bulls on America and buy stocks.
Joshua Hall, ChFC
Disclosure
The True Vine Letter is a publication of True Vine Investments, the investment advisory business of Joshua S. Hall, ChFC, and a Registered Investment Advisor in the U.S.A. The information presented is for educational purposes only and should not be regarded as specific financial or investment advice nor a recommendation to buy or sell securities or other investments. It does not have regard to the investment objectives, financial situation, and the particular needs of any person who may read this Letter. In no way should it be construed as personalized investment advice. True Vine Investments will not be held responsible for the independent financial or investment actions taken by readers. All data presented by the author is regarded as factual, however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive evaluation of financial strategies or specific investments and consult a professional before making any decisions. Positive comments made regarding this Letter should not be construed by readers to be an endorsement of Joshua Hall’s abilities to act as an investment advisor.