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| Investors watching the markets this last week may well have felt as if they were base jumping off a mountain. |
This last week of February was spectacular for all the wrong reasons, as months of relentless forward momentum ground to a halt and moved in full reverse, with markets closing Friday near levels first seen in September of 2018 and then again in the late spring of 2019. Equities basically gave up a year and some gains in a matter of a week, destruction to the tune of more than $3 trillion in market value according to estimates. Let’s look at those numbers in detail. In the past five days, the S&P 500 fell more than 8.3%; the Dow closed down 10.1%; and the Nasdaq declined 6.3%. Oh, and as an expected accompaniment to such declines, the so-called VIX “fear” index exploded a record 112.9% (to close above 40) over the same period.
Ouch! The culprit behind this massive decline is, of course, the coronavirus strain now termed COVID-19 (SARS was a different strain of the coronavirus family). The virus has apparently broken out of China and has begun to spread, organically, in such faraway places as South Korea, Japan, Iran, and Italy. Although highly contagious, it must be noted that the World Health Organization and the US Center for Disease Control recommend that simply washing hands and not touching the face will typically be sufficient preventive actions for COVID-19. Hopefully continued practice of these measures will also help when the common flu season comes around again this year. But we digress!
True investors slept well this week. Yes, that’s right. Diverse asset allocations and careful company and sector selections enable a good investor to weather even the scariest downturn without fear. Investors also, understandably, hate uncertainty. But just so that we’re clear, this last week in the equity markets the baby was thrown out with the bathwater as the old saying goes; oh, and the bathtub was seemingly tossed as well for good measure. In the limited panic selling of last week, stocks – good, quality stocks – sold off ridiculously along with companies that can reasonably be expected to suffer material losses from the side effects of coronavirus. Some quality companies started to see significant buying pressure as early as Thursday and again on Friday (based on personal observations of companies The Ignorant Investor follows that have compelling stories). In the January post, The Ignorant Investor listed stocks being richly valued as a potential headwind to equity. Perhaps it’s time long-term investors re-evaluate that statement and begin to sift through the ruins of last week’s selloff in search of “diamonds in the rough”.
*Please note, the threats some companies face as a result of COVID-19 are MATERIAL. The possibility of coronavirus indirectly affecting the economies of various countries is REAL. A sustained global battle with coronavirus will have implications that spill over into the commodity markets, debt markets, and currency markets. Be cautious and always consult an investment professional before taking significant positions in individual companies or the broader market.*
Notable Stories from February
Inflation indexes may be missing the bigger picture. Rent prices have risen relentlessly in the United States for years now, partially supported by a limited housing supply that has seen buying prices steadily rising over the same period (New York City is just an exaggerated example of the theme that has played out in many regions). Barron’s has an excellent article on why inflation may not be missing from the US economy.
The beginning of the end for a failed business model? In 2008, Groupon launched the first collectively bargained online coupon website. Several years later, Groupon turned down an informal $3 billion offer from Yahoo; then a $5 billion offer from Google. Now, in 2020, the company is fighting for survival and relevancy, having lost more than 50% of market value in the last month following a very disappointing earnings report and a failed pivot into the ecommerce space. The New York Post has a good summary of Groupon’s disappointing quarter.
And then there were none. TD Ameritrade, E-trade, and Scottrade were independent brokers considered very beginner-friendly. First, Scottrade was acquired by TD Ameritrade in September 2017. Then TD Ameritrade was snapped up in November of 2019 by Charles Schwab. Finally, E-Trade was acquired by Morgan Stanley in this last month.
Why all this recent consolidation? In October of 2019, Charles Schwab made the unprecedented announcement that it would cut trading fees to zero for online stock and ETFs (bringing trading costs in-line with fintech startup Robinhood). TD Ameritrade was forced to do likewise to remain competitive and made a similar announcement the next day. The remaining independent brokerages have mostly followed. TD Ameritrade’s stock plunged after cutting trading fees to zero as analysts and investors examined the company’s business model. Then, Charles Schwab announced in November that it would acquire the now-cheaper TD Ameritrade for $26 billion. A brilliant strategic move that one might almost mistake as being part of the plan!
