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Navigating a Downturn

12 March, 2020 by Mark O'Brien in Commentary

The market as I write is down “another” 7% on the day.  Yesterday was no better.  This is ugly.  What needs to be said?

I have weathered many market crashes, including the Great Crash of 1987, the year I started O’Brien Greene & Co.  What I can say about the experience is how fast things come back from a crash.  I would go even further and say that one is never prepared for the snap back.  I say this now at what is in all likelihood the darkest moment surrounding the Coronavirus crash (off over 20% in the last several weeks).  If there is a serious mistake people tend to make in market crashes, it is forgetting about the inevitable snap back.

We at O’Brien Greene have been careful in recent years to make sure client portfolios had enough cash for a year’s worth of monthly remittances plus a little something extra for emergencies.  We did this even as the stock market soared several months ago; we thought it was prudent because stock valuations were high.  Now that the market is tumbling, there is another form of prudence that is called for.  Selling volatile stocks for cash at times like this might feel good, but it is costly. I think this may be especially so right now.  That’s because at the beginning of the year, market commentators were united in optimism about high and even rising employment and wage levels, strong corporate earnings and balance sheets, among other things.  The point is that the economy was strong when the virus struck; it was not sick, as was the case before other crashes, like that of 2008.  Today, unlike then, banks are well-capitalized and more judicious in their lending.  There are pockets of excess and uncompensated risk, such as the private credit market, but we have been careful to avoid those.  Thus the snap back is likely to be particularly fast and strong.

What else? Structural long-term benefits are likely to follow.  I expect a wave of new investment in infrastructure and manufacturing, as some of the risks hidden in extended global supply chains have now become evident. We as a nation and economy have tried globalization and found it wanting in key regards; it is unlikely the nation will ever give over all drug and medical supply manufacturing to an unstable regime half a world away.  This is true for most sectors of the economy. So remember the positives.

There are of course many other things that can be said.  I will leave that to colleagues Sally Sulcove and Matthew.

 

Mark O’Brien