On October 16, 2008 in an editorial for The New York Times, Warren Buffett, considered by many to be one of the greatest investors of his generation, repeated one of his favorite maxims: Be fearful when others are greedy and greedy when others are fearful. Markets would subsequently see considerable losses before reaching their lows almost five months later on March 6, 2009. Buffett didn’t call the bottom, and there were still gains to be made for highly tactical investors who were betting against stocks. But looking back on Buffett’s remarks today, the advice was quite prescient.
As we sit writing this blog, with the S&P 500 Index down more than 5% from Friday’s close and evidence of panicked selling around the globe, Buffett’s comment comes to mind. Every market, of course, is different, and following Buffett’s advice can be challenging. We may miss tactical opportunities to mitigate downside, but LPL Research believes the advice remains sound in the current context.
What happened over the weekend that led to the sell-off? Saudi Arabia’s decision to start an oil price war roiled a market already beset by uncertainty as market participants tried to gauge the economic impact of the coronavirus. Lower oil prices have a mixed impact on the global economy. Consumers benefit, as do countries that are net oil importers. At the same time, US shale production has a high breakeven point (the price at which production is profitable) relative to Saudi Arabia. Because of that, low prices can create stress in credit markets that can spread to other areas of the global economy. We saw this in late 2015 and early 2016, when oil prices fell over 75%, leading to credit stress that expanded beyond the energy sector. At the same time, the S&P 500 only pulled back a little over 15% over that period and the US economy did not go into recession.
Looking domestically, the US is now a net oil exporter but not by a large margin. So, independent of credit market stress, the direct economic impact is about neutral, although there are regions of the country like Texas that are heavily impacted. The indirect stimulus low oil prices provide in an economy that is currently relying heavily on consumer spending could be a difference maker, giving a small boost to consumer confidence as we navigate the economic rough patch.
Unlike 2015, the oil price declines are taking place in a market already trying to come to terms with the coronavirus outbreak, and increasingly pricing in some significant downside scenarios. Coronavirus uncertainty is real, although we are encouraged by the apparent progress in containing the virus in China and the recent resiliency of China’s markets relative to downturns across the rest of the globe.
At the same time, we are aware of the rise in cases around the world despite aggressive containment efforts, the growing disruptions to economic activity, and increased fear. Downside scenarios may not yet be fully priced in and a crisis of confidence can become a self-fulfilling prophecy. We think the more extreme scenarios of an uncontained global pandemic are unlikely, but no one knows where this goes from here. What we can state with confidence is that through all the disruptions, businesses will adapt, entrepreneurs will continue to think about business opportunities when we get to the other side, new research will continue to foster innovation, and policy makers will provide additional support. That’s a mix for an eventual economic rebound, which will get some added extra energy from pent-up demand.
The greatest risk for everyday investors during periods of market disruption may be the opportunity it creates to make mistakes. Short-term outcomes are highly uncertain for even the most seasoned investors. The potential disruptions to longer-term expectations, however, appear likely to be minimal, and some markets may even become more attractive as volatility persists. That’s what lies at the heart of Buffett’s maxim. It’s not so much a prediction for the short term, but a forecast for the long term and possible insight on how to respond. In the meantime, we’ll continue to provide the best guidance we can in both the short-term and the long-term as this market volatility persists. Through it all, stay safe.
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