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The Models No Longer Apply

May 11, 2020

I want to piggyback off last week’s post about our economic return to normalcy and present more evidence for a longer-than-anyone-wants recovery.

 

How can we know what the recovery will be like with so many unknowns and no real idea of where the “bottom” is? It’s nowhere to be found right now.

 

Many people think COVID-19 was just a blip on the market’s radar – a speed bump on the growth path – and a bounce-back is imminent. But they’re guessing. The models they used for those conclusions no longer apply.

 

The dataset collected over the past 35 years has nothing like this pandemic in it. Models using that data assume the market behavior of the future will resemble the market behavior of the past.

 

That’s invalid because we’re facing a new crisis. Markets haven’t seen anything like this in many decades. Going back to 1987, every market crash has been a financial crisis. And there’s a pattern:

  1. There’s a dislocation involving the financial system

  2. The central bank steps in with rate cuts or stimulus

  3. New liquidity helps the crisis resolve quickly

  4. And then the market is back in business

It’s been the playbook since 1987. But today is different. We’re in a multi-faceted crisis. Public health is a concern and so is our macroeconomic situation.

 

Trillion-dollar federal stimulus wasn’t a shot in the arm, it was a blood transfusion for a dying patient. It was to avoid a depression, because right now, supply and demand are in shock.

 

And analysts don’t have a real macroeconomic crisis in their 30-year datasets. When they look back, they see financial crisis and the resulting playbook, which then enables them to say the economy will bounce back “X months from now.”

 

That’s unlikely to work this time.

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Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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