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We’ve started a new weekly series called The Price of Pandemic. Given the uncertain climate COVID-19 has created, we are pausing work on our latest season of the narrative style podcast. Things are changing on a day by day basis, so with this, it makes more sense to do a timely weekly series. In this new series, we’ll be tackling a range of topics on the economy, business & investing that have been affected by the virus. We hope to keep you informed and provide you with insights, transparency and tools to make better decisions in this surreal time.
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MESH VO: Hey everyone, Mesh here from Talk Money. We’ve been working hard to bring you Season 2 of the podcast, and like the rest of the country, things have changed drastically in the past few weeks with the spread of the coronavirus, COVID-19. With all that’s already happened and all that’s still to come, we’re covering the economy, business, finance, markets & investing with a series of shorts called The Price of a Pandemic. Things are changing fast - both socially and financially - and we want to provide you with transparency and a toolset to make more informed decisions. We’ll be talking to experts from many fields and sharing stories of how the pandemic is affecting industries far and wide. In today’s episode, we’ll take a look at what’s been happening with the stock market these past few weeks and what we can expect in the months to come. We sit down with my dear friend and business partner Rennick Palley to understand why there’s been such a drop, how it relates to history, and what it can tell us about the future. Let’s get started.
Rennick: [00:03:04] My name is Rennick Palley, I'm the co founder and managing partner at Mark 2 Capital. And before that I was a research associate at Sanders Capital, which is a global equity fund focused on finding value in either misunderstood or // otherwise unappreciated opportunities and liquid [00:03:30] securities around the world.
Mesh: [00:03:31] And what would liquid securities be.
Rennick: [00:03:34] So anything that // would be referred to as being publicly traded. So things that you could trade on a daily basis, more or less, having instantaneous liquidity, an // ability to buy and sell.
Mesh: [00:03:48] So stocks.
Rennick: [00:03:50] Stocks, bonds // other sorts of // securities, which are // things that have a continuous price as opposed to something [00:04:00] private, like a piece of real estate, a home, a business, a restaurant, you know, as long as it's not a publicly traded business.
Mesh: [00:04:20] What was going on with the stock market before the news of the virus hit the United States? Was it healthy? Was unemployment high? // What was it [00:04:30] like a few months back?
Rennick: [00:04:32] So before the virus even became a thing in China, I think most people looking at the market had the view that things were priced in such a way where // things were pretty good, and none of the external risks // were present.
Mesh: [00:04:55] And so would you say that we were in a good economic climate?
Rennick: [00:05:03] Yeah, things looked pretty good. // Unemployment was at an all time low, // certainly a low over the past few decades. // And generally [00:05:30] people felt pretty good about where the economy was. // There had been some concerns // later in the summer of 2019 around a potential recession in the offing. // That didn't seem to materialize, but // some investors had the view that things were almost too good, and it was time for that tide to turn.
Mesh: [00:05:57] And then what happens? So the virus hits the United States. We already know that it's in China. // The market dropped really quickly around the week of February 20th. Could you // explain what exactly happened?
Rennick: [00:06:18] So I think there have been a couple of phases of the virus related market behavior in the US so initially there was some concern about what was going on in [00:06:30] China, but it // didn't really affect most investors' views about the US so there were some rumblings in the market. There were a few days that were down, but things didn't really start to look bad until the week that you mentioned where then there were some more widespread concerns // after looking at what had happened in other countries outside of China, and people starting to [00:07:00] realize that that was, the virus was most likely not going to be completely confined to China.
Mesh: [00:07:07] And in comparison, can you tell us // a regular down day in the stock market in comparison to, let's say this 12% drop during that week, that's pretty significant, right?
Rennick: [00:07:27] Sure. // So a bad day in the market is, [00:07:30] you know, the S and P or the Dow is down 3%. So to see a market open at down 7% is pretty alarming. // There are these things built into the trading systems of the market, uh, called circuit breakers, where if the market is down more than 7% no one's able to trade. [00:07:55] And that is built in because markets have a tendency [00:08:00] to have a herd mentality. And if there's essentially a moment where there's no liquidity, in other words, there's no one willing to buy stock and everyone's trying to sell. That can get ahead of itself really quickly. And so at the open when the market opens in the morning on the east coast, if there's not enough buyers for stock that's being offered for sale, you can have the market essentially take a [00:08:30] huge jump down. And so the circuit breaker // exists there so that people can sort of, you know, get a level head in and get their bearings before things get out of control.
Mesh: [00:08:42] And do we know why? Why were these circuit breakers put into place?
Rennick: [00:09:05] I actually think it may have been put into place // after Black Monday in the 1987 crash // which was really the last time in history. We had seen markets be so volatile to the downside where they would just gap down, you know, 7% plus // in a single day.
Mesh: [00:09:25] And what's actually going on there? // Who is selling these stocks? Can you actually explain like // is it a bunch of people who got together and said, the world is imploding. Let's get our cash out right now?
Rennick: [00:09:40] So I think to try and keep it simple, there are a collection of different species, if you will, that are actively involved in trading. // But they all have different objectives. And when I say that, what I mean is they make money in different ways. [00:10:00] And some have the time horizon of holding a stock for a few milliseconds, and others have the time horizon of holding a stock for a few years. // And therefore, how they react to that information is different depending on where they are in that spectrum. [00:10:21] // So it's hard for me to sit here and tell you that I know why the market moved in the way that it did because there are so many [00:10:30] different actors with different viewpoints expressing those viewpoints in different ways. // I think that generally what had happened is some [00:11:00] of the market participants had come to realize that just based on the data from some of the countries outside of China [00:11:08] // that // the virus wasn't likely to affect the US and // some of the more developed countries.
Mesh: [00:11:20] And since that drop, I mean now we're // approaching the last week of March and we're about 30% down from the highs. // Why have we continued to go down? // What is the potential for this to level off?
Rennick: [00:11:54] So I think one way to describe price activity is that it is [00:12:00] constantly weighing every piece of new information to try and determine what the risk reward is for holding a particular stock or a group of stocks given the prevailing environment. So as the news of the coronavirus gets worse, and people start to realize [00:12:21] what sort of effects it might have // on the economy generally and on their lives directly. They start to integrate that new [00:12:30] information, that new understanding into the type of return they want to generate by taking risks and owning stock. And so that's why the price activity tends to move on a daily basis. [00:12:44] And now you're starting to see it really start to react negatively to what the perceived ramifications are for the virus.
Mesh: [00:12:55] And how can we use what's happening in the markets to get a sense of what will happen in [00:13:00] the economy? Historically, what's happened is after the market sells off or has a big potential, you know, quote unquote crash like this, it's followed by a downturn. It's followed by a recession. Can we expect the same thing to happen?
Rennick: [00:13:15] Yeah. // I would like to frame my response // to first say that. The market certainly has lost a lot of value from the high. // [00:13:50] If you look at where // prices were in September, you know, they actually rallied quite a bit. So up into [00:14:00] // late January, early February // the concerns of the virus really started to take hold. // It's a fairly recent increase in value. [00:14:15] And so, you know, to look at that decline from the peak is // making things look, in some cases worse than they are. // And it also depends on which stock you're looking at. Some companies have actually rallied as a [00:14:30] result of the virus, like Zoom. Other companies are // you know, down 70, 80% like Boeing and some cruise lines. [00:14:40] // But to answer the other part of the question, // what does this really mean? // I think that // markets’ real job // is to try and pull forward the [00:15:00] expectations of future events. And so seeing the market decline is really // market participants basically saying, look, we think that the economy actually is not going to be as good as what we had entered 2020 thinking it's going to be. [00:15:15] And now the question really is, well, how bad will it be?
Mesh: [00:15:40] You know, history says when the market has these downturns or these huge dips // it's a buying opportunity. // In this case, we have a health crisis where people's lives are // actually // at [00:16:00] risk. And so do you see the same thing now? Is this that time where it's like // I forget the quote.
Rennick: [00:16:12] When there's blood in the streets. That's when I buy. // It was a Rothschild // who // is // one of the bankers of Europe in the 18th...
Mesh: [00:16:25] // What did he say? What's the quote?
Rennick: [00:16:28] I'm paraphrasing, [00:16:30] but the gist is when there's blood in the streets, that's when I buy.
Mesh: [00:16:34] And in this case, because you know // people's lives are at risk. People's health is at risk, and then that has an impact on the economy. This feels different. It doesn't feel like, you know, it almost feels weird to look at it like an opportunity.
Mesh: [00:19:38] Should we be looking at this // differently?
Rennick: [00:20:15] Well, I guess it depends on how bloody you think the streets are by now. // Things can always [00:20:30] get worse. So the question is, at what point do you look at the price of any given stock or the market overall and say, yeah, I think based on the earnings you're going to make, once we get past all this...
Mesh: [00:20:57] And in the case of a dip // we actually don't know the real severe economic impact of this virus and therefore we are kind of at this crossroads of, does this go much lower from here or is this just all // overreaction.
Rennick: [00:21:22] I think a lot of people are probably asking themselves that question right now. // But I think it's the [00:21:30] right question to ask. And I think what is hard to judge at this point is the extent of the potential economic damage. And that is sort of dependent on how long it takes for people to go back to work. [00:21:46] And some of the things that I think are a little bit less obvious to people sometimes is the mechanics behind what you know, most people see in their day to day lives when it [00:22:00] comes to the credit system banking // the the financial system, even behind the stock market and what it's built to withstand.
Mesh: [00:22:15] Can you explain that further? // Let's actually talk about that credit piece because I think it's important to explain to people // what potential impact that has. If people can't work, they can't get paid and then they can't pay off their debts [00:22:30] and what exactly, you know, what's the domino effect to the entire system then.
Rennick: [00:22:40] The easiest way to think about the US economy is that it's really primarily dependent on the US consumer. That's, you know, the average DRO, you and me, people who are making money, paying their taxes, and then buying stuff // going on trips, going out to restaurants, buying clothes, buying [00:23:00] cars, buying homes, renting, et cetera. [00:23:02] // And when you think about the average person // they're really sort of depending on their paycheck // to make ends meet. // Pay their rent, go to dinner, make their car payment, et cetera. So if those people go for too long without receiving a paycheck, then you know, we're suddenly in a position where we have to ask ourselves, well, what am [00:23:30] I going to spend my money on? What am I not? And at what point do I run out of money altogether? And that's sort of an extreme situation to be in. // I don't think that we're really dealing with a typical downturn here in that respect.
Mesh: [00:23:49] And so what are we dealing with?
Rennick: [00:23:53] Well, it's hard to say at this point, but what I can say anecdotally is that when you think [00:24:00] about stress testing a company or some other financial instrument in case you run into a downturn or recession, you know, an inevitable. Bump in the road, you typically don't assume that you're going to lose the amount of revenue that I think a lot of businesses and cities like San Francisco, New York City, Los Angeles are looking at losing.
Mesh: [00:24:38] This is obviously not investment advice, but how do you look at your own portfolio? To use the cliche statement, cash is king, but in this case it's not necessarily cash for, Oh, I'm going to have an opportunity to buy. It's more for, I don't know what the hell is going on.
Rennick: I'm adjusting my portfolio accordingly based on the risk I perceive in the world versus what I think I can go and earn by [00:25:30] investing that money and putting it at risk.
Mesh: [00:25:32] I think // everyone has to think about risk and how it relates to their own lives. // And that could be anything from like, hey // I don't know if I'm going to have a job // whatever cash I have, I need it now. [00:25:51] Or // it's uncertain what's happening. And I'd rather hold on to my cash for God knows what.
Rennick: [00:25:59] Yeah. // People talk about risk, people think about risk, but I think we may be entering a period where risk is perceived in a much more visceral way. // [00:26:35] Risk is going to be borne out in ways that we're not used to seeing. And one of those ways is, well, historically, over the past 10 years, if you've bought, the dip when the market pulls back. You've gotten paid for doing that. And you know, that may be the case here. [00:26:51] It may not be. And the same goes to, well, what happens if you chose to spend your savings on a nice [00:27:00] vacation with your significant other instead of saving it. And in the past // I think for most of us that that was an okay decision because we kept our jobs and you know, we kept working, we made some more money and // six months later // we forgot about that. [00:27:19] But now I think if some of us end up not having jobs // we're gonna look back and say, huh, you know, maybe I should have prepared for [00:27:30] the rainy day because it's here now.
MESH VO: Uncertainty creates volatility in the stock market, those big swings. We don’t know the health impact of this virus just yet. We don’t know the longer economic impact, or the social impact. And this is a global issue. How are governments going to react? How long can businesses stay closed, and how many will never reopen? Simply put, no one knows. We can only guess. And because of that, the markets don’t know how to react either. So keep that in mind. Don’t take risks based on gut feelings. Wait for the facts. Be patient. We’re going to continue talking to experts and making episodes about all the ways this will change us, financially and otherwise. Write me at email@example.com and tell me what you’re interested in learning about.
I want to thank my guest Rennick Palley for his time. This episode was edited and produced by Olivia Briley & engineered by Max Miller. Sign up at thetalkmoney.com for further deep dives and to hear other episodes. We appreciate you sharing this episode with your friends, and please subscribe to us on Apple, Spotify or wherever you choose to listen. Until next time.