The Steep Takeoff Of The S-Curve

The only thing more steep than the twist in the s-curve of the progress of COVID-19, was the twist in the s-curve of human action and talk as people tried to catch up with the projected implications of the virus, and likely overshot the mark.

That second s-curve not only affected what human institutions would close, what and how testing would or wouldn’t be done, quarantining, social distancing, and so called economic stimulus that will do little, but it also drove the market. It created the fastest transition from a market high on February 19 to a new bear market on March 12. That’s 22 calendar days, or 16 market sessions.

It usually takes a lot to move a market from the bravado of the bull market, which takes time to create, but seems inevitable once it gets going, to raw fear. It typically does not spin on a dime, as signs of weakness meet resistance, even if new highs are not being made.

I could make the comment that when valuations are so high, it doesn’t take that much to create a bear market, and in the Great Depression, that was true (42 days, or 30 trading sessions). But in the dot-com bubble it was not so, and valuations were at their highest then. The transition to a bear market there was 353 days, or 242 trading sessions. That’s almost a year.

But what if there is an interruption in credit conditions? Weak entities that require access to the credit markets get knocked for a loop. That was certainly happening in energy names and various companies with junk credit ratings. It not only matters that a company has enough flexibility for an average disruption, but enough for something that can’t happen. As Buffett sits on a big pile of cash, he may still say, “We’re paid to think about the things that can’t happen.” Hopefully, he’s deploying some cash now.

I like the companies I own to have low debt levels as a result. Nonetheless, I was knocked around last week by companies that had low debts, but had some economic cyclicality. Personally, I’m not worried about a deep recession, at least not yet. The economy will slow down. Real GDP may even shrink for two or more quarters in a row.

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