On March 23, 2020, stock markets hit a bottom. In places like Canada and the United States, they had just experienced a massive drop of about 1/3 in only 5 weeks. Now that that experience is almost a full year behind us, we can look back on it to assess what it really was. Not only was this the steepest drop in recorded history, it was also the shortest bear market in terms of duration.
Recall that stocks have continued to touch a series of all-time highs, thanks in part to trillions of dollars’ worth of fiscal and monetary stimulus that’s been sloshing through the economy. Policy makers are still looking to shore up households hit hard by the crisis and to keep confidence and liquidity running high. As mentioned in the previous post, this policy response may have brought some unintended consequences along for the ride. The question we now need to ponder: “was that five-week drop last year a blip or an omen?”
The broad consensus is that it was a blip. Not everyone thinks this, of course, but it certainly seems to be the dominant view. To hear the purveyors of this narrative tell it, we are coming up on the one-year anniversary of what will likely be a strong and prolonged bull market – buoyed by ultra-low rates and a paucity of realistic alternatives. Stocks will rise simply because the people who invest in stocks have nowhere else to put their money. Apparently, “under the mattress” is not an alternative.
The minority (dissenting?) view is this: the drop of Q1, 2020 was merely a canary in the coal mine. Things were dropping precipitously and the trajectory was only staunched by an unprecedented amount of stimulus. As of now, monetary policy can go no further and additional fiscal relief would most likely be reckless. The aforementioned ‘TINA’ problem has led to valuations that cannot be sustained for much longer. The Buffett Ratio on the S&P 500, for instance, is at an all-time high.
I am in the minority here. My dissenting viewpoint has fallen mostly on deaf ears. I worry. Mostly, I am worried because it seems no one else is worried. I believe they ought to be.