I recently watched the film Midway, which depicted a key turning point for the Americans in the Second World War, following the Japanese attack at Pearl Harbor. It reminded me a lot of what has transpired over the past few weeks as the global economy has come to grips with the sudden threat posed by the coronavirus.
Thanks to social media and the rapid spread of fear, markets have reacted violently, resulting in catastrophic damage with equity markets falling by more than 35 per cent in just a few weeks. This has left many wondering what the future holds not only for the economy but also for those investing in it.
However, during such times there are some important lessons to learn from history, and Midway is one of them.
Stay calm and listen to the intel
There were those such as Col. Rufus Bratton who believed an attack on Pearl Harbor was imminent and yet they were ignored by Washington. In the three weeks prior to the attack, there were 49 espionage messages sent between Honolulu and Tokyo providing the precise locations of the ships, with 18 of them intercepted and only three processed.
It’s a good lesson on why we need to take a step away from the pervasive view to hear what the outliers have to say. They may not be right and they may be too early but they may also be on to something that others are missing.
For example, according to Morgan Stanley research only 3.9 per cent of stocks are now above their 200-day moving averages, a level only experienced during “the final phase” of a “severe, acute bear market.”
That, Morgan Stanley says, ”means we’re closer to the ‘early stage recovery’ phase than we were over the past three weeks.”
This is in stark contrast to the pervasive view that there is further chaos ahead with many pointing to charts from 2000 or 2008 as evidence of what’s to come. Before capitulating to that interpretation, consider the source of that intelligence, especially if it’s coming from those seeking personal profit via short selling or out of spite for missing the bull market rally from the 2009 lows.
Adapt, improvise and overcome
By luck, none of the three U.S. aircraft carriers in the fleet were at Pearl Harbor during the attack as all were out at sea on manoeuvres. Instead of hunkering down, the Americans quickly adapted their strategy to include a much greater role for aircraft in naval warfare and then prepared to go on the offensive.
Feelings such as shock and awe can be overwhelming and often paralyzing, but now is not the time to hide and seek cover but rather look at what’s in your portfolio and how it can be used strategically to reposition for the ultimate recovery.
For example, we’ve found that long-term Treasuries and U.S. dollars have not only survived this COVID-19 surprise attack but were strengthened by it, thereby providing a very successful hedge well into this current meltdown. For those lucky enough to own such assets in your portfolio, why not use some of those gains to rebalance by feathering into the markets especially on those record setting drawdown days?
Don’t underestimate American resilience
The impact from Pearl Harbor was devastating to the U.S. naval force, destroying their fleet of Battleships and allowing the Japanese to gain control of the Pacific for the first 90 days following the attack.
However, the Americans didn’t sit idle and took on the Japanese at Midway from June 4 to 7, 1942, despite being outnumbered and with no battleships. Through the execution of sound strategy and the use of intelligence it was a not only a decisive victory but one that ended up being a key turning point for the war in the Pacific.
While it feels as though we’re right in the middle of those 90 days, know that the full might of the U.S. government is preparing for its Midway moment to attack this virus with everything it has — including a stimulus package potentially worth more than $1 trillion. Then ask yourself: Which side of the trade you want to be on, betting against this or supporting it?
For some historical perspective that may help you decide, the S&P 500 fell 20 per cent following Pearl Harbor through to the end of April 1942 and started to turn a month before the battle of Midway. It subsequently went on to gain nearly 110 per cent during the remaining three-and-a-half years of the Second World War.
The Japanese vastly underestimated the American resolve. Despite the catastrophic damage, it only took the U.S. six months, not years, before responding with a significant victory in the Battle of Midway. This virus will be dealt with, and the economy and markets will ultimately respond. So don’t allow this surprise challenge to get the better of you and your portfolio.
Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.