The Coronavirus and Templeton’s Four Dangerous Words

With coronavirus cases rising and global stocks’ worst week in over a decade taking them into correction territory, we have seen some echoes of what Sir John Templeton famously called the four costliest words in investing: “This time it’s different.” Pundits acknowledge past outbreaks didn’t drive global bear markets or recessions, but they argue past experience is irrelevant due to unique unknowns about the novel virus. But the specifics of any market downturn are always somewhat different. How markets react, though, rarely is—and that is the point of Templeton’s sage statement. In our view, stocks are very likely to once again prove his wisdom timeless. 

The this time is different claims stem from detailed analyses of fatality rates, transmission speed, geographic spread and the like. We think these deep dives miss the point, which is about how human emotions affect markets. New diseases spur worries of pandemics slashing global commerce. In response, sentiment often swoons briefly, knocking stocks. But as we wrote, markets soon move on as they realize pandemics, though tragic, are temporary. They rarely pack enough economic punch to cause even local, much less global, recession. Factory shutdowns aren’t permanent. Companies work to keep goods flowing—perhaps by drawing on inventories or shifting production to still-operating factories elsewhere—and keep taking orders in the meantime. When the scare passes, they work through those orders. Output is delayed, but doesn’t disappear. Moreover, services—which comprise the bulk of developed-world GDP—are less affected. Sure, more visible services activities like tourism, dining out and shopping at brick-and-mortar stores likely dip initially. But activities that don’t require milling about in crowded spaces—like online shopping, insurance, finance, and countless forms of digital consumption and tech-related services—needn’t suffer. Some may even gain as consumers and businesses substitute them for potentially more infectious activities.

While stocks may react sharply at first, they soon realize commerce won’t crater for long and bounce before data recover—hard to fathom directly after stocks’ plunge, but normal. Hence, we think the key historical lesson is how sentiment can swing sharply in response to disease speculation—and recognizing recent volatility as sentiment-driven. Sentiment temporarily undershooting reality in response to a false fear isn’t different—it is a story as old as markets.

To see this, consider the stream of “this time is different” projections during this bull market that proved false. They started early: After the 2007 – 2009 bear, many believed stocks’ history of high long-term returns was over, and a “new normal” of inferior, low single-digit stock returns had begun.^[i] Risk, proponents argued, no longer paid off. Gloomy economic predictions abounded, too—like this one from May 2010: “The world economy, and the U.S. economy, will resemble the post-bubble Japan of the 1990s—with its ‘L-shaped’ recovery writ large.”^[ii] L-shaped recoveries feature stagnant GDP. The US’s 2.3% annualized average since the recession isn’t fast by historical standards, but it isn’t stagnation, either.^[iii]

Fast-forward to 2011, when pundits warned S&P’s downgrading US debt meant the government couldn’t keep borrowing more without facing skeptical creditors and sharply higher interest rates. From then on, the conventional narrative went, big budget deficits would bring serious consequences. One article argued “the downgrade will force traders and investors to reconsider what has been an elemental assumption of modern finance”—that Treasurys are close to risk-free.^[iv] Rates have declined further since, suggesting this wasn’t such a watershed moment. As for federal deficits and debt, they aren’t exactly smaller.

Political events can also spark dour “this time is different” forecasts. For example, many expected President Trump’s election to be uniquely disastrous for markets. Following a brief spate of volatility in overseas markets the night of the vote, one prominent editorial opined, “If the question is when markets will recover, a first-pass answer is never. … We are very probably looking at a global recession, with no end in sight.”^[v] But stocks bounced back by morning and growth continued. The Brexit referendum also inspired many run-for-the-hills responses—including from the UK Treasury, which warned of a “less open, less productive and permanently poorer economy.”^[vi] You can read more about overwrought Brexit forecasts here. None have come true yet, and we don’t believe they will.

Volatility—including corrections—frequently accompanied claims history didn’t apply to the most recent threat. But none ended the bull market or economic expansion. Arguing recent dangers or newfangled theories nullify stock market history isn’t unique to the current bull market, either. It is a time-honored tradition. For example, in May 1988, a New York Times article proclaimed “The Death of Investor Confidence,” not quite a decade after BusinessWeek’s legendary (and similarly morbid) cover story, “The Death of Equities.”^[vii]

While imperfect, we think history helps investors frame probabilities around potential market outcomes. Ditching it altogether means striking any context for assessing them and instead drowning in an unlimited array of possible outcomes—a recipe for poor decision-making, in our view. So, yep, no two corrections or negative stretches are exactly alike. But, for markets, that doesn’t mean this time is different in any meaningful sense.