It is fair to say that the first half of 2020 has contained one extreme event, a genuine ‘black swan’; arguably at a time when a recession was due or even overdue anyway in terms of the business cycle. Certainly, many investment advisors had been predicting a recession last year - however, as the saying goes, they and economists have also predicted about nine out of the last three recessions.
I remember first hearing of an impending recession, which was impossible to get away from in 2015; in parts of London. There will be those who wish they had indeed exited the market, particularly in the capital, at that point. However, in the subsequent five or so year period until spring 2020 there have been significant gains in the market in many regions of the UK, which investors have benefited from. Indeed, the entire idea of staying on the side-lines waiting for a recession is a damaging one; Warren Buffett would characterise this as timing the market, rather than time in the market - the latter of which he is a big fan of, for the everyday investor (which by definition, characterises about 99% of us).
Fundamental investment works at any time in any market cycle - that is the beauty of it. By fundamental investment I mean buying or investing in areas that are unlikely to depreciate in value, that provide a solid cashflow and yield, and can be leveraged safely such that the income stream will get you through any periods of flux.
The current pandemic has sent a ripple of fear through all investment markets the likes of which have not been seen for decades. Indeed, during the past six months, the Vix (the volatility index that is often characterised as the “fear factor”), has hit record highs, since its creation in 1993. For those who had to get supplies when the stocks in supermarkets were at their lowest, you may have noticed the genuine panic in peoples’ eyes - I certainly saw multiple instances of it - and you may even have been prone to some panic yourselves.
Ultimately, fear is the enemy of investment. Perhaps the biggest enemy. Uncertainty of future cash flow tends to lead to market crashes (although it seems the market as I write this believes that future dividend cash flows are relatively stable, with stocks trending back towards pre-corona levels). One way, perhaps the most fundamental way, of valuing stocks and indeed all investments is the Net Present Value (NPV) basis which relies on discounted cash flows. If these cash flows become unknown and dividends are cancelled for an unknown period of time, the sell signals are there for all to see. Also - for institutions that rely on cash flow in order to pay their obligations (e.g. a pension fund), no dividends is not an acceptable position for them to run in anything other than the short term.
