Market Crashes: When Losers Become Leaders

Introduction: An Inadequate Note of Thanks
Valuation Update: A Dubious Dance with the Unknown
Crashes and Recoveries Sorted by Performance into Crash, Best to Worst

Introduction: An Inadequate Note of Thanks

Writing about equity markets amidst a global health pandemic feels wrong to your author. The severity of potential dangers, both current and future, are seemingly in constant dispute and subject to much speculation. Regardless of how the facts pan out, the individuals providing critical services have quietly tended to their duties in the face of frightening headlines. Kailash would like to thank the healthcare workers, those that support them and everyone in essential industries. For most alive today this is the most vivid reminder about the invaluable services provided by farmers, manufacturers and drivers who persist in getting essential food and supplies to hospitals and on store shelves and the scientists racing to develop a new generation of medical solutions.

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Valuation Update: A Dubious Dance with the Unknown

Kailash decided to update readers on the violence of recent moves and where investors stand today. The chaotic news flow around infections, mortality rates and soaring unemployment collides with unprecedented levels of government intervention. These cross-currents have created unprecedented price movements over a mere few weeks of trading. In our original piece found here, Kailash highlighted how the market destroyed three years of returns for equity holders in just 23 trading days, with debt markets faring even worse. We continue to believe Energy stocks are of particular fundamental interest but recognize that speculative buying of the market’s lowest quality firms may persist as gambling venues are closed leaving stock promoters with a captive audience.

For new readers please see our January piece Why Market Neutral Now where we discussed the case for caution. The paper used Buffett’s valuation metric, market cap to GDP, which is updated through April 9th in Fig. 1 below. Due to the incredible speed at which wealth was destroyed and the stunning snap-back in prices the line is difficult to see. Holding GDP constant from the low on March 23rd until yesterday’s close, valuations have risen from 114% of GDP to 143% of GDP. Investors far wiser than ourselves have reasonably asserted that the current state of affairs will destroy $5 trillion in GDP. If that is the case the effect on valuations, as annotated by the dot in Fig. 1, is stunning. Adjusting for the potential loss in GDP could leave market cap to GDP at record levels even with markets trading roughly 17% below their 2/19/2020 peak.

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ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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