On Monday, it cost nearly $38 to get rid of a barrel of oil. This was more of a technical phenomenon than actual opportunity, yet it is another example of how traditional economic and financial conditions have been upended by the pandemic. Oil is cheap globally - but not that cheap.
The oil situation shows how in many markets short-term pressures can cause asset prices to deviate substantially from their fair value. We're not buying crude oil, but recent market volatility in other areas has created potential investment opportunities. With that in mind, and as Ross noted in his letter last week, we've been acting accordingly.
When such opportunities do arise, having a long-term investment strategy can highlight the real differences between the economy and the stock market, particularly as it relates to timing.
First, the timing of the economic recovery has in many ways become entwined with the state of the public health outlook. The only thing investors know with a high probability is that, when it comes to the timing of reopening the economy, the extremes seem to be off the table. The economy is not likely to come fully back online as if by flipping a switch. And the economy is not likely to remain in a state of suspended animation until the day a vaccine provides a long-term answer.
There is a lot of room between those two extremes, however, and some protocol of testing for exposure to the virus, and tracing the contacts of those who test positive, will likely be critically important. Fortunately for the U.S., we can look to the experiences of other nations that are further along in this process of ramping up testing and reopening their economies. Korea has such protocols in place, for example, and Germany just recently began its efforts to gradually reopen. Policymakers and corporate leaders in the U.S. will be in position to learn from the successes and challenges elsewhere in adapting our own policies.
Second, the timing of movements in the stock market rarely track in tandem with changes in the economy. The March selloff occurred well before the release of any tangible economic data points showing the extent of the decline in economic activity, or any corporate earnings forecasts had been adjusted lower. The stock market is a leading indicator, anticipating future economic changes. As such, markets are likely to ultimately recover well before life and the economy feel back to normal. In March of 2009, for example, markets hit their financial crisis lows and then quickly and sharply rebounded by launching a bull market that lasted 11 years. At the time of the market reversal, economic conditions were still dismal, however: the unemployment rate was 8.6%, would continue climbing for months afterward, and wouldn't again be lower than 8.6% for nearly three years. But investors were already looking ahead. Investors are forward-looking, and those future expectations drive markets.
We suspect that we will continue to see high volatility in the markets, but when we are evaluating the opportunities that are being created, we too are looking forward, and making investments that appear best poised to benefit from the eventual economic recovery. In such an environment, having a long-term investment strategy in place can become an important advantage.