This is the third major market correction I have lived through while selling independent research. The two previous corrections – the tech bubble bursting in 2001 and the financial crisis of 2007—had these results in common:
• While, like the corona virus outbreak, tech bubble and the financial crisis are recalled as specific events, in both cases it took about 2 years for the markets to bottom.
• During each 2-year period, the importance of independent research soared.
During the bursting of the tech bubble, when the NASDAQ fell 77% from March 2000 to October 2002, I was in sales at economic research firm BCA Research. It was a period of rapid sales growth for this independent research firm.
Again, during the financial crisis, the S&P 500 fell by 50% from July 2007 to March 2009. We had founded the Research Alliance in 2006, and this two-year period was one of dramatic growth for ourselves and our research partners.
At the Research Alliance, we’ve been able to have a number of discussions with institutional buy-side clients to understand their perspective on the markets. The following is a summary of some of the ideas mentioned:
• After 10+ years of a bull market, the market was over-valued. Many clients argue that the market was overdue for a sell-off.
• Ironically, it may require many more people getting the virus before the panic in the public subsists. Why would more people catching the virus be helpful for market sentiment? This is because – from a medical perspective – this virus is basically like having a very bad flu. Many people that have the virus display only mild symptoms before recovering fully. So, once the public realizes that this virus does not warrant the sensationalist headlines, fear should subside. And the media will move on to another story.
My conclusions are the following:
• Don’t expect a quick fix from the fear instilled by the corona virus on the stock market. Even if the virus scare calms down quickly, it could take months or years for the market to regain confidence.
• Ultimately, over the long run, the market’s resiliency has proven to bounce back – even if it takes some time.
• It is a good time to be in the independent research business, or to source independent research if you are on the buy-side.
Why does independent research benefit from a crisis?
• The sell side bias towards writing ‘buy’ and ‘positive’ reports becomes less popular when things go awry in the markets.
• The buy-side is looking for clarity and for information they can trust during this time. If the independent firms stay close to their clients and help them out during this time, they can strengthen relationships and gain market share.
• Independents can speak their mind more freely. If they see more bad news coming, they can let clients know. One of the boutiques we represent is Chanos Short Research (Tom Chanos is the brother of James Chanos, founder of Kynikos Associates). Tom’s recommendations have fallen even faster than the market.
• During times of crisis, when an independent issues a ‘buy’ rating or identifies a positive investment opportunity, they have more credibility than a similar declaration from a bulge bracket sell-side firm.
For the full report, including investment ideas from each of the Alliance’s research partners, can be found HERE.