At the start of an annual gathering of professional investors in December, Jim Paulsen — the Minneapolis market analyst whose humor and knack for clarity has given him a national profile — brought up the elephant in the room.
He and other market watchers, he said, underestimated the economic and financial risks of the coronavirus as it rippled out from China in the first two months of 2020.
"We could have all decided that what we saw in China was nasty, and we could have decided that that really is going to make a mess here in the United States," Paulsen, chief investment strategist at Leuthold Group, said at the Star Tribune's annual Investors Roundtable.
Just as with TV sportscasters predicting winners before a game, the air of precision in short-term stock market analysis and forecasts often turns out to be simply air.
No market watcher could have predicted the bust and boom of unprecedented speed that happened in 2020. Stocks lost one-third of their value in late February and early March and were back at record high levels at the end of the year.
But unlike sportscasters, the analysis by investment professionals has real-world consequences. Larry Kudlow, economic adviser to President Donald Trump, at a White House meeting in late January "couldn't square" the warnings health officials presented about the coronavirus with absence of stock market reaction, the New Yorker reported recently.
"Is all the money dumb?" Kudlow reportedly asked.
Most investors ended 2020 in better shape than they began, but some of their money managers and advisers feel a nagging sense they could have done a better job.
"What bothers me is some crises just happen out of the blue, but this really wasn't that way," Paulsen said in an interview last week.
"There were at least 30 days before this became an issue in the U.S. to look and ask, 'What do you think about this?' " he said. "And I certainly said, 'Ah, it's just another health thing going on in the world somewhere. I don't think it's going to be a big deal.' And yet there was pretty glaring evidence that it was a real big deal."
The coronavirus shocked people in all walks of life all over the world, first by eroding their sense of control, as many natural disasters do, and then by persisting, which is different from most disasters. Throughout 2020, the virus forced people to readjust their thinking about how it would affect and endanger them.
Joleen Hadrich, an agriculture economist for the University of Minnesota extension service, recognized the potential for big problems sooner than most people in part because her work involves animal disease and she has colleagues in China. In January, when the first reports of the coronavirus emerged, Hadrich took cleaning wipes onto an airplane during a business trip.
Now, she laughs at the limit of her imagination. "I worried about getting sick," she said. "But I had no idea that the world would shut down."
Professional investors, and the researchers and analysts who support them, work particularly hard not to be surprised. A year ago, the task seemed fairly straightforward as they watched for signs of an end to a bull run that began in 2009. Fundamentals — easing interest rates, low inflation, favorable policy developments — pointed to higher stock values.
"It was going to be kind of a no-miss year," Paulsen said.
Then on Jan. 6, a statement by the World Health Organization (WHO) announced the emergence of a coronavirus from the Chinese city of Wuhan. Within two days, governments across Asia were scanning travelers from China for signs of it.
Chinese stocks held steady until a 3% drop on Jan. 23, the last day of trading before the Lunar New Year holiday. The Chinese government extended that break to contain the spread, shuttered factories and imposed strict lockdowns in several cities. When trading resumed on Feb. 3, the benchmark Shanghai Composite Index dropped 10%.
In the U.S., the first tangible market move happened on Jan. 30, the day the WHO declared a global emergency. The yield curve between three-year and 10-year U.S. Treasury bonds inverted, a sign that investors expect economic trouble in the near term.
But the Dow Jones industrials average, which had passed 29,000 for the first time on Jan. 14, stayed above that threshold until Feb. 21.
"Toward the end of January, we had some sell indicators with some of our technical work that we do," Craig Johnson, chief market technician at Piper Sandler in Minneapolis, said during the Star Tribune gathering. "But I think a lot of people looked at that and said, 'This particular virus is over there in China,' and they started making all these comparisons to the SARS virus and said, 'Well, this isn't going to be as big of a deal.' "
SARS was a less-infectious coronavirus that began in China in 2003. Though it spread to about 30 countries before being contained, SARS sickened only about 8,000 and killed 744 over a 14-month period.
After the Federal Reserve's Open Market Committee met on Jan. 29, Fed Chairman Jerome Powell said he expected "some disruption" to business activity in China because of the new coronavirus.
"Of course, the situation is really in its early stages, and it's very uncertain about how far it will spread and what the macroeconomic effects will be in China and its immediate trading partners and neighbors and around the world," he said.
On Feb. 13, several hundred Twin Cities financial analysts gathered for the annual winter dinner hosted by their trade association, the CFA Society of Minnesota. The keynote speaker, a top portfolio manager from one of the country's biggest investment firms, talked about the virus in passing but did not mention it on his PowerPoint slides.
Just over a week later, U.S. stocks began six days of losses that wiped out 13% of the market's value. Kudlow, the presidential adviser, said on Feb. 28 that investors had gone too far and stocks were "pretty cheap."
But market watchers began to intensely focus on the virus. A U.S. analyst for London-based Capital Economics wrote on March 5 that his firm's working assumption was that U.S. cases would be limited to the "low tens of thousands."
"We all had a lot of information," Biff Robillard, president of Bannerstone Capital Management in Wayzata, said recently as he looked back on January and February. "But it goes back to what always matters in investing, which is not the news but the reaction to the news. The reaction was quite benign until it wasn't."
The biggest wallop came on March 16, the day many Americans worked at home for the first time, when the Dow Jones industrials average fell 12.9%, its second-biggest single-day decline ever.
Stocks reached their low a week later on March 23, the day the Federal Reserve began extending loans to businesses and buying hundreds of billions of dollars in government debt. The Dow touched 18,213 that day; it reached 29,000 again in November.
Paulsen said, in retrospect, he should have realized the extreme steps China was taking to curtail the virus, such as spraying disinfectant through city streets and confining people to their homes, couldn't have been duplicated by the U.S.
As well, with far more people traveling internationally than even in 2003, the risk of spread is far greater. Given another chance, he said he would have told clients to pare their risk but not cash out of their investments entirely.
Despite wishing he had done a few things differently, Paulsen said he's not sure the experience of 2020 offers a template the next time a market shock comes along.
"You still have to put the pieces together. There might be a similar situation again and, guess what, it might turn out very different," he said. "The lesson I take is to make sure to give everything appropriate consideration."
Staff writers Patrick Kennedy and Lee Schafer contributed to this report.
Evan Ramstad • 612-673-4241
