The Dividend Cafe - An Anniversary to Forget and Remember

Episode Date: March 21, 2025

Today's Post - https://bahnsen.co/3DRejE6 Reflections on the Five-Year Anniversary of Covid Market Crash In this special episode of Dividend Cafe, recorded live from Washington D.C., the speaker reflects on the five-year anniversary of the dramatic market movements in March 2020 due to the COVID-19 pandemic. He recounts key events from the early days of the pandemic, including the significant market drops and the unique responses from the Federal Reserve and policymakers. The episode also delves into the broader social, economic, and political ramifications of COVID-19, the resiliency of markets, and the key lessons learned from that period. Emphasizing market behavior during panic, the importance of pre-existing principles, and the inevitability of market volatility, the speaker provides a rich analysis for investors to consider. 00:00 Introduction and Overview 00:33 Reflecting on the COVID-19 Market Impact 01:59 The Initial Market Reactions 02:37 The Week of March 8th, 2020 04:21 The Market's Worst Days 09:46 The Turning Point: March 23rd 14:26 The Federal Reserve's Response 22:17 Lessons Learned from the Crisis 29:32 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to a very special Dividend Cafe, live from Washington, DC, where I will actually leave here in a few hours, but have been here since Tuesday. And I'm going to be talking a bit more in the Monday Dividing Cafe about some of the meetings this week that I can talk about. It's been a very constructive week for me and I'm excited to share some things, but I'll let that wait until Monday's Dividing Cafe.

The priority I have today when I say Special Dividing Cafe is that we are sitting here right now in roughly this five-year anniversary. What's exactly the five-year anniversary of roughly the period throughout the middle part of March in 2020, when I would argue that a lot of the world changed. It is certainly a moment that will be in the history books, and there's a particular market focus I want to have today in Dividing Café. When people think about that COVID moment and the onset of what became a COVID period, there are a lot of ways you could go with this topic. First of all, it didn't last just two or three weeks in March.

It ended up in some ways lasting a couple of years for some people anyways, but the cultural aspects, the social aspects, what it meant to our social cohesion as a society, the political ramifications, there's longer term and peripheral dynamics around the COVID moment that are actually not the subject of Dividing Cafe today. Although I guess I would be lying if I didn't tell you I do have pretty strong opinions on a lot of that. I think about that a lot. I think that there was a sense in which COVID exacerbated a lot of tensions in society, not united despite tensions in society. It was a uniquely traumatic event in that regard that a lot of times traumas in our

society serve as a unifying force. And this was very much quite the opposite. But what I want to talk about in Divinity Cafe today is a very specific period in... or we're going to start our little walkthrough here on Sunday, March the 8th of, and end up into the final week of March. As I'm sitting here recording on the 21st, we're literally right at that five-year mark. The eighth was a Sunday, and the Bonson Group had been a sponsor of the Hogue Classic golf tournament in Newport Beach. We had hosted quite a few clients throughout the weekend and had a big tent on, I think it was the 16th or 17th hole.

And on the Sunday afternoon of the tournament, it's three o'clock Pacific time, six o'clock Eastern time when futures markets open up. And so because of course we were on the West Coast, we were still smack dab in the middle of the golf tournament when futures opened. And the Dow futures are down about a thousand points. The market had been going down slowly and steadily, not a lot of violence, but a downward trend for a couple of weeks already. I think the high point for the S&P and Dow had been February 19th.

So by March 8th, the markets had already been coming lower, but oil completely fell out of bed. The oil futures broke down in response to the announcement that Saudi and Russia were going to be flooding the world with oil. And of course, this was on top of not only was supply and production commitments going full steam ahead, but at that time it was very obvious that there was some level of demand erosion. China was already dealing with a lot of COVID issues and Italy was.

And even though the markets at that point didn't know the severity of what demand erosion was about to mean, oil dropped from something in the range of dollars to something in the range of $35. And so at that point you were well below the break-even price of every oil producer in the country. And we sat there at the golf tournament and it was a chilling moment that was about to

get a lot more chilling. And so I had to take a red-eye flight that night to New York. I landed early in the morning and it was to be my very first day in our brand new offices at the Graybar Building by Grand Central. And our apartment at the time was on the Upper West Side of Central Park. So Jolene and I had a long walk from our apartment to the office. I had a new assistant starting that day. And what would end up happening was the market would drop 2 points that day, roughly give or take an eight, nine

percent drop, which was at that time the worst day for market since Black Monday. That was on Monday, March 9th. On Tuesday the 10th, I was here in Washington, D.C. and I was at the White House meeting with National Economic Council, quite extended meetings with Larry Kudlow, who was the director of NEC, a lot of rendezvous with some people that day, but also just general discussion that was very clear to me. I most certainly did not know what was about to happen.

The markets didn't yet know, the country didn't yet know, but I will tell you that I don't believe the administration, the White House, policymakers knew either where exactly we were headed. That's how quickly things were moving. And the very next day, Wednesday, March 11th in the evening, is where I think a lot of people will always remember as the real beginning of the country's COVID moment. There are symbolic cultural things that go along with it. The announcement

of Tom Hanks contracting coronavirus, famous American celebrity getting this disease that up till now we thought of as this highly fatal thing and it was not yet in this mass contagion across the country. So there was a big cultural import around someone famous like Hanks contracting it. They canceled the rest of the MBA season. But then the policy side of it was the president, then President Trump 1.0 announcing from the Oval Office that he was cutting off all travel from people in, in from Europe and Asia. And so now it was, okay, this is quite a serious messaging to markets. And the next day, the Dow set another record for its worst day since 1987, Black Monday,

and we dropped 2000 points and from a lower price than we had been. So the percentage violence was getting worse. And there was this general question as to exactly how bad things were going to be. Markets were absolutely in forward-facing panic mode, but I have to be very clear. 49 states at that time didn't have a single diagnosis of COVID. There was no indication yet of lockdowns. There was significantly contracted activity. When I was on that Acela train to Washington, D.C., there was barely anyone else on it. When I was walking around Manhattan, you could tell that there was a lot less activity. And then the next day, Friday, March the 13th,

markets came back 2,000 points. So they almost made back what they had lost on Thursday, but were still down quite a bit for the whole week. And they went up that day because Vice President Pence had announced that there was some sort of pro-... They announced a task force, which famously was involved him, but a gentleman that most of the country had not heard of at that time by the name of Anthony Fauci, a woman most people had not heard of at that time by the name of Deborah Birx. They put together this coronavirus task force. But what Markets responded to was an announcement that they had this tracking situation that I believe, if I remember correctly, was in concert with Walmart and some other things

they were going to be doing that they felt was going to serve as some kind of a containment deal that would certainly not last. And we'll get to that in a second. But as I walked home from my office that day, Friday, March 13th, we were scheduled to come back, my family, to come to California. My kids were in school in New York, had a spring break, and we were going to be coming back I think on Monday anyways. And as I walked back that Friday, Midtown looked to me like the rapture happened and

I didn't get taken. It was empty. Ghost town. And I called my wife and said, I'll be back in a few minutes. I'll be to the apartment in a few minutes. We should try to get out tonight. We moved our flights and we flew back and landed in Los Angeles in the middle of the night and figured we'll just ride out the kids spring break for the next couple of weeks

here in California and come back to New York in two weeks. We would end up coming back in June, of course not knowing at the time what was going on. So that Sunday night, which was March the 15th, I had a phone call with a client who had some outside asset things that were called naked options, but have unlimited loss and are margined. And it was a very traumatic and painful event that I always hold onto emotionally is the moment I realized how scary this was, what was going on. And then that next day, Monday, March 16th, would become the worst day for markets since Black Monday.

We now had three of the worst days in six days, and the market was down 3,000 points, 13% is 12.9% and the violence was massive. Now then we were still having a little back and forth volatility. I think the next day on St. Patrick's Day the 17th, we were up 1,000 points if I remember correctly, then dropped 1,000 the next day or flat the next day, down 1,000 the next, but it was just, there was no sign of any kind of improvement, massive uncertainty, and then all the lockdown stuff beginning and spreading to other states, ultimately leading to a national shelter in place order and so forth.

The following Monday, which was March the 23rd, did represent, this is just an amazing fact, March 23rd represented the bottom of the market. At that point, I don't think that people in at least 48 states even knew anyone who had COVID. There were starting to be more diagnosis. Mortalities were heavy in New York state, especially around nursing homes. They were not heavy really much anywhere else yet, but this is how far advanced it was.

The CARES Act didn't even pass for a couple more days. Obviously, the vaccine wasn't for eight more months, but you're talking about a very early stage in where things were to go with COVID, both in terms of mortality, health repercussions, but also just the broader sense of what the impact was going to be with lockdowns and all the things that ended up happening. School closures at this point, sports stuff was all closed, events were closed and whatnot. But that's how far in advance the market bottom was. And a couple of days later, Congress passed the CARES Act, there was ongoing market volatility.

Markets did not end up making a new high, recovering everything to later in the year, but they did. And a lot of things within the market were back up by June, but the point is they stopped going lower on that Monday, March 23rd. That's a stock market index comment. Corporate credit spreads were still wide. What's called CNBS spreads, commercial mortgage-backed securities, these are very vital indicators

in the economy. They were still very wide. The unemployment was going to skyrocket higher. Weekly jobless claims exploded higher, GDP deterioration completely fell out of bed. So obviously there was economic and other financial market deterioration that was still extremely severe, but the equity markets had stopped going down from what became 35% drop in the S&P 500 from February 19th to March 23rd.

So essentially, little over a month, 35% drop. I wrote about it then, I believed it then, talked about it quite a bit then, and today I know even more than I did then, affirming this idea that what we had experienced in that week of equity market downside violence was a national margin call. A significant amount of our financial system and risk assets is levered, and an awful lot of forced selling took place as prices dropped to places where people had to sell, and it pushed a lot of things down very quickly. I can't emphasize enough how unique it is that the markets dropped so much so quickly, and how non-unique it is that markets began going back higher well before the other fundamental

conditions did. I'm going to talk about that more in a moment. We certainly had a situation where people that had no leverage, that are not for selling, that are regular buy and hold type investors were seeing their values drop a great deal as other people who were for sellers were bidding prices down, and that becomes a story that I have a huge takeaway on I want to talk about. Congress passed the CARES Act on Wednesday, March 25th. Call it $2 trillion of additional spending, and that included the Paycheck Protection

Act that really basically represented just hundreds of billions of dollars of businesses getting the money as loans right away and then having it forgiven later when they could validate that they had kept their payrolls going and so forth. So a very unique kind of backwards experiment where people had to borrow money quickly and prove they didn't have to pay it back slowly as opposed to usually it's a long process to be able to borrow money. And it was a way to try to get a lot of liquidity in the financial system and do what they could to keep payrolls together.

There's a lot of things I can say in hindsight, very, very critical and certain things I think could have been done far differently. But again, at that point, there was this mass panic, lots of things going on. And I spent a lot of time in the written dividend cafe today. In the interest of time, I'll try not to spend as much time right now in the podcast here in video, but the Fed becomes a very significant actor here. Okay, they went to 0% interest rates right away. They announced trillions of dollars of purchases of treasury bonds and mortgage backed securities.

So they immediately went back to the 2008 playbook of reflating their balance sheet as a means of trying to provide emergency liquidity in the financial system. And I would say that there are three major takeaways that I believe we have to understand that I saw on full display from the Fed and about the Fed during this COVID moment. There was nothing controversial or questioned about them going back to the Bernanke 2008 playbook. When Bernanke did it, it was very controversial. There was pushback. There was discussion. There was a Fed governor by the name of Jerome Powell who pushed back on QE3. At this point, it was just unanimously assumed, not just from other Fed governors, but financial

actors, policymakers, the media, that a very aggressive and creative form of asset purchases were the lay of the land. That's what the Fed was expected to do. That was very different from 2008. But I would also say number two, that the creativity of the Fed asset purchases defied the imagination. There is a section in the Federal Reserve Act called Section 13.3 that allows for an unusual and exigent circumstances, the Fed to do certain things. Their creativity in doing those things and coming up with other assets that they're able to buy that they're not really legally allowed to buy, but by a combination of using that

provision and getting a small amount of equity injected from the Treasury that then the Fed levered up with money that doesn't exist to come into high yield bonds, which we never did after 2008, into certain elements of other asset-backed securities, some of which we had done in 08, some of which were new, into municipal bonds, short-term municipal securities, which we hadn't done in 08, commercial paper, which we had done in 08 to protect money markets. They borrowed a lot from the 08 playbook, which was the TALF, the Term Asset Back liquidity facility from March 2009.

They did a TALF 2.0 in March and April 2020 and went to a whole other level with it. At that moment, I learned their creativity, their ability to do whatever they want to affect policy objectives is far beyond what we can really comprehend. I say that for good or for bad. It can be said as a criticism. There's an element to it which I'm very critical of, but that's not my point. There's an element which people can say it's a good thing that the Fed took bold, audacious

steps to avoid a bigger crisis. For my purposes right now, I'm just simply saying it descriptively. Then the third point is that the default expectation of the Fed as an economic savior in financial markets, in the broader economy, now included, as I saw during the COVID moment, everyone. I think a lot of Main Street during financial crisis wondered what Congress was going to do, what the president was going to do, what the banks were going to do. And the Fed was this huge actor out of it, but I don't think it had really permeated the consciousness of American Main Street. I think the COVID moment, it was just everyone.

Politicians, sure. Media, yes. Wall Street, yes. Money managers. sure, media, yes, Wall Street, yes, money managers, but businesses and people in America are wondering, well, what's the Fed going to do here, right? And that to me was a big difference from March of 2009. Now we were dealing with a broad-based, what's the Fed going to do in that really reset a certain national expectation.

This matters going forward in the sense that I do not understand for the life of me why anybody believes that given the right trauma to the system, the right financial emergency, that the Fed would not go back to more quantitative easing, to more creative asset purchases. I believe that that is a given and that we saw it out immediately in the COVID moment that there was no sense of, okay, well, we did it in the financial crisis, but do we really want to go back there? It was just a default position. I think it would be again.

I believe they would do it differently to some degree. I think that they view that there are some lessons learned. I also don't believe that their motives were wrong. I think they viewed this as what they needed to do. Financial markets expected it. And because financial markets were expecting it, there becomes this moral hazard if you don't do it. You've indicated we're here to do it.

Now by not being there, a lot of things fall apart. Main street, Wall Street, whatever you want to say. I understand the man in the ring reality. They're there making very difficult decisions and I'm not trying to be ideological or doctrinaire, but the only thing I will say is trying to do QE at that kind of violence, just magnitude, trillions of dollars, ended up being $5 trillion of buying securities with money that didn't exist. Going into junk bond markets and going into corporate sectors and asset backed markets and not recognizing that there are trade offs, that's where I'm most critical.

I believe that there are trade offs that are really, really important. What their fundamental policy objective in this is, just so we're very clear, is trying to prevent a liquidity crisis from becoming a solvency crisis. That's more or less the best sentence to use to understand lender of last resort, central bank ethos 101. And getting very creative in the way it's done and all these additional tools they're using still come down to that basic idea. In a different Divinity Cafe, a different forum, we can debate what they should do and shouldn't do.

I do believe that was the motive and all I'm suggesting is that not understanding trade offs is where it has big implications to markets later. Well, I ended up in the middle of this period being rather obsessive in my collection of data, the way it was impacting markets, what the Fed was doing, what policymakers were doing, what was happening on the health side of it. I was talking to doctors, hospitals, scientists every single day, and I started just emailing out some of my findings to different clients and things day by day. And then we decided to incubate it around a web property, a digital asset we created called COVID in

Markets. And that became a seven day a week practice through the entire deal. And we kept that going all the way through spring and summer. And then by September, I honestly never wanted to hear the word COVID again, but it was a tremendous learning experience for me, a little bit outside of my comfort zone. I definitely learned more in the medical and science side than I ever wanted to learn.

But even just the ability to collect information, the kind of investigative journalist side of things, it was fun in a lot of ways. I got very tired of it, but cold calling hospitals in Texas and New Jersey and finding out what really was meant and not meant about surge capacity and ICU availability and other things. And I hope there was value that went to clients during that period and even non-clients. And we certainly picked up a lot of readers during that period. These things stick out.

There's times where it feels like it was a year ago and other times it feels like it was 25 years ago, not five. That's all birthed at this five-year anniversary. I want to close though with five lessons that I learned from that experience in March. Not the entirety of the COVID moment, but what took place in March of 2020 that I think matters just now. First of all, and I alluded to this before, markets are discounting mechanisms, always pricing into today what they believe about tomorrow.

They can drop way quicker and more severely than you expect, and they can rebound way quicker than circumstances seem to warrant. That was not a new lesson to me in the spring of 2020. It's the testimony of history. It took place out of the financial crisis. It's taken place out of most moments in history. Markets begin recovering sooner.

When you wait for the good news to be announced, markets have already priced it in and then some, and that is an incredibly important lesson for investors. Number two is that tough times don't last, but human nature does. And what I mean by this is the statements that would happen during shutdowns that no one was in a travel again, Similar sentiment expressed after 9-11. That convention center activity would never come back. That businesses learned they didn't need to meet face to face anymore. That there wouldn't be corporate events. There wouldn't be speaking events. That all conferences and seminars were going to go virtual forever. That New York was

dead. That New York restaurants would never be busy again, that Las Vegas was over. Las Vegas is the most crowded it's ever been ever by far now. New York restaurants are the most crowded they've ever been by far now. Air travel is busier than it was pre-COVID. Shopping malls right now have the highest occupancy at the highest per foot rent, at least high end. There are plenty lower end ones that are decimated. There is a lot of melodrama that happens,

and not just these examples I give that were more specific to the COVID moment. The critique I have was believing that we could extrapolate the uniqueness of what had happened there across years and years to come. And that human nature somehow was gonna be so different as a result of those tough times. The tough times didn't last and human nature did. When people are going down that path, is there an investment opportunity to short that kind of imbecility?

Well, it's called going long. Investing long in the right things as others are believing that those things are permanently changing. Number three, severe distress creates severe dislocations and creates serious opportunity. But seizing that opportunity requires a contrarian impulse that very few people have. All I mean by this is to actually buy when there is the most blood in the street is nearly impossible to do for almost all people. Certain hedge funders have become billionaires doing it.

And I'm not being funny when I say they're psychopaths of the human persona. At the point where the pain is most severe, that the opportunity is most profound, you don't know that. And so to go act at that time feels like you're stepping in front of a train. And yet that's where the dislocation is most severe, and that's where the opportunity is most real, and you don't know it till later. So all one can do in these severe dislocations is either ride them out or if they're trying to play offense during them, accept a level of contrarianism that is deeply and profoundly and for most people impossibly uncomfortable.

Number four, I love this one, principles are something you bring to a crisis. Principles are something you bring to a crisis. They're not something you come up with during a crisis. So I can talk about this in the context of policymakers, politicians, central bankers, leaders, elected, whatever. I'm right now referring to investor behavior. There are disciplines, there are principles that you have, that you bring in that drive your portfolio, that drive implementation, drive activity.

And if you want to alter those things during a time of crisis and forfeit your principal's forfeit fortitude, that's a recipe for investing disaster. Finally, number five, the intensity of these moments is always and forever driven by the leverage reality of our financial system. Two things to remember. A, it's happening to others and will end. And B, it should not be happening to you. That forced selling dynamic is real and it hurts our asset prices as mark-to-market investors. It exacerbates the pain, violence, and magnitude of market trauma and market distress.

And it is irrelevant if you yourself are not a force seller. It's acerbates the pain, violence, and magnitude of market trauma and market distress, and it is irrelevant if you yourself are not a force seller. It hurts that guy. Doesn't hurt you unless you are that guy. The short term pain is coming as a result of spillover from the other guy. The permanent pain is only for the other guy, as long as you don't become that guy by becoming a forced seller.

This is a profoundly important lesson because there is no chance in my lifetime or yours that our financial system will not have leverage in it. Now there will be varying degrees of how much leverage, more will be less. Are we in a period of profound risk on that there's greater leverage at the time a certain extrinsic event happens? That's unknowable. But my point is that these periods of force selling is what we experienced in March 2020, and it did not do any permanent damage to anyone who wasn't a force seller.

That is something I cannot emphasize enough as a permanent lesson for us to hold dear. I don't know if we're going through another moment exactly like that. I would pray we wouldn't. We generally don't. Our history often rhymes, but doesn't exactly repeat. There are social, political, and other historical components of this that may or may not happen. And yet the part I'm positive will happen again is another market experience, another severe drop, another traumatic event. What exactly catalyzes it's unknowable, when it happens is unknowable. But anybody invested in risk assets right now with things humming along and you think,

well, it's been difficult for some equity investors with tariffs or whatever, but you look at the returns that have been created over the last few years, over the last 15 years, over 30, 40, so many good things for so many risk investors. It's good. What happened in March of 2020 can happen anytime, and it will happen again. And I pray that the lessons I've talked about today will be held on to by more people. I know they will be held on to by me and my team. I want our clients to always know that we work to that end of maintaining these disciplines,

these principles, but there is no scenario by which traumatic events and distress events on this side of glory go away. And that was a real bad one. And in a lot of ways, compounded with other social and cultural and medical things happening that made it especially intense and difficult experience. But from an investment standpoint, it didn't last very long and it wasn't fatal. And that's a byproduct of the way markets work, what we're actually doing in constructing

a proper portfolio and the disciplines necessary, the principles necessary, the activity necessary to see it all the way through to a positive conclusion. So I don't want to say happy anniversary because there was nothing happy about what we experienced five years ago, but it's memorable and I hope this little trip down that memorable lane has been beneficial for you. Thanks for listening. Thank you for watching and thank you for reading The Dividing Cafe.

I'll see you on Monday. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk.

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