A New Reality
Covid-19 is laying siege to our way of life. People are now fearful, and fearful people change their behavior. They have canceled vacations, are putting off trips to see family and friends, and are eating at home much more often. Businesses of all kinds are under pressure. Companies have canceled conferences, and many have cut back or eliminated all but essential business travel. Many employees have been told to stay home. Disneyland closes tomorrow and Major League Baseball, Major League Soccer and the NBA have suspended their seasons. There will be no NCAA basketball tournament. Across the country, schools are closing. Just this morning, I learned that my own kids’ schools will be closed until April 6th. While Covid-19 is certainly a serious short-term concern for all of us, I believe it is highly improbable that we will tolerate this virus dictating our lives for very long.
Houston, We Have a Problem
We are in need of an Apollo Program-level coordinated national effort to contain and defeat this virus. Thus far, movements in the financial markets in the last few weeks indicate that investors are very underwhelmed at our policy response so far. Only when the force and scope of our policy response equals or exceeds the Covid-19 threat will investor sentiment improve, and our markets find some support.
Economy Will Dip, Then Recover
The economic numbers coming out in the near future will be grim. This coronavirus scare has likely precipitated an instant recession here in the U.S. (The technical definition of a recession is two consecutive quarters of negative GDP growth, as determined by the National Bureau of Economic Research (NBER).) When the first and second quarter GDP numbers are eventually tallied, it is difficult to see how these figures will not be negative on a year-over-year basis given the abrupt shutdown of services, travel and events across the country. (Toilet paper manufacturers are doing just fine, however.) While the numbers in the next few months will be tough at the national and corporate level, we don’t expect them to matter very much once we start to get back to normal life. We expect consumer confidence and spending to surge as this problem ebbs and we exit our current crisis footing.
Investors Need to Stay on Track
The violent action in the markets has understandably spooked many investors. Uncertainty and fear are in charge, and investors’ time horizons have contracted dramatically. In such times, many investors will make emotionally driven decisions that may permanently alter their financial circumstances. It is critical for investors to keep a long-term perspective and remember the best course of action during inevitable market downturns such as this one is usually to make no major change to strategy. Selling stocks in a bear market has been proven to be a very bad strategy, whereas buying stocks during a bear market has proven to be an excellent strategy.
A Sudden, but Temporary, Shock
This crisis began suddenly, and we expect that in the markets, it will end quite suddenly as well. When that happens is anyone’s guess, but, in our view, it will be weeks or months, not years. Any progress on containment of the spread of the virus, better and quicker testing protocols, or any promising clinical news about treatments and/or vaccines will likely provide a significant boost to investor confidence. Currently Gilead Sciences, Moderna and numerous other drug companies and government agencies around the world are working on treatments. It will take some time before we get some good news on the treatment front, but we expect markets to respond positively when we do.
These last few weeks have been very unsettling for everyone, as health concerns have converged with investment concerns. Covid-19, however, does not represent an existential threat to our country or our financial system. With a forceful response, we can and will prevail over this virus. By the time the end of this health crisis comes into view, stocks will probably long since have begun to recover.
As always, I welcome your comments and feedback. Please contact me if you would like to discuss the markets or your portfolio.