This Newsletter was sent to subscribers in April. If you would like to get these when published, subscribe for free here. Quick Note - due to this unusual time, this newsletter will be longer than normal. If you're like us, you are probably stuck at home consuming more information than usual. So, we are making this issue longer than usual to give a more thorough commentary on the current environment.
So much has happened that we can only touch on some key aspects.
The stock market had it’s fastest bear market correction in history (measured from peak to trough). The number of days trading more than 5 billion shares is astounding, with many days trading over 8 billion shares. More companies have cut or eliminated their dividends than we can count.
Also during this time, US coronavirus cases passed 500,000 on April 10th. While the mortality rate appears to be high at roughly 4%, the question is if that’s really correct. It is highly likely that there are many more people infected who have little to no symptoms if this German study is any indication. That’s actually good news, as the mortality rate would then be well under 1% – more in line with normal flu season. The lack of testing so far has hindered our ability to know this answer, yet it is the most important question that anyone could ask today for making policy.
In response to the outbreak, most states put in some form of a lockdown on non-essential movement and business, which had predictable results of millions of people losing their jobs & income, and then applying for jobless benefits. Other countries also responded firmly. India made headlines when it put its entire population of 1.3 billion people on lockdown, and it is too soon to see the economic impact. Many other governments around the world have locked down their countries, and as with the US, the fallout from these measures is still unknown.
The US government has gone all out to limit economic damage, by passing the CARES act, which applies trillions in stimulus. The Federal Reserve also joined in, promising to buy trillions more of federal debt, municipal debt, corporate debt, junk bonds, and individual debt. Other leading governments and centrals banks have done likewise.
The outlook for the economy is varied. Vanguard thinks we’ll have a V-shaped recovery. Guggenheim’s Scott Minerd thinks we’ll be in recession for 6-18 months. Jeff Gundlach, the reigning “Bond King” thinks it will take a while, and that April will be worse.
Our prediction is this – the world economy is a complicated set of interactions, and most of the economic side effects of the coronavirus have not yet been felt. When they are felt, it will be in new and unfamiliar ways to most of us.
Business shutterings and job losses lead to missed rent and credit card payments, as well as lower tax receipts for states & municipalities. Missed rent payments means less money for REITs to cover their mortgages. Lower mortgage and credit card payments mean higher leverage ratios for banks, and overall lower liquidity.
In other words, we are about to experience a set of social, economic, and political events that will resemble a global Rube Goldberg machine.
Countries around the world are also reconsidering their supply chain processes on a strategic and operational level to address vulnerabilities. Many countries are putting export bans in place to control medical supplies. When over 80% of the active ingredients for all of our pharmaceuticals are sourced in China, our heightened need for biosecurity will lead to changes in policies and politics.
As weird as this year has been, it will probably get weirder. Every major sport has been cancelled. ESPN is experimenting with games of horse to replace NBA basketball and NBC teamed with NASCAR to replace car racing with a video game. Hollywood will be different, as blockbuster movies won’t be dependable revenue for a while. China has even banned the eating of dogs (but not bats, unfortunately).
The new normal won’t be the same as the old. Normally after a war, governments generate economic demand through the rebuilding of key infrastructure. But after a virus, our infrastructure is still intact. Bridges still stand, roads sit ready to use, power lines still deliver power, and the internet still runs.
Actually, that last point is the most salient. The internet does still run, but we use it a bit differently now. Usage of videoconferencing through tools like Zoom, Microsoft Teams and others has skyrocketed. Mobile use has surged as well.
Working from home is also part of the new normal (sort-of), causing the acronym WFH to go viral. Schooling from home is temporary, but as schools scramble to adjust, it is likely that schools will utilize digital tools differently next year than they did last year.
Delivery of food and groceries has greatly exceeded capacity. In many cases, the only way to stay in business is to be online and have delivery. It’s too soon to tell exactly how this will unfold, but the future of retail will also change and evolve. In order to keep and strengthen brand awareness during this new normal, it will be increasingly important for companies to have easy-to-use apps and great customer service to succeed going forward.
Amazon and Walmart are the most visible examples of this change, hiring hundreds of thousands of new workers in just the past several weeks. Waiters and waitresses may have trouble getting their old jobs back, but new ones are opening.
This unfolding shift in our economy (the world economy actually) will be the most impactful restructuring most of us will have ever seen. Every part of the economy will be touched, and while much of it will be visible, much of it won’t.
Predicting the future is usually folly, but we know one thing – the spread & mortality rate of the coronavirus will drive the key decisions that affect the economy. Back to that German study that we mentioned earlier – if its results hold up to scrutiny, then we could see people going back to something much more “normal” than we otherwise would.
So the outlook for now is cloudy with a chance of meatballs. This is the year your kids will tell stories about for generations to come.
Two tips for this month.
First, a link to the CDC Covid-19 prevention page. Please read it.
Second, we are in a time of obviously volatile markets. Given that this turbulence is likely to last longer than we’d prefer, take the time to make sure your cash and investments are at the right levels of risk for you.
Ensure your emergency fund is topped off at a minimum of 6 months of expenses. If not, focus on that before anything else. The closer to retirement you are, the higher this should be, and if you are near/in retirement, having 2 years of cash is a prudent level.
Next, if March’s market madness caused you to not sleep well at night, then you probably have too much risk in your portfolio. Either consider ways to adjust it appropriately, or talk to a financial planner who can help you do so in a systematized manner.
Words of Wisdom
“If you stick around long enough, you’ll see everything in markets”
~ Warren Buffet