Infection rates, death counts, and this or that business deciding not to reopen. Understanding when to wear face coverings. Stay-at-home orders that seem perpetual and a mark of the new normal. These and myriad other uncertainties make it extremely difficult to keep a clear head amid a turbid flow of information coming from all points of the compass. The problem, of course, is that we’re in a historically unprecedented situation. We have little to reference for appropriate context and guidance about what to expect.
For example, the price of oil had been cratering in recent weeks on demand uncertainty. This makes sense given that so many people are staying home, not driving or flying, and so forth. Yesterday when the contract for delivery of oil in May was set to close many who owned it feared (presumably) not having enough storage space for the planned excess and had to pay others to take it off their hands. This caused the price of oil to close negative for the first time in modern history, probably one of the strangest occurrences I’ve seen in the markets. Now, this doesn’t mean gasoline will soon be free. Oil contracts for future delivery, even later this summer, are not negative, but right now there’s too much Texas tea floating around and (again, presumably) not enough places to store it.
There truly seems to be no shortage of negative headlines in the world these days. But while there is much to be fretful about and even fearful of, hope remains. If optimism is a choice during the best of times, it’s a cultural imperative during times of crisis.
Along these lines I wanted to share recent work from my research partners at Bespoke Investment Group. I look forward to reading their analyses because they are apolitical level-headed observers of the economy, market developments and, during tumultuous times, the news in general. In short, they help provide meaningful context that is so hard to come by these days.
The following two short pieces are a good summary of where we’ve been and where we might be headed, as per Bespoke. Click the link below to see the information on my website.
Written March 19th looking back at a month of extreme uncertainty and market volatility…
Markets are quickly trying to adjust to life in a COVID world after falling more than 30% from their closing high in just a month. In the hardest-hit areas of the equity market, stocks in sectors like Energy, Consumer Discretionary, Industrials, and Financials are down more than 40% on average (-64% for Energy). Just about all discretionary activity has come to a stop, and only essential economic wants and needs are being met. Credit markets, meanwhile, have essentially seized. If we can't stabilize that, there's much more pain ahead.
But there is some reason for us to have hope. Yes, government officials from the local level up to the federal level have raced to shut down over the last week. Without minimizing the risk of the virus spreading, it cannot be overstated how much this type of action shuts down the economy, and the stock market has reacted more to our reaction to the virus than the virus itself. Once everything is essentially shut, though, there is no way to go but up. As we adapt and learn more about the virus in the days and weeks ahead, we will learn to live with it. Hopefully, just as quickly as we all raced to shut down, Americans will race to open back up in a manner that fits with life in a COVID world. No one wanted to be the last to close, and on the flip side, no one will want to be the last to open either. Yes, the virus will be here for many more months, but with testing, testing, testing and very successful treatments that are already saving lives, we can envision getting on with our daily lives again once we're all confident that we know exactly what it is and how to deal with and defeat it.
All of this said, we're not going back to the world we lived in prior to mid-February for a long time. Those that haven't accepted this yet will have to eventually adjust. You can't completely upend the US economy without major changes taking place. There will still be air travel, but we can envision passenger health screenings being required before boarding. The cruise industry will not recover for a long time. Your favorite restaurant may not re-open, or at least not in its current form. Home delivery and take-out will be the norm for awhile. There will be massive shifts in employment as a large number of workers being forced to stay home now will not be back at their old jobs. But there will still be jobs. We'd guess that the Health Care industry just might be looking for workers right now?? The infrastructure of the economy is also still running, from shipments of goods to cashiers at our grocery stores. There's no way around job loss, but we will carry on. Americans out of work are an entrepreneurial bunch. Post-COVID businesses are being dreamed up as we type this and will hit many of us with the thought of "why didn't I think of that" when we see them. We're staying optimistic and looking ahead. It's really the only way.
Written now and looking forward…
On March 19th we mentioned that the only direction to go was up once all of the states have shut down. In less than a month since then, we’ve seen that the most dire models for hospital beds needed didn’t even come close to being met, and in the most densely populated part of the country — the NYC region — the peak for the health care system (at least for the time being) came and went well before the state’s governor and local authorities were projecting. We’ve now gotten directives at the federal level on how to re-open the economy in states where case numbers are trending down, and there are states working either together or in competition with each other on how and when to re-open things the fastest while still trying to limit the spread of the virus. This isn’t to say that we’re in the clear, but what we are seeing is a significant shift in sentiment towards looking forward rather than looking backwards. This week is the first we can remember since the start of this where the major focus in the investment community was shifting away from the daily virus case count numbers and more towards things like earnings, the economy, and when things would open back up. We’ve been sounding the alarm about the economic damage of the shutdown from the beginning, but it has taken four consecutive weeks of 1+ million new jobless claims for some to catch on.
The public has also finally caught up more with how the virus actually works and who it impacts most. While early numbers from the Diamond Princess cruise ship suggested that the true death rate was somewhere between 0.08%-0.8%, and up to half of cases are asymptomatic, it simply takes a long time for info like this to make its way into the minds of a collective nation. There is more widespread consensus now that the virus has likely spread 10x more than the reported numbers at a minimum in the major outbreak areas, and serology tests out today suggest that number could be as high as 50-85x, which would put the true death rate at closer to 0.08%-0.14%.
The impact of the virus on various age groups and at-risk populations are now more well-known to the public. While kids certainly can be spreaders, the virus simply does not impact them in a way that even the regular flu does. For people under the age of 25, the regular flu has caused more deaths than Covid between February 1st and April 11th in the US by a wide margin. It’s the elderly and the at-risk (obesity, diabetes, heart/lung issues) that the virus impacts most, and there are better ways than full lockdown of all age groups to address this.
All of these things that are making their way through the minds of the public helps put them more at ease and more willing to entertain life in a post-Covid world. Yes, the virus is bad, but it’s here and it’s not going away. Leaders and the people are now realizing we have to come up with better policy methods because remaining in lockdown until we have a vaccine in who knows how long is not an option.
While the stock market has indeed bounced back significantly on hope, unfortunately we’re still very concerned about the long-term impact this entire virus and shutdown will have.
Here’s a link to Bespoke’s website if you’re interested in checking them out.
Have questions? Ask me. I can help.
- Created on .