Everyone is naturally fixated on the daily news on the Covid 19 pandemic and the economic repercussions. We know the news will remain horrific on both fronts for at least a few more weeks. But we also have good reason to expect most people who contract the virus and the economy to recover. “The sun will come out tomorrow.” So how should we think about our investments?
The market decline was sudden, very severe, and seemingly unrelenting. The S&P 500 is down about 30%, reducing household wealth by more than $7 trillion. The economic decline in the second quarter will be historic, somewhere between 15% and 30% at an annual rate. That broad range reflects the wide range of uncertainty. Nonetheless, we can look ahead to the prospects for recovery in the second half of the year. This is a recession by decree, whereby policymakers shut down large parts of the economy for the last third of March and much of April (and possibly a bit longer) to contain the contagion. The latest data show that case growth is slowing, so we’re making progress, even if we have further to go.
It is truthfully difficult to describe the recovery path when we don’t know the full extent of the decline or the additional policy actions that may be taken to mitigate the economic effects of the shutdown. Still, we believe it is very likely that a solid or a strong rebound will ensue as the economy is reopened. The government is paying firms to retain their workers, which will make it easier for many firms to resume business activities. Even so, some businesses will surely revert to more normal levels of activity faster than others. And that’s one of the keys to the efforts we’re making to identify the industries and firms that would be likely to recover sooner from those that may take considerably longer to rebound.
In thinking about how to invest, we believe that playing for the rebound in the economy makes the most sense. Inflation and interest rates are likely to stay very low for some indeterminate period, so retaining fixed income investments for one’s safe money remains reasonable and appropriate. But the carnage of the last several weeks in the stock market should reverse over time. It is critical to understand the market will not wait until the economic recovery is visibly underway before investors pile in to buy cheap equities. Historically, there are short, dramatic increases in stock prices following every major recession and these typically occur in the earliest stages of the economic recovery. In fact, the media is typically filled with stories marveling at early rebounds in stock prices when the economic data are still weak. But investors look ahead. Unfortunately, we have no visibility on the timing for such a rebound. In the meantime, we are positioning in companies and sectors that we expect to recover sooner, even as we must remain patient in waiting for the turn.