So the big question on everyone’s mind is: How long is this going to take? How long are we going to be stuck inside? How long until our 401(k)s are back to where they were? I wish we had all the answers, but let me share with you what some of the brightest and sharpest economists and health experts are saying.
First, in our opinion, job #1 in the US and globally is getting our arms around the pandemic itself, the actual virus. We have seen the articles making the case that it would be better if we let everyone get infected (herd immunity) for the sake of keeping the economy afloat. Or keeping our more vulnerable population protected and letting everyone else take their chances that they get it and are able to survive. We think that is, frankly, nonsense. For a variety of reasons, including the fact that no one wants to go to work if they think their personal health is in jeopardy, or if not them, that they could then infect people in their lives who are more vulnerable (kids, parents, etc). Additionally, the US economy is not going to recover if people don’t feel safe to come back out and spend money as they normally would.
It is completely unclear what this timeline looks like, presently. Healthcare officials’ estimates are changing, and the US is very clearly still on the upswing part of “the curve” as far as newly identified cases go – we have not (as of Saturday morning) seen that curve start to plateau yet. There are positive indicators from specific regions of the country (Washington state, for example, as well as parts of New York), so everyone needs to keep up the social-distancing, that will be a huge help. But if we’re talking about a return-to-normal/no social-distancing, that timeline will depend on a) how fast we can flatten the curve; b) development and distribution of speedy (minutes, not hours let alone days) testing, including antibody testing; and c) development and distribution of therapeutics and, ultimately, vaccination. Assuming we are making progress on the curve, testing is our next major hurdle – there are “positive” reports of the types of tests needed, but there is nothing concrete out there yet regarding timeframes when these will be as widely available as is needed. And therapeutic treatments seem to vary wildly in their effectiveness, while a vaccine is, by most health experts’ estimations, still 12-18 months from being available to the public.
So with all of these unknowns around the healthcare aspect, it is unfair to make predictions about the economy and market, but with the understanding that this is highly speculative, here goes:
The US economy, up until about 6 weeks ago, was in, overall and by consensus, pretty good shape. There were indicators of potential issues, which we have been talking about with clients over the last 12 months or so, but from an overall perspective, nothing that was jumping out as a major, single issue. Having said that, one of the reasons why our portfolios have had a cautious-leaning nature to them was that we were at market all-time highs, and there *were* signs that, whether because of the 2020 election (did we all forget about this?) or global trade issues, we might be seeing enhanced volatility in 2020. Volatility: check. Stock market repricing: check. (For investors, this would seem to be a pretty good time to be entering the stock market.) It is absolutely reasonable to think that, as this was not an inherent flaw in the US economy that has caused this problem, the US markets can get back up to their more recent highs in the *relatively* short term.
We think the economic recovery is likely to start later and to take longer than market recovery, based on previous epidemic impacts on global markets, and the distinction is important. The economic recovery is not likely to be “quick” at this point – the longer people are forced to shelter-in-place and the greater the strain on businesses to keep ties with their employees, the more difficult it will be to re-start the giant engine that is the US economy. Globally, governments are attempting to more-or-less accomplish the same goal of essentially “freezing” their economies in ice until there is a vaccine and life can get back to “normal.” The methods governments are doing that vary to degrees, but overall, governments are rolling out massive enhancements to unemployment benefits and providing massive financial relief to businesses. In Europe, we are seeing governments paying employees’ salaries directly. In the US, for now, efforts are to pay employers who will then pay the employees, with that extra layer in between. In the US, we are pleased to see the Federal government roll out “Phase 3” two weeks ago, definitely a positive, but there is a LOT of work yet to do. We are waiting on new details of what will be a “Phase 4” rollout, hopefully this coming week. And the topsy-turvy (some would say that’s generous) rollout of the Payroll Protection Program and Small Business Association disaster loan program will see improvement and be beneficial as well. Again, to stress, from an economic perspective, we absolutely will need MORE assistance from the Federal government, and speed is *critical,* but we have been pleased thus far with their response (and especially the response of the Federal Reserve – Chairman Powell has been up to the crisis thus far).
A question that has come up is with respect to the US balance sheet and deficits – this is a very good and valid concern – the US balance sheet is absolutely going to be tested. However, given that this is, in every way imaginable, a GLOBAL issue, the dollar’s strength relative to other currencies remains strong, and while we will eventually have inflationary pressures (not in the short-term), there is going to likewise be heavy pressure to keep interest rates down (not just in the US but globally as well) as governments everywhere are presently assuming mountains of debt. We are absolutely looking ahead to years of budget austerity among many state and local budgets that will be stretched thin in the short term. And again, there will be opportunities for intelligent investors as more clarity emerges in that area.
We think that once the breadth of the healthcare impact is more clear, and the timeline for economic recovery becomes more clear, markets *ought* to improve in *relatively* short order. Make no mistake – we will be living in a post-COVID world – there are sectors of the market that will take much longer to recover, if they ever do (hotels/travel/cruises). And it will take time for the market to recover – “estimates” are still, for reasons just discussed, all over the place, but we are anticipating volatility through the 2020 election, and recovery likely through the 4th Quarter of 2021. Still and all, we were not in the midst of a “bubble” that has been the cause for prolonged economic downturns in the past – tech/housing/credit – that is simply not the case here. Rather it will depend on the global ability to find a solution for getting back to normal so businesses can hire back their employees and consumer spending can resume, and that will happen as testing and surveillance improves in the short-term and then businesses can, slowly, re-open their doors.
Please take these timeline estimates for what they are – awfully speculative, but they are based on reasonable expectations, and, most importantly, we will continue to share our evolving thoughts on what the next 12-24 months will look like as we continue to gather information and data about what the future holds…
In Closing
Hang in there though these unprecedented conditions – we WILL get through the pandemic, the economy WILL get back up and running and smart, principled investors who stick to their plan WILL get through this!
As always, we are here for you, we are here WITH you, side-by-side, we hope this finds you safe and healthy, and we look forward to talking with you all again shortly!
Sincerely,
Tucker McDonald, with Rick McDonald and Chris McDonald
